The Neoliberal Choice

Hiroko Tabuchi, writing in the NYT, shows us what a non-liberalized labor market looks like in the modern world:

[There is] an intensifying battle over hiring and firing practices in Japan, where lifetime employment has long been the norm and where large-scale layoffs remain a social taboo... 

Sony wants to change that, and so does Prime Minister Shinzo Abe. As Japan’s economic recovery slows, reducing the restraints on companies has become even more important to Mr. Abe’s economic plans. He wants to loosen rigid rules on job terminations for full-time staff... 

Labor practices in Japan contrast sharply with those in the United States, where companies are quick to lay off workers when demand slows or a product becomes obsolete. It is cruel to the worker, but it usually gives the overall economy agility... 

Critics of labor changes say something more important is at stake. They warn that making it easier to cut jobs would destroy Japan’s social fabric for the sake of corporate profits, causing mass unemployment and worsening income disparities. For a country that has long prided itself on stability and relatively equitable incomes, such a change would be unacceptable. 

It would be a radical change. A combination of lifetime employment, seniority-based pay and intense worker loyalty to the company was credited for Japan’s postwar economic miracle, as stability and growth went hand in hand. But when the Japanese economy stumbled in the early 1990s, companies found that Japan’s rigid labor practices made downsizing impractical... 

Proponents of employment change point out that stiff protections for workers have prompted companies to make major cuts in hiring, shrinking opportunities for scores of younger Japanese.

Mark Ames, never one to mince words, replied on Twitter:

NYTimes rehashes same old anti-labor libertarian bullshit..."Economists say... flexibility to labor market...compete"...NYT: What Japan needs to do is listen to what "economists say." And ain't it grand that crypto-fascist Abe is anti-labor neoliberal...The same neoliberal crap, same Soviet-like propaganda "flexibility" "bloated" "compete" NYT used in 1990s...Those code words are loaded with all sorts of discredited neoliberal market theory assumptions[.]

So maybe it's all a lie? Maybe liberalized labor markets don't help any economy in any way? Maybe the choice Tabuchi depicts - between security and dynamism - is a false one?

The truth is: We'll never know. That's how history works. But it's certainly true that the U.S.took a far more neoliberal (laissez-faire) route in the 80s, 90s, and 2000s. The different paths taken by Japan and the U.S. are a sort of "natural experiment", if an imperfect one. It's hard to know which of the present-day differences between the two countries can be chalked up to this divergent path. But we can at least make some educated guesses.

It's true that Japan is a more equal society than the U.S., though less equal than West and Central Europe. It's also true that Japan has a lower unemployment rate, though that may just be due to different ways of defining "unemployment"; Japan has a lower labor force participation rate than the U.S., though part of that is due to age structure). And Japanese corporate profits have traditionally been lower than American profits.

But Japan's heavily restricted labor market and its government protections against hostile takeovers have not saved it from a declining labor share of national income, nor from steadily falling wages, nor from steadily rising inequality.

And it seems to me that these rigid labor market protections and corporate legal and regulatory protections have imposed some real and serious costs on Japanese society. First of all, Japanese total factor productivity has essentially flatlined since the late 80s, performing much worse than TFP in America or even Europe. 

That's what economists mean when they use words like "flexibility". It means that Japanese people can only maintain their rich standard of living by working insane amounts of unpaid overtime. That in turn means that many men in Japan can only see their families on the weekends. Those are real human costs.

Now maybe that productivity flatline is due entirely to other factors. But the evidence says that Japanese companies that are kept on life support by the government (directly, or indirectly through big banks) are responsible for a decent-sized chunk of the stagnation (here's another study and yet another study that agree). Are those studies are done by mendacious neoliberal economists with an axe to grind? Maybe, I guess! But until someone shows me some different results, I'm going to go with the best guess of the people who study this stuff (I also checked the methodology of two of the papers and found it generally sound, though these things are always hard to say.)

But it seems to me that the cost of Japan's refusal to embrace neoliberalism go beyond lack of "flexibility". I think that Japan's labor-protectionism has caused deep unfairness to persist in Japanese society. Japan is still one of the lowest-ranking countries in terms of women's equality. Go into a lot of Japanese companies, and you still see the men climbing the corporate ladder while the women serve tea. That cozy boys' club is protected by the government, which makes it incredibly difficult to fire the mostly-male "正社員" (lifetime) employees, while making it incredibly easy to fire the mostly-female "契約社員" (contract) and "アルバイト" (part-time) employees. It really still is Mad Men in much of corporate Japan. (And did I mention the fact that female labor force participation in Japan in under 50%?)

And speaking of those different tiers of workers, Japan's protected, restricted labor market seems to be creating an enduring class division. If you manage to grab one of those "正社員" (lifetime) jobs, you're set - say hello to job security, guaranteed pay raises. But if you miss that bus, and end up as a "契約社員" (contract employee) or "アルバイト" (part-time employee), you're screwed. It's very very difficult to get a "lifetime" job if you've ever worked at a "contract" or "part-time" job - in other words, say hello to a lifetime of low wages, job insecurity, and menial servitude. Now, realize that most Japanese workers are hired either right out of college or right out of high school (if you take a "gap year", you're toast). So that one first job will determine your entire future.

In the past, about a fifth of Japanese people age 15-24 failed to get "lifetime" jobs, and many of those were women who - for better or worse - would end up dropping out of the labor force when they got married. Today the figure stands at about half, and now a substantial number of those (for better or worse) are men. Japan's rigid labor market risks creating a permanent underclass.

Like I said, we'll never know for certain whether Japan could have prevented this troubling state of affairs through methods other than neoliberalism. And I'm not saying Japan's system sucks - the dignity, security, and high standard of living enjoyed by Japan's "lifetime" employees, and by their wives and children, is real. But looking at the U.S., I see that despite all our economic woes, women have achieved a measure of equality, your first job out of college does not determine your life, and lots of people don't have to work 20 hours a week of unpaid overtime just to afford a first-world standard of living.

There are lots of good policy steps Japan could take that have nothing to do with labor market liberalization or the dismantling of corporate protections. But it seems to me that the choice Hiroko Tabuchi presents is very real. It can't be waved away. Japan really does have to choose: neoliberalism and "flexibility", or corporatism and continued social and economic rigidity. It's not an easy choice.


Update: As a number of commenters have pointed out, neoliberalism vs. corporatism is not a binary choice. You can have some of each, just like you can go to the grocery store and buy some eggs and some milk. The point of this post is that there is a real tradeoff between the two. Anyway, the truth is, Japan has already chosen to take a few steps in the direction of neoliberalism. A friend who works in Japan in private equity writes:

I'd point out that the Japanese labor market is already in the process of becoming more flexible, although slowly. A few points that come to mind: 

A. Rise of the IT industry
Now, IT companies such as Rakuten, Yahoo Japan, DeNA, GREE, NRI and so on are creating a huge number of jobs, and these companies don't offer a life-long employment nor hire you necessarily out of college. This is partly because the IT services industry is a more skill-oriented field and thus people can easily move between companies, while Japanese traditional large corporations still tend to nurture "generalists" (i.e. the value of employees in those companies is "knowing the system/culture of their company"), and hence those generalists are usually useless once they move out of the company that they joined out of college. So the rise of IT service industry is changing the employment custom to some extent. 

B. Legislative changes in the staffing service industry
The Staffing service industry offers contract employees to many corporations. Due to the legislative deregulation of the Temporary Staffing Services Law in 1996, 1999 and 2004, the number of contract employees has hugely increased. This was partly in response to increased pressure from the business sector after the burst of the economic bubble... But as you know, after the GFC in 2008, criticism against this staffing service industry is intensifying... 

C. Lay-offs at Japan Inc.
These last few years, many major Japanese companies ("Japan Inc"s) such as Sony, Panasonic, Sharp, NEC, among others, haven't been performing well and had to lay-off a few workers. This was a big shock for those who are employed by these companies. Not only are those manufacturing companies losing their competitive edge, but also Japanese big banks with solid balance sheets cannot employ all their people forever - they typically kick out many people in their 40s and send them to client companies (this is possible because Japanese banks still have huge power over their borrower companies). Those people's salary will typically be cut in half...