Airy fairy

Abe's "wage surprise" hopes lack reform push

Shinzo Abe is pinning his hopes for Japan's economic revival on a new national consensus on boosting workers' pay. He's being too optimistic.

The Japanese prime minister's "wage surprise" doctrine, outlined in a New Year op-ed, seeks to reverse the 15-year slide in wages as part of an effort to boost household consumption and end deflation. Abe expects to achieve this by getting workers and bosses to agree to higher salaries.

While the diagnosis is correct, the prescription is naive. Relying on enlightened managers to share a bigger chunk of rising corporate profits with employees is unlikely to help workers regain what have lost. Since 1997, Japan's annual wage bill has shrunk by 12 per cent, much faster than the two per cent decline in the workforce.

Indeed, proposed reforms to Japan's two-tier labour market could further crimp wages. The administration is considering a plan to allow companies to keep rolling over temporary job contracts indefinitely. That would make it easier for lowly paid temps to substitute workers on cushy lifetime employment contracts. Already, the share of non-regular employees has soared to 35 per cent of the total workforce, from 20 per cent in the early 1990s.

To prop up the wage bill, Japan needs to make its labour market more unified. A recent study by the International Monetary Fund suggests putting all new hires on a single, open-ended contract, and making severance pay binding for all. The result would be a little less protection for permanent staff, but greater security for non-regular workers, who are mostly women.

Another solution would be to insist that companies fold one of the two semi-annual bonuses - currently paid in June and December - into regular pay. Bonuses are more volatile than wages, and that makes consumers loath to spend them. Last year, wages hardly grew, but the June payout jumped 6.5 per cent. If the bonus boost was partly folded into higher wages, consumption would get a lift. Abe is on the right track, but his doctrine needs work. The notion that bosses, workers and the government can put their heads together and come up with a "wage surprise" for the economy is just wishful thinking.