Changing Characteristics of the Japanese Employment System
Author(s): Kanji Haitani
Reviewed work(s):
Source: Asian Survey, Vol. 18, No. 10 (Oct., 1978), pp. 1029-1045
Published by: University of California Press
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CHANGINGCHARACTERISTICSOF THE
JAPANESEEMPLOYMENTSYSTEM
Kanji Haitani*
WHAT IS COMMONLY known as the "Japanese Employreferredto as JES) is a patternof employment
mentSystem"(hereafter
relationsthatis typicalin largeJapanese corporationsand government
offices.About half of the total number of employeesin Japan are involvedin thissystem.The basic institutionsthatcharacterizethe system
are "lifetime"employment,
seniority-based
rewards,and the enterprise
whichwas neverstaticeven in the 1960s,began to
union.'1 The system,
change markedlyin the 1970s. Three factorsare responsiblefor this
change: (1) the slowerrate of growthof the national economy,(2) the
rising age of workers,and (3) the increasingproportion of college
graduatesin thelabor force.This paper addressesitselfto the questions
of how thesefactorsare causingchangesin the JES, and how Japanese
corporationsare dealing with the trendsof change.
* An earlier version of this paper was presented at the New York State Conference on Asian Studies held at SUNY Buffaloon October 14, 1977. The author wishes
to thank Bob Hall, Hiroshi Itoh, Jim Sonkup, and Steve Welch for their helpful
comments.
1 This characterization
of the JES dates back to JamesC. Abegglen,The Japanese
Factory (Glencoe: The Free Press, 1958). For discussions of the JES emphasizing
the importance of the traditional cultural factors,also see Ezra F. Vogel, Japan's
New Middle Class (Berkeley:Universityof California Press, 1968); and Ronald Dore,
British Factory,Japanese Factory (Berkeley: Universityof California Press, 1973).
Over the last decade or so, a number of writershave challenged the validity of the
traditionalistview, and particularlyof the lifetimecommitmentmodel, of Japanese
employment practices. For these contrarytreatmentsof the JES, see Koji Taira,
"Characteristicsof Japanese Labor Markets," Economic Development and Cultural
Change, 10 (1962), pp. 150-168; Robert E. Cole, "Permanent Employmentin Japan:
Facts and Fantasies," Industrial and Labor Relations Review, 26 (October 1972), pp.
615-630; and Robert E. Marsh and Hiroshi Mannari, Modernization and the Japanese Factory (Princeton: Princeton UniversityPress, 1976).
1029
? 1978 by The Regents of the Universityof California
0004-4687/78/101
5-1029$00.25
1030
KANJIHAITANI
oftheJES
The MainCharacteristics
In orderto understandfullyemploymentrelationsin a country,it
is necessaryto have some understandingof the basic principlesgoverning social organizationin that country.The relationsamong members
of a Japanesegroup are likelyto be diffuseand particularistic.Diffuse
relationsinvolve the entireperson. Within a group, people associate
witheach otheras totalhuman beingsratherthan regardingeach other
as playingspecificfunctionalroles. Particularism,on the other hand,
refersto an exclusivisticpatternof behavior towardother individuals
and groups. Members of a group treat other memberswith special
affectionand considerationmerelybecause they are membersof the
same group. Nonmembersare discriminatedagainst simply because
theyare outsiders.
A Japanese group has another importantcharacteristic,namely,
verticalorientationor hierarchism,and its corollary,rank and status
consciousness.Personsdo not, as a rule, interactwith othersas equals.
rankseverypersonaround him eitheras his
The Japaneseinstinctively
superioror inferior,and uses appropriatedemeanor and language in
his behavior.The Japanese language itselfis almost totallydevoid of
neutral-levelexpressions.The Japanese must thereforebe constantly
aware of the rank of the person he is speakingor referringto so that
he can use appropriatelevels of honorifics.
What complicateslife and makes interpersonalrelationscumbersome in Japan is the factthat the rank consciousnessis entwinedwith
of personalrelations.Individual A is superiorto individual
diffuseness
B not only in theirspecificroles (e.g., sectionchiefand staffmember,
professorand student,captain and lieutenant),but also as entirepersons. Thus, B is expected to behave towardA with appropriatelyrespectfuldemeanor and language; and this relationship,once established, cannot be easily changed without causing mental anguish on
the partsof both A and B. What if B, in his later life,should achieve
a higher status than A? The relationshipbetween the two, if they
continueto belong to the same group, would be awkward,to say the
least. In order to minimize chances of creatingsuch awkward social
situations,the Japanese striveto preserveestablishedranking orders
among individuals.
The practiceof "lifetime"employment(shushinkoyo) entails recruitingworkersfreshfromschoolsand employingthemuntil theyretire at the mandatoryretirementage of 55 or 60. This practice is a
social norm,not a legallybindingrule. There is a generalexpectation
on both the employer'sand the employee'ssides that the employment
relationis to be continuous.Perhaps the termlifetimeemploymentis
too strong;continuousor tenuredemploymentmay be more descriptiveof theactual practice.
THE JAPANESE
SYSTEM
EMPLOYMENT
1031
The systemofseniority-based
promotionand wages (nenkojoretsu)
is deeply rooted in Japan's hierarchicalgroupism. As pointed out
earlier,theJapanesehave an innatedesireto preservetheexistingranking order of individualsin a group. In a place of work,the most importantframeof referenceforrankingindividualsis the "same-year-ofentry"group. Employeeswho enter a company togetherin the same
yearconstitutethisreferencegroup. They have the same seniority,and
share a unique sense of "equality" that is rare in Japanese society.
Those in a same year-of-entry
group are verysensitiveabout the ways
in which theirdohai (equal-senioritycolleagues) move up in the company hierarchy.There is a strongpresumptionthat theydo, or should,
move up in step. Of course there are fast and slow movers,but the
companydoes not place a man of greaterseniorityunder his kohai
(junior). This fear of disturbingthe hierarchyof employeesbased on
seniorityis the basic reason for the Japanese penchant for nenko
joretsu,or "rankingby the meritof yearsof service."It mustbe noted
that under the systemof lifelong employment,nenko means both
seniorityand age. Since workersare as a rule recruitedstraightfrom
schools,thereis an almost perfectcorrelationbetween their age and
seniority.Thus, in an "ideal" nenko system,a senior in rank is also a
seniorin age.
The ChangingEnvironment
of theJES
Prior to the 1970s,theJES had servedits purposeswell; under this
systemthe Japaneseeconomyachieved the phenomenal growthof the
1950s and 1960s. It was a systemwell suited to a situation of rapid
growth.Companies employed a large number of young workersat
wages that were low relative to their productivitywith an implicit
promisethat theirwages would rise as theygrewin seniorityand age.
Because the workersstayedwith the same job for life, the firmcould
affordto investheavilyin workersgenerallyas well as in specifictraining and education.Workerscould count on ever-increasing
wages and
steadilyrisingrankswithina companyas it grewin size. The promise
of risingwages and ranks reinforcedemployees'desire to stay in one
company for life. Enterpriseunionism minimized labor conflictand
gave workerssecurityand protectionfromcompetitionfromworkers
in smaller firmsand less prosperousindustries.In sum, the JES was
instrumentalin assuringlow labor costsand high workermorale and
productivity,therebyservingas a powerfulengine of growthin the
1950s and 1960s.
The environmentof the JES, however,has changed significantly
since the early 1970s.The threefundamentalchanges that have profoundly affectedthe characterof employmentrelations in Japanese
businessare: (1) the slowerrate of economicgrowth;(2) the risingage
1032
KANJIHAITANI
of Japanese workers; and (3) the increasing proportion of college
graduatesamong managerialworkers.
Since the oil crisisof 1973, the Japanese economyhas no longer
been able to maintainthe rapid growthrate (10% or more per year in
real terms)of the 1950s and 1960s. By all estimates,the long-term
growthrate of the Japanese economyin the late 1970s and the early
1980s is expected to be, at best, 5% or 6% per year. Corporations
which recruiteda large number of young workersin the 1960s and
early 1970s now have a surplus of workers,particularlyuniversity
graduatesin themanagerialranks.Because of this,theyhave drastically
reduced hiringduring the last few years.For example, Hitachi Co.,
Ltd., which had previouslyhired an average of 800 college graduates
per year,recruitedonly 100 in 1976, and its 1977 hiring plan called
forabout 400 college graduates.Accordingto a surveyof 1,711 corporationsconductedby a privaterecruitingfirm,only 6.8% of the firms
surveyedreportedplans to increasehiringin 1977 by more than 50%
over 1976,while 13.8% reportedplans to increaseby less than 50%2.
Much of therecentdrasticreductionin hiringis no doubt attributable
to cyclicalfactors,but thereare also strongindicationsthatmanycorporations have adjusted their long-termrecruitingplans substantially
downwardin line with the prospectof a permanentslowdownin the
growthof the economy.
bearingon the changingcharAnotherfactorthathas a significant
acterof the JES is the risingaverage age of the Japanese people. This
rise,of course,is the resultof the decliningbirthrate and the steadily
risinglife expectancyof the population. (Between 1955 and 1977, the
normal life span of Japanese men increasedfrom64 to 72.) Between
1965 and 1975,the percentageof the population under 25 yearsof age
decreasedfrom45.9% to 39.5%. Correspondingto the rising average
age of the population as a whole is the risingage of Japaneseworkers.
Accordingto the 1977 WhitePaper on Labor, the ratio of male workers
in the 45-years-or-older
bracketrose from
bracket to the 18-to-25-year
0.84 in 1965 to 1.78 in 1975 forall industries,and from0.63 in 1965 to
1.67 in 1975 in manufacturingindustries.Accordingto a recentstudy
by a lifeinsurancecompanycoveringsome 470,000firmsemployingten
Ormoreworkers,the averageage of salaried employeesincreasedfrom
32.6 in 1961 to 36.1 in 1975,and is expectedto reach 39.9 in 1985.3
The age structureof employeesof a typicalJapanesefirmwas often
describedas a pyramid.This is no longertrue of many firms;the bottomof thepyramidis shrinkingand a bulge is developingat the lowermiddle age level. The productsof the postwarbaby boom are now in
theirearlythirties,and a large numberof thesepeople were hired during the superboomyearsof the 1960s.The decline in the youthpopu2 Nikkei Business, August 16, 1976, pp. 36-37.
3 President,August 1977, p. 45.
THE JAPANESEEMPLOYMENTSYSTEM
1033
lation coupled with the recentslowdownin hiring has resultedin a
sharp reduction in the employmentof workersin their twenties.A
1976 surveyof 438 firmsconducted by the Ministryof International
Trade and Industry(MITI) found that 34.6% of male staffworkers
were in theirthirtieswhile 30.6% were in their twenties.4
The rising age of Japanese citizens is exerting an increasingly
heavypressureon theoutdatedsystemof mandatoryretirement(teinensei) foundin a greatmajorityof Japanesefirms.Prior to the 1970s,the
mandatoryretirementage in manyfirmswas set at 55. The retirement
age of 50 or 55 practicedat the turnof the centurymade sensein view
of the then veryshortlife expectancy,which was about 43 for men.
Now, with the male life expectancyof 72 years,retirementat 55 poses
a veryseriousproblem to the retireeswho still possessmany years of
productivelife.Retirementbefore60 is particularlyhard since the paymentsof the national old-age pension (kosei nenkin) benefitsdo not
startuntil age 60. For these reasons,the extensionof the mandatory
retirementage has become a serious social issue in recentyears,with
labor unions fightingfor the extension and employersresistingthe
change. The average retirementage is now about 57, with 477% of
at 55 and 32% settingthe age at 60. As more
firmsrequiringretirement
firmsraise theirretirement
ages to 60 and above, the higherthe average
age of the workerswill become, aggravatingthe problems to be discussedin the next section.
Anotherdevelopmentthat is closelyrelated to the rising average
age of workersis therisingproportionof the workingpopulation with
universitydegrees.Of the male population of 25 years or older, only
4.5% were collegegraduatesin 1960; the figureexceeded 10%/in 1970
studentsexceeded
and was 12% in 1975.The totalnumberof university
one million in 1965 and two million in 1975. The percentageof college-agepopulation attendingcolleges and universitiesincreasedfrom
10%oin 1960 to 38%0in 1975. Close to 40%0of high school graduates
now seek higher education. These developmentshave the following
effects:first,the decliningnumberof young job seekerscoupled with
employers'penchant for recruitinguntrained labor have resulted in
acute shortagesof young production workers;second, the increasing
availability of universitygraduates for managerial positions has diminished the special advantages of having universitydegrees. In the
superboomyearsof the 1960s,corporationscompetedforcollege graduates in order to expand their managerial staff.Managerial trainees
with college degreeshad a special advantage in wages and promotion
over those with only high school educations. This advantage has diminishedmarkedlyin recentyears.
4 Ministry of International Trade and Industry, Atarashii Keieiryoku Shisu,
Showa 52-nen,p. 63.
1034
KANJIHAITANI
Problems and Changes
The recentdiminishingeconomicgrowthrate and increasingage
structureof workerswithin the environmentof the JES have created
two ratherseriousproblemsfor Japanese business.The firstproblem
concernswagesof productionworkers.Rising workers'ages withinthe
contextof lifetimeemploymentand nenko ("rankingby the meritof
yearsof service")wages mean that the total wage bill increasesautomaticallyeveryyear as workersgrow older, other thingsbeing equal.
The second problem primarilyconcernsmanagerial employees.The
risingage ofworkersmeans,in thecontextof nenkopromotion,thatan
largernumberof administrativepositionsmustbe created
increasingly
each year to meet the growingdemand for them. This was possible
during the boom years of the 1960s,but it is becoming increasingly
in the 1970s.The wideninggap between the demand for and
difficult
the supplyof administrativepositionsis becominga veryseriousproblem formanyJapanesefirms.In thissectionwe shall examinehow these
two problemsare being dealt with and, as a result,what changes are
occurringin the JES.
The Problemof RisingLaborCosts:The practiceof paying wages ac-
cordingto nenko is found primarilyin large firms;it is characteristicallyabsentin small firms.Nenko wages make senseonly under a system of lifetimeemployment,but the latteris neitherpossible nor desirable in small firms.They do not possess the prestige,stability,and
of largercorporationsthat are needed to attractyounger
profitability
workersto work at wages below their productivity.Since their needs
are primarilyforunskilledlabor, theyneed not invest,as largerfirms
do, in workers'skills.Instead, theycan easily obtain ample supplies of
unskilledolder workerswillingto workat lowerwages.Finally,smaller
firmsare relativelyfree of labor union pressuresdemanding security
forolderworkers.All in all, the labor marketforsmallerfirmsis highly
fluidand wages tend to be in line with workers'contributionsto production.In contrast,the nenko wages of largerfirmstend to underpay
youngerworkersand overpayolder workersin termsof theirproductivity.
Figure 1 showsthe changes,between1967 and 1975,in the average
age bracketsby large (1,000 or more
wages paid to workersin different
firms.Workers'productivitycan
to
99
small
workers)
and
(10
workers)
be assumedto peak in theirthirties,and this is reflectedin the smallfirmwages curves.These curvesare not only less steep than those of
theyhave peaks in the middle years.
large firms;but, characteristically,
In contrast,the wage curvesof large firmsfor both yearsare positive,
indicatingthatthe nenkosystemof wagesis stillverymuch in evidence
in large firms.We note, however,that the 1975 curve of large firmsis
considerablyflatterthan the 1967curve;theratio of older (50-59) work-
300
250
1967
200 _
1975
,
150
100_
50
0
20
I
24
25
I
29
30
I
34
35
I
39
40
50
49
59
I
Age
I
B*
200
150
1967
1975
100
50
0
20
I
24
25
I
29
30
i
34
35
1
39
40
I
49
50
I
59
Age
FIGURE 1: Wage structureby age bracket, male workers.
*A: largefirms,1000 or moreworkers;B: small firms,10 to 99 workers.20-24 = 100.
SOURCE: Ministryof Labor, Rodo Tokei Yoran 1977, p. 97.
1036
KANJIHAITANI
ers' wages to those of younger(20-24) workersdecreased from2.4 in
1967 to 2.1 in 1975.This changeclearlyindicatesthat the advantageof
seniorityis diminishing.One reason for this developmentis undoubtedly the factthat the shortageof young school leavers,particularlyin
blue-collarjobs, has pushedup theirstartingwagesrelativeto thewages
paid to older workers.Anotherreason may be that firmsare successful
in preventingthe rising ages of workersfromautomaticallypushing
theirwages up. In fact,a studyby the Ministryof Labor reveals that
firmswitha largerproportionof workersin the middle and upper age
bracketstend to have flatterwage curves than those with a relatively
largernumber of youngerworkers.5This downward pressureon the
wages of older workersis expected to increase as more firmsextend
theircompulsoryretirementages to 60 and beyond.
One may wonder how corporationsunder the nenko wage system
can cope with the problem of rising labor costs caused by the rising
age of workers.Theoretically,the solution is obvious: it is to replace
nenkowagesby a systemof wages based on functionand ability.Given
the nature of Japan's social environment,however,a systemof wages
based solelyon meritis untenablefortworeasons.First,therestillpersistsa widely held view that wages should be geared to the necessary
living expenses of workers.A merit-basedwage systemthreatensto
undermine the financial securityof some older workers.Secondly,
since work is a group effortin a Japanese organization,an accurate
It
measurementof an individual's performanceis oftenverydifficult.
appears, then, that the only viable option open to Japanese corporations is to work out a compromisebetween the nenko and meritsystems; or, more specifically,devise a nenko systemmodifiedby considThe followerationsof an individualworker'sabilityand performance.
ing case studyillustratesone such compromisesolution.
The Wage System of PolyplasticsCo., Ltd.: PolyplasticsCo., Ltd. is
ownedjointlyby Celanese PlasticsCompany,a New York-basedplastics
company,and Daicel Company,Ltd., a large Japanese chemical firm
headquarteredin Osaka. AlthoughPolyplastics'employeesnumberonly
of a
about 350 (all Japanese),the companyhas all the characteristics
large corporation,both in termsof capitalization and the volume of
sales.6Its employmentsystemis strictlyJapanese,or more specifically,
thatof a large Japanese corporationwith lifetimeemployment,nenko
wages and promotion,and an enterpriseunion. We will examine
brieflythe company's wage systemwhich incorporatesa significant
elementof workers'ability,but will limit discussiononly to wages of
nonmanagerialemployees.Bonuses,allowances,and fringebenefitswill
not be considered.
5 Ministryof Labor, Rodo Hakusho, Showa 52-nen, pp. 154-155.
6 The discussion in this subsection is based on the booklet on the wage system
prepared by the Polyplastics Co.'s Personnel Department, and personal interviews
with the head of the department,Mr. S. Iwai.
THE JAPANESEEMPLOYMENTSYSTEM
1037
All employees including production workersare paid monthly
salaries. The basic monthlysalary(rirongesshu) consistsof two parts:
and thejob-abilitywage (shokuno-kyu).
The
the basic wage (kihon-kyu)
basic wage is strictlyproportionalto the age of the workers.It ranges
workerto 90,300yen for
from51,000yen per monthforan 18-year-old
a 55-year-oldemployee.The strictnenko nature of the basic wage is
justifiedon the groundthat the employees'needs are highlycorrelated
with theirages. The job-abilitywage is designedpartlyto rewardemployees' abilityand performanceand partlyto reflecttheir education
and seniority.The average proportionof the job-abilitywage in the
worker'sbasic monthlysalaryis about 20% foran 18-yearold and 40%
fora 30-yearold.
There are threecategoriesof job-abilityclassifications:M (manS (senior),and J (junior). Each categoryis divided
agerial-specialist),
into severalgrades (4 in M, 4 in S, and 3 in J). Each grade is defined
in termsof the minimumquality of workrequired in that grade. For
example, J-3 grade requires "possession of high-schoollevel general
knowledgeand an abilityto performsimple,routinetasksunder supervision." The minimummonthlyjob-abilitywages forthe gradesare as
follows:J-3,19,400yen; J-2,22,900yen; J-1,28,500yen; S-4,35,750yen;
S-3,45,750yen; S-2,56,750yen; and S-1,72,500yen. The assignmentof
a job-abilitygrade to a new recruitwho has no work experience is
based on the worker'slevel of education: High school graduate-J-3;
Junior college graduate-J-2, with automatic promotion to J-1 after
two yearsof service;Universitygraduate-J-1; and Master's degreeJ-1,with automaticpromotionto S-4 afterone year of service.
A workermustservein each grade fora minimumnumberof years
before he becomes eligible for promotion to a higher grade. The
minima are one year in J-3,threeyearsin J-2,and two years each in
J-1throughS-1. There are also a certainmaximum number of years
which a workermay serve in some grades beyond which he is automaticallypromotedto a next higher grade. These maxima are: one
year in J-3,
threeyearsin J-2,six yearsin J-1,and nine yearsin S-4.
The combinationof the minima and maxima worksin such a way that
an 18-year-old
high school graduatewho startsto workin the company
with J-3 grade will automaticallybe promoted to J-1 in four years,
which will put him on an equal footingwith a 22-year-olduniversity
graduate who startshis employmentwith J-1 grade. The company's
wage policythusimpliesthatfouryearsspentby a highschool graduate
in the companyis equivalent(as faras his usefulnessto the firmis concerned) to fouryearsspent in a university.Promotionsbeyond the J-1
grade are less certain and automatic; ability and performanceof the
individualworkersignificantly
affectthespeed at whichhe is promoted.
Promotionsto highergrades and categories,as well as the size of
annual pay increaseswithinthegrade,depend on theresultsof periodic
personnelevaluations.The criteriafor evaluation consistof the individual's (1) performance,(2) attitudes(discipline,cooperativeness,ag-
1038
KANJIHAITANI
gressiveness,and sense of responsibility),(3) competence (necessary
knowledge and technicalskills), and (4) capacitative maturity(judgment,creativity,
abilityof expression,leadershipability,etc.). Promotionsbetweencategories(Jto S, and S to M) also requirepassingexaminationswhichinclude writinga thesis.
Promotionin grades(J-3
throughM-1) mustbe distinguishedfrom
promotionin positions(foreman,sectionchief,etc.). Grades are "person-relatedranks,"whereaspositionsare "job-relatedranks." It is possible foran individual to be promotedin grade,with more statusand
money,withoutgettingpromotedin position,and vice versa. In practice, however,there is a close correlationbetween the two parallel
rankingsystems.
Thus, S-1 correspondsroughlyto superintendentforeman, and ordinaryforemenhave grade S-2 or S-3. In the managerial
category,the lowest M grade correspondsto the position of assistant
sectionchief,and thedepartmenthead-the highestfunctionalposition
below the top management-has the grade of M-1. For a managerial
employeewith a college degree,it takes somewherebetween 13 and 17
yearsfromentryto the firm(at age 22) to reach the positionof assistant
sectionchief.
The foregoingexample of Polyplastics'wage systemis fairlytypical
of thewage systemsof large Japanesecorporations.It is fundamentally
a nenko wage system,modifiedto some extent by considerationsof
merit.The merit (ability,performance,and attitudinalqualities) affects,withina limit,the speed at whichan individual employeeis promoted in grade with accompanyingincreasesin pay. Note that,under
this system,a worker'ssalary increasesautomaticallywith his age; it
cannotremainconstant,let alone decrease.As such,it is a systemwhich
is ill-equipped to cope with the problem of the risingage of workers.
In theyearsand decades ahead, theproblemof therisingage ofworkers
is expected to worsen,especially as extensionsof compulsoryretirement ages are inevitable.It will thereforebecome imperativeforfirms
to develop an even more flexiblewage systemgiving a much heavier
weightto merit.A step in thatdirectionwas recentlytaken by a large
textilefirmwhen it adopted a wage systemunder whichthe age-related
portionof the worker'sbasic wage ceases to rise at age 45.
of ManagerialRanks: In the precedingsubsecThe Problemof Inflation
tion we examined the problem pertainingto nenko wages. We now
turnto the otherside of the nenko system-thepracticeof nenko promotion in positions.This is a problem which largely concernsmanagerialworkers.Althoughemployeesare concernedabout grade promotionssince theybring forthhighersalaries and more statusinside the
company,theyare much more sensitiveto promotionsin functional
positions. "Rank" to them is synonymouswith position, not with
than positional promotions
grade.Grade promotionsare less satisfying
forthe followingreasons.First,gradesin actual practiceare so closely
tied to employees'ages that theyservelittle functionas a distinction.
THE JAPANESEEMPLOYMENTSYSTEM
1039
Practicallyeverybodygets highergrades by merelygrowingold. Secondly,gradesare usuallygood only inside the company.Such internal
grade designationsas 1\'-1and S-1 in PolyplasticsCo., for example,
mean little in societyat large. In contrast,such positional titles as
sectionchiefand departmenthead are commonlyrecognizablethroughout the bureaucraticworld, in business as well as in government.A
managerialemployeein his fortieswho has not made sectionchief(or
mustexperiencea seriousimageproblem
departmenthead in his fifties)
in the rank and statusconsciousJapanese society.Even the employee's
wife'sstatusand prestigein the neighborhoodand among her relatives
and friendsmust sufferif her husband does not have an appropriate
and keep peace with
title forhis age. In order to preserveself-respect
his family,a managerialworkeris drivento seek a titlewith cho (head
or chief)in it. Accordingto a reportby the Japan ProductivityCenter,
managersexpressedthe desireto become
some 80% of thelower-middle
a section chief (incidentally,only 13% of them felt that promotions
should be based solelyon individuals'merit).7
The basic functionalpositionsin the managerialranks are, in an
ascending order: deputy section chief (kacho dairi); section chief
(kacho); assistantor associatedepartmenthead (bu-jicho); and departmenthead (buchlo).Above the bucho are the executiverankscombined
with directorship:managing director,executive managing director,
president,and so on. Below the deputysectionchiefare nonmanagerial
ranks of subsectionchief(kakaricho),chief(shunin), and so forth.All
these designations,of course,vary to some extent from company to
company.
Given the traditionalJapanese attitudetowardranks and the recent changesin the environmentof the JES discussedearlier, an inevitable conclusionmust be drawn. The systemof nenko promotion
pushes a large number of increasinglymore eligible managerial employeesupward in the organizationalhierarchy.Not only the absolute
number of eligible managersincreaseseach year as theygrow older,
but also the proportionof junior managerswho seek higher administrativepositionsrisesas college degreesbecome commonplace.Corporations,however,are unable to meet the increasingdemand for administrativepositionsbecause the slowerrate of economicgrowthprecludes theircontinuedexpansion. They thus face a serious dilemma.
Promotingmanagersto satisfytheirneeds fortitleswould resultin an
Failexcessivenumberof managerialposts and attendantinefficiency.
ing to give thempositions,on the otherhand, would lowermanagerial
This problem has come to be known as the
morale and productivity.
"inflationof managerial ranks" (kanriso no hidaika). It is emerging
as one of the most vexing problems confrontingJapanese business
todayand in the yearsto come.
Table 1 presentsa resultof the surveyof 93 large corporationscon7 President,August 1977, p. 40.
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THE JAPANESEEMPLOYMENTSYSTEM
1041
ductedbyNikkeiBusinessin the summerof 1976.The table showsthe
changes,between1960 and 1976,in therange of ages and relativenumfirms.
berofdepartmentheads and sectionchiefsin sevenrepresentative
It is evidentthat therehave been sharp increasesin both the ages of
positions,especiallysection
managersand thenumberof administrative
chiefs.The same surveyalso foundthat corporationswere not optimistic about thefutureprospectsof theiremployees'promotions.In 73.3%,,
of thefirmsthepromotionchanceswere to worsen,while in 15.1% they
would remainthe same and in 8.1% theywould improve.8According
to a projectionby the National Land Agency,only about 10% of male
collegegraduatesof 45 yearsof age or older will be able to occupypositionsof sectionchiefsor higherin the year2000, as comparedto about
70% who are so positionedtoday.9
What stepsare being taken,or can be taken,by corporationsfacing
theproblemof theincreasingnumberof managerialemployeeswho are
eligible forpromotionto higheradministrativepositions?The following six broad categoriesof actionsmay be considered:(1) maintaining
thestatusquo; (2) increasingthe numberof titledpositions;(3) adopting "qualificationsystems";(4) adopting the "specialist system"; (5)
easing out older employees,and (6) othermeasuresfor greateroperational flexibility.
could simplyignorethe
Maintainingthe Status Quo: Corporations
problemof the managerialemployees'need for higherstatus,and fill
administrativepositions only when economically justified. In most
such a courseof action is extremelyunwise since it is likely
enterprises
to resultin a deteriorationof morale and productivityon the part of
an increasingly
largerproportionof managerialworkerswho cannotbe
promotedto positions of authority.There exists an underlyingpresumptionin a Japanesefirmthat thosewho are hired in the same year
are approximatelyequal in ability.It must also be rememberedthat
in a Japanesecorporation,employeeshave littlesay over the positions
to whichtheyare assigned.Thus, when one managerin the same-yearof-entry
group is promotedahead of the others,the lattertend to feel
that the one promotedhas been lucky because he was assigned to a
"right" position. The sense of unfairness,resentment,and jealousy
are likelyto frustrate
thosewho are leftbehind.
IncreasingtheNumberof TitledPositions:Corporationsare resortingto
this measureratherprolifically,as Table 1 shows. The percentageof
sectionchiefsin total employees,forexample,increasedin many firms
froma merefewpercentin 1960 to about 10% in 1976.Besides increasing the numberof sectionsand departments,firmscould also create
8 Nikkei Business, August 16, 1976, p. 92. Don't-knows and no answers constituted the remaining 3.5%.
9 Chuo Koron, April 1977,p. 138.
1042
KANJIHAITANI
layersof intermediateranks.The most commonlyfound intermediate
ranks nowadays are: associate departmenthead, assistantdepartment
head, deputydepartmenthead, deputysectionchief,and assistantsection chief.Althoughexact designationsand rankingof theseintermediate positionsvaryfromcompanyto company,theyare takenseriouslyas
formalpositionalranksand theirholdersare accordeddue recognition
and respectboth inside and outside the company.This proliferation
of rankswould certainlyquench the employees'thirstfortitles,but it
would be damagingto the efficiency
of the company'soperations.
Adopting"Qualification
Systems":The term qualification system
(shokunoseido) refersto the use of a wide varietyof person-related
grades ("qualifications") that are not directlyrelated to functional
positions.The grade systemof PolyplasticsCo. discussed earlier is a
typicalexample. Some firmsuse systemsof grades that are hardlydistinguishablefrompositional ranks.For example, in one large firm,a
distinctionis made between "accountingsection chief" (kaikei kacho,
a grade) and "chiefof accountingsection"(kaikei-kakacho,a position).
In the accountingsection,thereis only one "chief of accountingsection," but there may be several "accounting section chiefs,"that is,
thosemanagerswho "qualify" to be the real chiefin termsof experience and ability.In some rare cases,not even such a subtle distinction
is made. Thus, theremay be severalchiefsin a given section,and only
the insidersknow which one is the real (i.e., functional)chief.In most
firmsthat use a qualificationsystem,however,the grade designations
are eithertheimpersonal,mechanistictypelike Polyplastics'M-1 or S-1,
or broader,more general designationssuch as counselors,principals,
secretaries,and so on.
The objectiveof the qualificationsystemis to rewardemployees'
and seniorityby means other than promotionin
ability,performance,
functionalpositionswhich,by theirverynature,cannot be given to all
who qualify.Under this system,even though only a fractionof managerial employeescan actuallybecome, say, departmentheads, all, or
almost all, of them can look forwardto eventuallyreachingthe rank
(giade) whichis regardedas equivalent to the departmenthead.
This systemis not withoutshortcomings.
First,the grade designations used in many corporationsare not directlyrecognizablein the
outsideworld,so that theyare not helpfulin boostingthe social status
of the employeesand theirfamilies.Secondly,since seniority(nenko)
is still an importantfactorin the determinationof employees'grades,
thereis a tendencyforthoseemployeesin the same-year-of-entry
group
to be roughlyin the same grade.Their need forrecognitionand status,
cannotbe fullysatisfiedby thissystem.Thirdly,highergrades
therefore,
are oftennot accompanied by increasedauthorityand responsibility.
Those with high grades may become frustratedif theyare not given
THE JAPANESE EMPLOYMENT SYSTEM
1043
comparablyhigh positions-a situation which is not very conducive
to high employeemorale and productivity.
Adoptingthe "Specialist System":With a betterunderstandingof the
distinctionbetweenline and stafffunctions,therehas been an increasingly clearer recognitionin Japanese companies that all managerial
Some firmshave consequently
employeesneed not be administrators.
adopted the designation of specialist (senmonshoku) as a separate
category.Managerial employees(in the broader sense of the term)are
then divided into two categories:kanrishoku(managersor administrators)and senmonshoku.To theextentthatsome managersare removed
positionsis reduced.
fromline functions,thepressureon administrative
The systemhas one serious drawbackas a means for solving the
problem of statusinflation.Not manymanagerslike to be called specialists,and thosewho are so called tend to be regardedas misfitsor
incompetents.The reason for this unpopularitylies deep in the character of Japanese social organization.Workerstend to identifythemselveswith theirgroups-sections and departments-ratherthan with
their"profession."The conceptof professionor specialtyhas not been
firmlyestablishedin Japan. Managers are, as a rule, employedby corporations not as specialists-e.g., accountantsor lawyers-but as generalistmembersof the corporatefamily.They are assignedto sections
or departmentsthatcollectivelyperformspecializedaccountingor legal
fromone functionto
functions.Besides,mostmanagersare transferred
anothermany timesthroughouttheircareers.To be labeled "specialist" and removedfromthe candidacyfor positionsof authorityis tantamountto being leftout of the mainstreamof the corporatelife. Nor
does a specialistdesignation-forexample,seniorchemist-carrymuch
prestigeor statusoutside the company.The manager of a nearbybar
would be more than happy to extendcreditto a sectionchief,but not
to a senior chemist.To make the matterworse,specialistdesignations
have been used in the past by some firmsas a convenientdumping
ground for older, less competentemployees.For these reasons, the
specialistsystemhas not been verypopular with corporatemanagers.
Many firmswhichhad adopted the systemin the fiftiesand sixtiesare
now droppingit.
emoflifetime
EasingOut OlderEmployees:Becauseof thetradition
ployment,few firmsexplicitlylist reductionof excess (older) labor as
one of theirobjectives.However,many firmsdo have personnelpolicies that are aimed indirectlyat reducingthe pressureof older workers
on the companies' payrollsand administrativepositions.Several such
policies were reportedin a studyconductedby the MITI in 1976. Of
the 1,057 large and medium-sizedfirmscovered in the survey,438 responded to the questionnaire.The percentagesof thosefirmsusing the
1044
KANJIHAITANI
followingmeasures were: Arrangingretirementor temporaryassignment in affiliatedfirms-71.0%; Arrangingemploymentelsewhere51.6%; Establishingsubsidiariesin which to place older workers12.1%; Providing assistance in obtaining qualifications needed for
gaining employmentor startingown business-9.8%; and Providing
technicaland financialassistanceforstartingown business-8.4%.10
The mostoftenused measureis placing retiringworkersor older
employeesnearingretirementin the affiliated(keiretsu)firms,that is,
The transfermay be eitheron a temsubsidiariesand subcontractors.
porary(shukko)or permanent(amcikudari)basis.11Additionally,more
than half of the firmshad policies of helping their older employees
findemploymentopportunitieselsewhere,while 12% had subsidiaries
establishedfor the specificpurpose of absorbing older employees.In
general,the employeeswho are eased out are thosein theirlate forties
or fiftieswho, in the eyes of the top management,are not likely to
Some of themcould stayin their
reach the top level beforeretirement.
if theywished.Many, however,welpresentpositionsuntil retirement,
come the opportunityof moving to a greenerpasture while theyare
still relativelyyoung.
Since movementsare almost always to smaller, less prestigious
theyofteninvolveincreasesin rank,and possibly,salary.In order
firms,
some firmshave adopted a policy of usto encourageearlyretirement,
ing favorable formulae for calculating severance allowances and/or
pension benefitsof thosewho retireat 45 or 50. It mustbe noted,however, that compliance with early retirementpolicies is strictlyvoluntary.Most corporatetop managementrefrainfromexertingovertpressures on theiremployeeslest such steps should be interpretedas signaling the abandonmentof the practice of lifetimeemployment.In
fact,many firmshave put into effect,as a package, early retirement
programsand an extensionof the mandatoryretirementage.
OtherMeasures for GreaterOperationalFlexibility:Several other measures designed to increase the operational flexibilityof the managementof older personnelare being contemplated,and in some instances
adopted. One such measure is to abandon the provisionof automatic
annual increasesin the worker'sbasic wage once he reaches a certain
age. Other measuresinclude demotingmanagersfromfunctionalpositions,rotatingadministrativeappointmentsamong eligible managers,
and placing a limit on the numberof yearsa managercan servein administrativepositions.Some variationsor combinationsof these meain a small numberof firms.
suresare being triedexperimentally
entail to some extentan
measures
Note that all of the foregoing
10
MITI, Atarashii Keieiryoku Shisu, Showa 52-nen, p. 67.
11 For discussions of keiretsu,shukko, and amakudari, see Kanji Haitani, The
Japanese Economic System(Lexington,Mass.: D. C. Heath, Lexington Books, 1976),
pp. 44-47 and 120-127.
THE JAPANESEEMPLOYMENTSYSTEM
1045
erosion of the nenko system.In a companythat adopts one of these
measures,a situationcan easily arise where a person with longer seniorityworksunder,or receivesa smallersalarythan,a personwith less
seniority. Such situations would be fundamentally at odds with the
basic organizingprinciplesof Japanese society.Yet the fact that these
measuresare considered,debated,and experimentedwith indicatesthe
seriousnessof the problemat hand.
In speculatingon the trendsof change in the JES, it is helpful to
know what some presidentsof large Japanese finrsare thinking.The
surveyof 1,726presidentsconductedby Nikkei Business in July 1976
yielded some interesting
results.The 306 presidentswho respondedto
the questionnairepredicted as follows: lNenko wages-will change,
71%, will not change,28%; Lifetimeemployment-will change,56%,
will not change,44%0; Enterpriseunionism-will change, 44%, will
not change,55%. 'When asked if theyfelt that the ne77kosystemand
lifetimeemploymenthad to change,theirresponseswere: Nenko wages
-must change,73%X,need not change,26%; LifetimeemploymentMust change, 54%, Need not change, 45%.12 The fact that over 70% of
the presidentsof large firmsfeel that the nenko systemwill and must
changeis highlysignificant.
It appears to foretellthe natureand shape
of the comingerosionof the Japanese EmploymentSystem.
ConcludingRemarks
In this articlewe have examined the two problemsthat threaten
to plague Japanese business in the decades to come: the problem of
rising labor costs and the problem of inflationof managerial ranks.
Both problemsare directlycaused by the risingages of workerswithin
an environment
of slowereconomicgrowth.What is wanted,of course,
is greateroperationalflexibility
in the managementof older employees.
In searchof this flexibility,
Japanese firmshave adopted, or are consideringthe adoption of,various measures.The fundamentalproblem
is that thosemeasuresthat are compatiblewith the traditionalvalues
of Japanesesocietyare not effective
in solvingthe problem,while more
effective
measuresgo counterto the basic organizingprinciplesof societyat large.It is an old story-a perennialbattle betweentraditional
values and economicrationality.Althoughthereis littledoubt in most
observers'and practitioners'minds that economic rationalitymust ultimatelytriumph,there also seems to exist a widely held belief that
since traditionsdie hard, compromiseand gradualness in personnel
policies mustbe allowed.
12
Nikkei Business, September 27, 1976, p. 71.
KANJI HAITANI is Professorof Economics and Business Administrationat State
UniversityCollege at Fredonia, New York.