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Workway Reform

Ⅰ.  Introduction

 Workway reform. This is the most important element of structural reform which constitutes the growth strategy of Abenomics. The package of laws which delineate the regulations and rules to promote workway reform was legislated on June 29,2018. It took more than three years to be enacted since the act has been presented to the Diet.

   In this essay, let me explain the content of the law, importance of “work way reform” for the growth strategy of Abenomics, and why it took such a long time to have been legislated, and finally evaluate the effectiveness of the legislation to realize the workway reform in Japanese industry.

Ⅱ. Workway Reform Legislation

   The package of workway related acts was legislated in the morning of June 29 at the general assembly of the House of Councilors. Since this package has passed the   House of Commons a month ealier, May 31, this package of laws have been formally legislated and put to effect.

   The package comprises of three major components:
1. Upper limit of overtime work hours
      Over time is allowed maximum 720 hours a year. Should be less than 100 hours a month. Severe penalty is imposed if violated. The regulation becomes effective from April 2019 for large firms, and from April 2020 for SME(small and medium enterprises).
  2.Same wage for same work
        Unjustifiable difference of working conditions such as basic wage and allowances between regular and non-regular employees should be abolished.The regulation will be effective from April 2020 for large firms and from April 2021 for SMEs.

   3.  Introduction of hour-unrelated wages
         The new system is to allow paying wages on the basis of performance of the worker rather than the length of work hours. A limited number of professional workers can be applied this system so that they are exempted from the existing work hour regulations.

           These workers are still required to take at least 104 days off a year. The worker applied this system of exemption can leave the system at his or her will. The system will be in effect from April 2019.

    An important defect of this legislation is that the government failed to include the crucial item of “the expansion of the category of workers to be applied discretionary work hour system.” 

  Discretionary work hour system is the system by which the worker is regarded to have worked certain hours which was determined by the employer and the worker before hand, regardless of actual hours worked afterwards. For example, if the employer and the worker determined to work 10 hours before hand, and if the worker worked actually 8 hours, he will receive overtime pay of equivalent to 2 hours. This system has been planned by the government(MInistry of Labor)to use for such workers as professional workers like designers and those engaged in planning or research.

  The reason why the expansion of the coverage was not included in the legislation this time was the trouble in the process of Diet debate. While opposition parties have been strongly against the expansion on the ground that the expansion will increase long-time work. Debating against this argument, PM Abe argued at the Diet session that there exists the data which shows that workers of this category work actually shorter hours than the ordinary workers.

   The opposition party members asked the source of the data and asked Ministry of Labor which has conducted the work hour survey to explain it. It was found then that the questions asked for the two types workers were different. The question for ordinary workers was the overtime work of the day when they worked longest hours, and the question for the focused category of workers was the average hours worked for a day. Naturally, the data obtained from such different questions are not comparable so that PM Abe’s argument was accused to be non-sense.

   Having apologized for this lousy handling of the data at a meeting with opposition parties, Ministry of labor asked them to accept the rescheduling of submission of this item for a year. The opposition party representative fiercely against such a proposal, and consequently, this important item of expansion of category of workers was not included in this package of laws for legislation this time.

  Later from mid-July, Labor ministry announced to resume the whole process of examination of this item hoping to enact for the future.

  The process of workway reform legislation took more than three years, which is  extra-ordinarily long for legislation of this type of laws. Let me review briefly how it went in the process.

   As early as April 23, 2013, prime minister Shinzo Abe appealed at the joint meeting of advisory committee of Economy and Fiscal policies and the committee of Industrial Competitiveness, the highest body to determine Abenomics, to examine to formulate the new working hour system in which reward is determined not by the hours worked but by the outcome of the work. Prime minister’s proposal was followed soon by Minister of Welfare and Labor, Mr. Norihisa Tamura on May 28 that the government launch official examination for introducing “white collar exemption” in Japan’s work hour regulatory system.

   The debate on introduction of new work hour system had to cover many items, as I will review in the follows, and took a long time. And toward the final stage of long-lasting debate, in February 2018, the trouble on the nature of the data which was referred to by PM Abe as the evidence took place. This trouble wasted a few months and resulted in dropping an important item from the legislation.

Ⅲ.  Abenomics and Workway Reform

   It was emphasized by Abe administration and agreed by many experts that the workway reform is crucial as a structural reform to promote economic growth of Japan.

   Let me explain why. Japan’s workers productivity has been one of the lowest among major advanced economies of the world for the last few decades. For example, according to the survey of Japan Productivity Center for the period of 2010 to 2012, Japan’s labor productivity in service sector was only 38.4% of that of the US. While Japan’s labor productivity has been rising moderately during the recent decade, its pace has been much slower than that of US and Germany.

The main reason for this is the poor productivity of service sector. While the delay of IT application in this sector has been dragging the productivity improvement, the outdated work system particularly of hour linked pay system is another important reason.

   While average working hours of Japanese workers as a whole has been aroung 1700 hours a year, which is more or less comparable with major advanced economies of the world. But this is the average of temporary or non-regular workers who work short hours and regular workers. The regular workers working hours remain longer than 2000 hours a year. This reflects that Japanese workers, whose majority work in a broadly defined service sector, tend to work long hours with rather low productivity. And this related critically with the out-dated work hour regulation of Japan.

   In order to understand why the current work hour regulations are outdated, we need to look back Japan’s historical development of labor standard regulations.The current labor regulations have been formulated largely shortly after the defeat of the Pacific War in 1945. Under the control of the Supreme Commander of Allied Forces(SCAP), many aspects of government regulations have been overhauled and newly determined. Labor standard regulation was one of those.

   Prior to the defeat in the war, Japanese labor regulatory system was somewhat similar to the Western model, particularly, separate treatment of white-collar and blue collar workers. Since white collar workers were regarded as reservoir of the management class, they were not controlled by the labor law which regulated blue collar workers. In other words, they were “exempted” from labor regulations, just like Western counterparts.

   This separated treatment of white-collar and blue-collar has been regarded as class discrimination which is a critical element of Japan’s quasi-feudalistic social structure which was condemned by the SCAP office which earnestly advocated “democratization” of Japan. The young bureaucrats who were also critical against pre-war militaristic and quasi-feudalistic system of Japan and adoring “democracy” worked hard to plan the new labor regulation system without class discrimination.

   They drafted the new labor regulation system under the supervision of SCAP office without differentiation by worker’s status such as white and blue-collars.  The new labor standard law, which prescribes work hour regulations, thus created was rather unique compared to many major Western countries where white and blue collar workers are treated differently. The Japanese young bureaucrats believed that this uniform treatment of workers regardless of status was “democratic.”

    This new system motivated tremendously Japanese workers, particularly of those coming from low social classes. This is because they were on the same start line with those coming from higher social classes who were always treated differently and favorably. Now, only rule of the game was to work hard and win the competition. This “egalitarianism” was not limited in the labor system but extended also to many aspects of the society such as education and land ownership. Under this new system, if you work hard and attain results you can be promoted even to the top of social structure.

    Under the new “democratic” system, the majority of Japanese workers worked hard, which was a crucial element why Japanese economy has recovered quickly from the fatal destruction of the defeat of the war and grew rapidly as was often described as “Japan’s economic miracle.” Japan grew rapidly taking advantage of ample and cheap young highly motivated workers, imported technology and expanding global trade market of the time.

    However, as Japan grew much as a manufacturing exporting country, the economy has been transformed to the structure dominated increasingly by broadly defined service industries such as trading, finance, consulting, medicine, education, research, tourism, etc. Workers working in such industries are not working along the belt conveyers. Their contribution is measured not by the hours of work but rather the outcomes of their brain work.

   Now, the conventional labor regulatory system which measures worker’s achievement by the hours of work and pays accordingly, gradually became impediments to productivity growth. Since the contribution of these brain workers were not evaluated by their outcome or performance, they were discouraged rather than encouraged. Also because the system pays workers by hours, even these white-collar workers had to stay at the office and waste their time idly to meet the target of long working hours. This is one of the major the reasons why Japanese labor productivity, particularly of service sector, has lagged far behind of major economies in the world. This is the reason why I name the current labor regulatory system is “out dated.”

    Abe administration has been well aware of this institutional defect. Prime minister Abe proudly declared right after the outset of his administration at the end of 2012 that he will initiated a comprehensive package of economic policies, often called “Abenomics.”  Abenomics is comprised of three arrows: (1) unprecedented monetary easing to get rid of deflation, (2)active and dynamic fiscal policies to support the process of major economic transformation, and (2) structural reform to enhance economic power for growth.

   And reform of labor regulation is considered as the crucial element of growth strategy, as I explained earlier. White Abe administration did not have enough time to prepare for a full-fledged growth strategy in its first year, namely, the mid-2013, the administration forthrightly tackled the task of planning the growth strategy for mid-2014.  The administration tried to prepare the ground to write the deemed reform plan mobilizing reform task forces such as Industrial Competitive Committee, and Regulatory Reform Committee.

   They focused particularly on (1) monetary compensation  for unjustifiable dismissals, (2) Pay by performance among others. Proposals of these reform task forces have been encouraged by business leaders and particularly by prime minister Shinzo Abe himself, but encountered strongly by opposition parties, labor unions, and curiously by an important segment of the government, Ministry of Welfare and Labor.

   Let me review in some detail the contents and process of debate on various topics which have been relevant to realize “workway reform” of Abe administration, and finally give my personal appraisal on this subject. Topics which have been debated include(1) compenated dismissals, (2) temporary labor law reform, and (3) pay by outcomes、particularly the issue of expanding the coverage of workers who are applied the pay by outcomes.

Ⅳ.  Progress and Failures

1.  Compensated dismissals

    Compensated dismissal is the system by which the worker who was dismissed by unjustifiable reasons as recognized by the court can receive due compensation rather than returning to the old workshop. There are two ways of paying the compensation: paid after the court decision and paid prior to the court decision.

    Since Japanese legal system of dismissal is very rigid so that it is virtually almost impossible to dismiss workers, and also the dismissed workers are victimized for loss of forgone opportunity and income, the compensated dismissal system is useful for employers to make dismissal a reasonable option, and for dismissed workers who are otherwise not reasonably compensated this is helpful to reduce economic hardship.

    For these reasons, Abe administration tried to legalize the compensated dismissals as an important element of workway reform legislation. Abe administration proposed to legalize this as early as August 2014 to make Japanese legal system of dismissals somewhat comparable with major advanced nations.

  On June 16, 2015, the regulatory reform committee submitted the report in which the committee recommended to organize experts’ committee to examine for setting up rules of compensated dismissals.

   Half a year later, on January 31, 2017 the experts committee of Ministry of Walfare and Labor finally started examine the legalization. On this issue, the management side appreciates because the cost of dismissals can be more readily assessed, labor side worries because this system may help increase dismissals, and SME employers oppose because the cost of dismissals will increase because of the rule of minimum compensation.

   After repeated discussions, the experts’ committee concluded that the legalization of compensated dismissals is not necessary though the usefulness of the system itself can be admitted. About a year later, at the meeting of Industry Competitiveness Committee held on May 28, 2018, Ministry of Welfare and Labor declared  their decision to pass this up. Consequently, the legalization of compensated dismissals was not included in the growth strategy of Abenomics.

2.   Temporary labor law reform

     Abe administration has been attempting to reform the temporary labor law which was made much more rigid during the rein of Democratic Party of Japan government.  However, the attempt to reform the law has failed to be examined at the Diet session on June 20, 2014 because opposition parties attacked severely the mistake in the sentence of the bill for amendment submitted by the government.The government was obliged to resubmit it a year later.

     The revised bill for the reform of the law was picked up in the Diet discussion for examination in the main assembly of the House of Commons on May 12.2015.This was regarded as an important agendum side by side with labor standard law revision in the comprehensive reform of labor legislation. The government viewed the reform as necessary element of growth strategy. However, opposition parties as represented by Democratic Party of Japan opposed the reform as worsening of the rule of employment.
   On September 11, 2015, the bill for the reform of the law passed the examination at the main assembly of the House of Commons and consequently enacted.
   The main points of the reform are:
1.  The employer can extend the period of employing the dispatched worker, whih
      was limited up to 3years.
2.  For the dispatched worker to continue working under the same employer, he or
     she has to shift to other sections
3.  Worker dispatching companies need to be permitted by the government.
    This reform makes it possible for employers to keep employing dispatched workers as long as they want, which helps increase the flexible adjustment fo workforce.
  3.  Pay by outcomes

   Pay by outcome is the issue which has been debated harshly between those who oppose and support. In May 14, when PM Abe was expected to join the meeting to focus on this subject, the meeting was cancelled because of increasingly tense confrontation between Ministry of Labor and Industry Competitive Committee, and the meeting was postponed.

   On May 28, 2014 Industry Competitive Committee decided to relax the work hour regulation of 40 hours a week. Prime minister Shinzo Abe stated his determination to introduce “white collar exemption.” Expansion of the types of workers broadly, who are applied “Pay by Outcome,” will be conducive to enhance productivity.
However, there are those who want to limit the scope only within a very small numbers within Ministry of Welfare and Labor.

  On July 7, 2014, Employment policy Committee of Ministry of Labor started discussion of employment reform centering around the new pay by outcome system.
On Sept. 11, Employment Policy Committee presented main points for revision of work hour reform including “white collar exemption.” Management side demands the expansion of the scope of workers to be applied the new system, while the labor unions oppose worrying about likely increases of forced overwork.

  On Jan. 15, 2017, Ministry of Labor presented a new plan for pay by outcomes  at the sub-committee of Labor Policy Commission. The ministry proposes the annual income level of at least 10.75 million yen, and suggested 5 jobs as researchers as appropriate jobs.

    On Feb 13, 2017, Ministry of Welfare and Labor officially determined to introduce “white collar exemption’ at the Labor Policy Commission. The ministry meant to submit related bills to the ordinary session of the Diet and intends to put into effect by April 2016.  This system is expected to be applied to professional workers whose annual income is at least 10.75million a year.

   On April 2017, Ministry of Welfare and Labor announced to expand the types of workers who can be applied “discretionary hour work” to include sales workers who propose new plans. It is expected that financial and IT businesses will hire such workers, and they are expected to total more than several hundreds of thousands.

Ⅴ.  Workway Reform Execution Plan

1. Nine areas of workway reform
    On August 6. upon initiation of the third Abe cabinet, the discussion on the workway reform, which Abe administration regards as the most crucial challenge, will start.

    On September 15, Mr. Toshimitsu Motegi, LDP Chairperson of Policy Research
Committee, pointed to the five major items for workway reform.
   1. Improvement of work conditions for non-regular employees
   2. Shortening long working hours,
   3.  Preparing for flexible workways,
        eg: shifting from “spouse tax deduction” to “husband and wife tax deduction
   4. Promotion of obtaining desired kind of jobs
   5.  Accepting more foreign workers.

     On September 27, PM Abe stated at the first meeting of Workway Reform Realization Committee to examine nine items.

    On March 28, 2017, at the Realization Committede ,the government compiled the execution plan consisting of 9 items.
   1.  Improvement of non-regular employees,  introduction of same pay for same
   2.   Raising wages: raise the minimum wage by 3% annually to reach 1000yen
   3.   Correcting long working hours, Upper limit for overtime with penalties, and
          introduction of interval system
   4.   Assisting changing  and reobtaining jobs, financial and information assistance
   5.    Flexible workways: Tele-work, dual job holding, and side-job.
   6.    Encouraging female and young workers, re-learning of middle aged workers
    7.   Promoting woking of aged workers: Extending retirement age and assistance
    8.   Child rearing, nursing of the aged,:  Improve conditions for care worker
    9.   Accepting more foreign workers, involving all  relevant ministries.

  2.  Non-hour linked pay system
      On July 8, 2017, Rengo(Federation of labor unions) decided to present requests for improvement to the government on the bill for labor standard law reform. Rengo means to ask improvements on items on health protection.

      On July 10, the government responded to revise “white collar exemption"prescription on the basis of request from Rengo including imposing 104 days off  a year for employers, setting upper limit of overtime, and labor management consultation on determining continuous work offs.

      On July 14, Chairperson Mr. Rikio Kohzu of Rengo met prime minister Shinzo
  Abe and requested for improvement of the reform plan. PM Abe promised to 
  accept Rengo’s request.
      On July 22, many member unions of Rengo strongly criticized Mr. Kohzu for
  him to have met prime minister Abe by showing collaborative attitude.
      On July 28, 2017, Rengo decided to withdraw their initial acceptance of
  the reform plan of Labor Standard Law. The leaders of Rengo judged that the
  opposition of member unions were so strong that the entire organization may
  have to risk the collapsing of the organization.
      Witnessing the Rengo’s decision not to affirm the reform plan of labor standard
  law made business side worry about the possible delay of legislation and the likely
  change of the content in favor of strengthening work hour regulations.

Ⅵ.  Appraisals

1.  Much differed outcome relative to the initial intent

      The final result of workway reform, particularly its legislative form, is much different from what Abe administration wanted to achieve. As discussed above,the main intent of Abe administration was to utilize the workway reform as an important device to promote Japan’s economic growth as an integral components of its “growth strategy.”
    Japan’s economic growth has been slowing down in recent decades particularly since 1990s. While there have been macro economic shock such as the collapse of the “bubble” which triggered the acute slowdown of the economy. However, Japanese economy has been suffering from long term structural impediments: one is the declining trend of population and the other is a low productivity of service industry. The latter is serious defect in the era of “service economy” of advanced nations.

    The strategic intent of workway reform has been focusing on this issue. In Japan as a service economy, in which 70to 80% of workers work in a broadly defined service sector, workers contribution to the industry is not necessarity a coefficient of hours worked like manufacturing sector but rather the outcome of creative work.
Recognizing this trend, Abe administration attempted to reform the work system in which workers can work more efficiently to utilize their talents rather than bound by work hours.

    With strong advice of business related members of Industry Competitiveness Committee of Abe administration, primie minister Shinzo Abe himself took initiative to reform the conventional regulations of workways. Main objectives have been basically two:
  (1) Introduce a new workway in which wages are paid on the basis of outcome rather than hours worked. This is often refered to as “white collar exemption” borrowing the expression of Western countries where the white collar workers who are regarded as reservoir of management are exempted from ordinary labor regulation imposed on blue collar workers.

  (2) Compensated dismissals.  This is an important breakthrough in the rigid legal regulations against dismissals in Japan. With introduction of this system, employers can have a greater leeway to dismiss workers and increase flexibility of employment, and workers can have some compensation to minimize the loss of income due to dismissals.
  This has been and still is strongly demanded by employers of foreign
companies investing in Japan because they need flexible organization of their workforce partly because their time-horizon is not long as the local Japanese companies.

   The result of the campaign of workway reform as seen in the final product of the
workway legislation achieved at the end of July 2018 reveals three major points.
(1)  Reform to “pay by outcome” or “white collar exemption” was only very partially admitted. The new labor standard law permits highly professional workers whose salary is more than 1075yen a year can be applied the system of pay by outcome. The number of eligible workers in current Japan may be around 10000.
This is much too much smaller than what Japanese economy needs and can supply to increase the efficiency of large service sector. In my view, the law should have permitted at least a few millions of workers in this category.

    In fact, prime minister Shinzo Abe attempted to introduce this system during his first administration in 2006 but failed by strong oppositions from opposition parties  labor unions and relevant government branch. The accomplishment this time may be congratulated in view of this experience. However, since the coverage of eligible workers is so small that the new system will have only negligible effect to contribute to economic growth, if any.

  (2)  Reform for dispatched worker law is effective in making more flexible use of temporary workers and hence contribute somewhat to increase the efficiency of business. The original law was invented to make use of new types of workers who wish to work but not necessarily full-time in 1985. However, under the DPJ administration in 2009, it was revised much not to allow prolonged employment of dispatched workers as a temporary status. The revision this time is useful both for employers and those workers who want to work temporarily. This amendment will have some modest effect on increasing industrial flexibility and efficiency.

  (3)  Reform for compensated dismissals has been rejected almost outright in the process of examination without much meaningful discussion by strong opposition of labor unions, small firm employers and opportunistic Ministry of Welfare and Labor.
  (4)  In contrast, a major move has been achieved in fortifying the regulation system of working hours. One is imposing rigorous upper limit on overtime.
Over time is allowed maximum 720 hours a year. Should be less than 100 hours
a month. Severe penalty is imposed if violated. And the other is same wage for same work, which means unjustifiable difference of working conditions between regular and non-regular employees should be abolished.

   Although protecting fair labor conditions and workers’ health is undoubtedly the most important pillar of labor regulation and labor policies, the fortified regulations on working hours and working conditions as described above will increase the burden on Japanese business corporations and possibly their effort to increase efficiency.

   We may compare the workway reform legislation of this time with the comprehensive reform covering both labor and welfare regulations and corporate taxes which were conducted in 2003 in Germany, often referred to as “Shoroeder Reform or Agenda 2010.” This reform has been regarded as having triggered the dramatic economic recovery of German economy in the period of Merkel administration.

   The workway reform legislation by Abe administration could be much better if eligible workers were much more widely permitted to work under pay by outcome and compensated dismissals were legally permitted, and at the same time workers basic working conditions are more severely supervised and protected as done in the legislation this time, both for the economy and for the workers.

2.  Problems of Ministry of Welfare and Labor

   In the process of examinations, discussions and debate for the campaign to legislate workway reform, I am puzzled by two conspicuous problems: one is the time spent to arrive at the conclusion and the other is the lousy handling of the date prepared for official debate by Ministry of Welfare and Labor.

   The process of this campaign has taken more than four years counting from the initial proposition of prime minister Shinzo Abe to alter the labor regulation system, particularly work hour regulations, in the early 2014 until the enactment of law at the end of June 2018.

    As the reader of this essay may well be aware as reading of my chronological depiction of the process that the meetings of relevant committees take a long time between them. Much of this time management is up to the government office in charge, namely, largely Ministry of Labor. I myself has had much experience in this kind of work, I am not sure why they wasted that much time to reach the conclusion.

   Another, and more serious issue is that Ministry of Welfare and Labor committed a serious mistake by giving prime minister “wrong data” which led prime minister Shinzo Abe lose his credential in debate, and consequently the most important item to be included in the final legislation was scrapped.

    The reason why the expansion of the coverage was not included in the legislation this time was the trouble in the process of Diet debate. While opposition parties have strongly opposed against the expansion of the eligibility of the workers on the ground that the expansion will increase long-time work. Debating against this argument, PM Abe argued at the Diet session that there exists the data which shows that workers of potential eligibility work actually shorter hours than the ordinary workers.  The opposition party members asked the source of the data.  Ministry of Labor which has conducted the work hour survey found then that the questions asked for the two types workers were different so that working hours were not comparable, and consequently PM Abe’s argument was accused to be non-sense.

   This is a serious issue in the sense that Ministry of Labor not only abused but even demised the supreme leader of the government. This is the most primitive mistake that even college students would not commit to write a report. The ministry later reported that they found 117 cases of mistakes. The fact that this kind of lousy work is done in this most critical phase of the debate would make us even skeptical of some kind mal-intent at the side of the government branch in charge.  It is curious why reasonable punishment has not been given to the ministry on this serious mis-conduct.

   The strategic intent of Abe administration is clear, namely, make Japanese economy efficient, particularly, labor market. The actions that the ministry has taken in the process seem not quite supporting or even following it. We know that Ministry of Welfare and Labor must secure the understanding and support from both management and labor sides, unlike many ministries which only need to satisfy their clients. Nevertheless, the attitude of Ministry of Welfare and Labor seems curious and questionable under the given strategic intent of Abe administration.

   The opposition party members asked the source of the data and asked Ministry of Labor which has conducted the work hour survey to explain it. It was found then that the questions asked for the two types workers were different. The question for ordinary workers was the overtime work of the day when they worked longest hours, and the question for the focused category of wokers was the average hours worked for a day. Naturally, the data obtained from such different questions are not comparable so that PM Abe’s argument was accused to be non-sense.

   2.   Too much time elapsing and Lousy job of Ministry of Welfare and Labor
       ーintentional disturbance?

   3.  Productivity and Worker Protection
      ーLimited progress for flexibility
      ーIncreased control and inspection of working conditions
      ーProductivity increase by legal reform questioned
      ーLittle or no contribution for economic growth
  ーProductivity increase is up to corporate and individual effort

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