Japan’s Shrinking Workforce Spurs Shift to Full-Time Employees

Masahiko Tanabe’s life has changed since Japanese homeware retailer The Loft Co. made him a permanent employee and gave him a 10 percent raise. “This is kind of a luxury to me,” said the former temporary shop assistant. “I used to buy fish for dinner; now I buy meat.”

As aging employees retire, Japan’s labor market is shrinking, so companies are giving contract workers permanent status to retain staff. This reverses a trend that began in the early 1990s when a stagnating economy prompted businesses to hire more temporary employees and shed permanent jobs, many of which were considered lifetime positions.

“The era of companies just adding temporary workers is probably over,” said Kotaro Tsuru, a senior fellow at the Research Institute of Economy, Trade and Industry in Tokyo and a director of policy planning in the government’s Cabinet Office. “Full-timers are crucial for companies to increase productivity, accumulate knowledge and develop human resources to expand.”

The shift helped average monthly wages climb 18,700 yen, or 0.9 percent, to 311,400 yen ($2,850) in the first half of 2008 from the same period last year, providing some relief to households facing the fastest inflation in a decade. Better pay and job security may encourage consumers to spend more, supporting an economy that shrank an annualized 2.4 percent in the second quarter.

Easing the Pain

Permanent hiring is “easing the pain that rising food and gasoline prices are inflicting,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo. Japan’s core inflation rate, which excludes fruit, fish and vegetables, accelerated to 1.9 percent in June from a year earlier, the highest since 1998.

The change in employment is occurring even as Japan slides toward its first recession since 2001-2002. That’s partly because demand for labor is close to the highest level in 16 years, according to a Bank of Japan index.

One reason is demographics: Japan is the first developed nation to register more annual deaths than births; and by 2030, the National Institute of Population and Social Security Research estimates its workforce will shrink 20 percent to 67 million. In 2050, 40 percent of Japan’s population will be older than 65, doubling from 2005, the Tokyo-based institute predicts.

All this is prompting companies to begin unwinding a practice that increased the proportion of part-time and temporary workers to one in three last year from one in five a decade earlier.

`No Other Way’

“There was no other way we could have that many shop staff gain the product knowledge needed to satisfy our customers,” said Nobuyuki Shinoda, managing director at The Loft. The Tokyo-based retailer of cosmetics, stationery and toys gave permanent contracts to all its 2,330 temporary workers, including Tanabe, in April.

The company has a total of 3,400 employees, and turnover has halved since the change, Shinoda said. Previously, 80 percent of The Loft’s temporary workers quit each year.

The number of Japan’s full-time employees rose at the fastest pace in 15 years in February, outstripping the increase in part-timers for the first time since 2006, Labor Ministry data show. Permanent workers averaged 2,430 yen an hour in the year ended March 2008, more than twice the 1,020 yen received by part-time and temporary staff, who typically aren’t eligible for bonuses or company health insurance and pensions.

Korean Barbecue

Tanabe, 45, said his pay raise allowed him to buy a 30,000 yen mobile phone and dine at Korean barbecue restaurants.

The trend “is definitely durable as the population is going to keep getting older,” said Glenn Maguire, chief Asia- Pacific economist at Societe Generale in Hong Kong. “This could potentially become more pronounced in 2009 and 2010.”

The country’s 7 million so-called baby boomers — people born from 1947 until abortion became legal in 1949 — began retiring last year, giving companies “room to transfer younger people from part-time to full-time,” said Robert Feldman, head of economic research at Morgan Stanley in Tokyo.

The government is pushing companies to hire permanent staff because of concerns that part-timers may be forced into poverty when they get sick or retire. The Labor Ministry implemented rules in April that urge businesses to give equal pay and benefits to temporary employees who perform the same work as full-timers. The regulations don’t force companies to comply.

New Rules

Shidax Corp., a Tokyo-based caterer and karaoke operator, made 500 of its 30,000 employees permanent when the new rules took effect.

“Even without the law change, we really needed to reduce the waste of spending on training new employees, as half of them quit within a year,” said Akira Imamura, who works in the company’s personnel department.

Some employers may find it difficult to pay workers more when their profits are being squeezed by record materials prices. Japan’s largest businesses expect earnings will fall for the first time in seven years for the year ending March 2009, the nation’s central bank said July 1.

Still, Shidax is considering adding more full-time staff. “We have to increase the knowledge and productivity of our employees, even if it raises our costs in the short term,” Imamura said. “This is just the first step.”