Conclusion
Although lifetime employment and seniority systems can be partly explained as the natural response of postwar Japanese firms to a fast-growing environment and a catch-up economy, a comparison with Korea in the 1970s and 1980s shows that equally high growth rates and a similar catch-up economy can be accompanied by a higher rate of labor mobility and layoffs and a more flexible lifetime employment system.36 How can we explain this? The answer seems to be that the particular forms of lifetime employment and seniority practices in Japan are ultimately the product of specific decisions made in the early postwar period by unions and managements and the institutionalization and gradual adjustment of these practices over time. Although such practices became partly unaligned with large companies’ needs as time passed, they were gradually adjusted to fit the changing needs of the business environment. This process continues today and explains the evolutionary rather than revolutionary pace of change.
Given past history, there is reason to think that more adjustments, even major ones such as a gradual elimination of the seniority system and its replacement with a new system based primarily on individual performance, may eventually occur in most large companies, at least for managers and upper management. Such a change could occur at the same time that Japanese-style lifetime employment continues in most companies. This is possible because Japanese-style lifetime employment never has been lifetime for everyone and has coexisted with systems allowing early retirement and intragroup transfers for selected older workers, contract employment for a part of the labor force, and mid-career hiring for specialists. As such, the system is flexible enough to adjust to most environmental changes without eliminating the principle of lifetime employment for core employees. In addition, while the system clearly has contributed recently to higher white-collar costs and a lack of productivity growth, these problems seemingly can be resolved to a great degree by the introduction of performance-based wages and the gradual retirement of excess baby boomer employees currently in their forties and fifties.
Recent JMOL survey results support the notion that such adjustments, rather than a shift to an entirely U.S.-style system, are the most probable future course for large Japanese companies. The results indicate that most companies continue to maintain as their goal “keeping the merits of the existing system while getting rid of its demerits.” In practice, this means maintaining lifetime employment for a majority of employees, while introducing performance-based wages for managers, expanding mid-career hiring for specialists, and increasing the number of contract employees. At the same time, companies see the main challenges of establishing new performance pay systems as creating evaluation standards that employees view as fair and evaluation criteria that do not overly focus on short-term performance detrimental to the company’s long-term interests.37
In short, continuing evolution rather than abrupt revolution seems to best characterize the current process of changes in the human resource practices of large Japanese companies. While some observers argue that such incremental changes only postpone the larger transformation necessary for large firms to regain greater competitiveness,38 the evidence for drastic employment practice changes (for example, abolishment of lifetime employment altogether) is weak. Instead, both government policies and national attitudes favor social stability and gradual change as superior to maximizing short-term corporate profitability through massive layoffs. The most likely course for most large companies will be to accept redundant employees while gradually decreasing their numbers through attrition and increasing overall labor productivity levels through squeezing more productivity from all employees. Most large export-oriented companies already have had tremendous experience in such squeezing during the past twenty years at the factory level. The new performance-based wage systems and redesign of work processes, including faster, more top-down decision making, will make it even easier to do the same for the office level. Consequently, the pieces seem to be in place for large firms to manage their current employment issues through a shift to performance-based pay without eliminating the principle of lifetime employment for a majority of employees.
Perhaps the strongest evidence for this course, however, is the recent success of companies such as Honda, Fujitsu, and Sony, three of the first firms to institute performance-based systems for all managers. All three have been able to revitalize themselves without layoffs of core employees by using such performance-based pay systems along with a strong focus on new product innovation and partnering strategies.39 Similar reforms underway at Nissan, Toshiba, Matsushita, and other large export-oriented firms indicate that, while change will be gradual and vary by individual company, most large companies will eventually follow in the same direction.
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Conclusion
Although lifetime employment and seniority systems can be partly explained as the natural response of postwar Japanese firms to a fast-growing environment and a catch-up economy, a comparison with Korea in the 1970s and 1980s shows that equally high growth rates and a similar catch-up economy can be accompanied by a higher rate of labor mobility and layoffs and a more flexible lifetime employment system.36 How can we explain this? The answer seems to be that the particular forms of lifetime employment and seniority practices in Japan are ultimately the product of specific decisions made in the early postwar period by unions and managements and the institutionalization and gradual adjustment of these practices over time. Although such practices became partly unaligned with large companies’ needs as time passed, they were gradually adjusted to fit the changing needs of the business environment. This process continues today and explains the evolutionary rather than revolutionary pace of change.
Given past history, there is reason to think that more adjustments, even major ones such as a gradual elimination of the seniority system and its replacement with a new system based primarily on individual performance, may eventually occur in most large companies, at least for managers and upper management. Such a change could occur at the same time that Japanese-style lifetime employment continues in most companies. This is possible because Japanese-style lifetime employment never has been lifetime for everyone and has coexisted with systems allowing early retirement and intragroup transfers for selected older workers, contract employment for a part of the labor force, and mid-career hiring for specialists. As such, the system is flexible enough to adjust to most environmental changes without eliminating the principle of lifetime employment for core employees. In addition, while the system clearly has contributed recently to higher white-collar costs and a lack of productivity growth, these problems seemingly can be resolved to a great degree by the introduction of performance-based wages and the gradual retirement of excess baby boomer employees currently in their forties and fifties.
Recent JMOL survey results support the notion that such adjustments, rather than a shift to an entirely U.S.-style system, are the most probable future course for large Japanese companies. The results indicate that most companies continue to maintain as their goal “keeping the merits of the existing system while getting rid of its demerits.” In practice, this means maintaining lifetime employment for a majority of employees, while introducing performance-based wages for managers, expanding mid-career hiring for specialists, and increasing the number of contract employees. At the same time, companies see the main challenges of establishing new performance pay systems as creating evaluation standards that employees view as fair and evaluation criteria that do not overly focus on short-term performance detrimental to the company’s long-term interests.37
In short, continuing evolution rather than abrupt revolution seems to best characterize the current process of changes in the human resource practices of large Japanese companies. While some observers argue that such incremental changes only postpone the larger transformation necessary for large firms to regain greater competitiveness,38 the evidence for drastic employment practice changes (for example, abolishment of lifetime employment altogether) is weak. Instead, both government policies and national attitudes favor social stability and gradual change as superior to maximizing short-term corporate profitability through massive layoffs. The most likely course for most large companies will be to accept redundant employees while gradually decreasing their numbers through attrition and increasing overall labor productivity levels through squeezing more productivity from all employees. Most large export-oriented companies already have had tremendous experience in such squeezing during the past twenty years at the factory level. The new performance-based wage systems and redesign of work processes, including faster, more top-down decision making, will make it even easier to do the same for the office level. Consequently, the pieces seem to be in place for large firms to manage their current employment issues through a shift to performance-based pay without eliminating the principle of lifetime employment for a majority of employees.
Perhaps the strongest evidence for this course, however, is the recent success of companies such as Honda, Fujitsu, and Sony, three of the first firms to institute performance-based systems for all managers. All three have been able to revitalize themselves without layoffs of core employees by using such performance-based pay systems along with a strong focus on new product innovation and partnering strategies.39 Similar reforms underway at Nissan, Toshiba, Matsushita, and other large export-oriented firms indicate that, while change will be gradual and vary by individual company, most large companies will eventually follow in the same direction.
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