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Labor Institutions in Japan and Her Economic Growth

  • Kang Chao

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Japan provides a fascinating case for studying economic development. With her real GNP rising at an annual rate of 4 percent during the period 1878–1942, Japan was the only Asian country that emerged from a backward agrarian society to become a modern industrial power. Her postwar economic performance has been even more phenomenal; the average growth rate of real GNP in 1955–1964 was 10.4 percent—the highest in the world. Her investment rate reached an astonishingly high level of over 40 percent in several years in early nineteen sixties. Believing that there is no miracle in economic affairs, economists began to search the secrets of Japan's extraordinary achievements in economic development. To offer possible explanations, they usually stress the active role played by the Japanese government in economic modernization, the vigor of the country's response to new stimuli, and a strong national consciousness. These factors, while undoubtedly important, do not reveal the whole story. There are in Japan a number of institutional traits which, in my opinion, are highly conducive to economic growth. However, the contribution of these institutions to Japan's economic development has not been fully recognized because, in part, they were not designed for that purpose. Their growth-stimulating effects are accidental and unexpected. As a matter of fact, some of these institutions may even appear as economically irrational or socially unjust. Consequently, when students of the Japanese economy study these institutional factors, attention is usually directed to the negative side.

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1 See Ohkawa, Kazushi, The Growth Rate of the Japanese Economy, 1957, Tokyo p. 2. This estimate has recently been challenged by a new study by Nakamura, James I.. See his Agricultural Production and the Economic Development of Japan 1873–1922, Princeton, 1966. Nakamura scales down drastically the growth rate of Japanese agriculture during the Meiji period from what Ohkawa and others have believed. However, Nakamura's contention has not been generally accepted by students of the Japanese economy mainly because some doubts may be cast on the methodology Nakamura has utilized to arrive at his new estimate. Even if Nakamura's argument is accepted, the assertions presented in this paper still remain valid, for, as will be seen, all the significant contributions of the Japanese institutions to be discussed here center in industrial production whose past growth rates have not been challenged.

2 Computed from the data given in Monthly Statistics of Japan, Bureau of Statistics, Office of the Prime Minister, Japan, No. 54, Dec. 1965, p. 118.

3 Computed from the data given in the same source.

4 In my opinion, zaibatsu is another Japanese institution conducive to economic growth. Its merits lie in the contribution to capital mobilization and utilization, market stability, balanced development, and technological progress. However, since the issue of zaibatsu has been treated more extensively by other writers, pro and con, I prefer to leave it out here.

5 For instance see Levine, Solomon B., “Labor Markets and Collective Bargaining in Japan,” in Lockwood, William W. (ed.), The State and Economic Enterprise in Japan (Princeton, 1965), pp. 633–67.

6 See Namiki, Masayoshi, “The Farm Population in the National Economy Before and after World War II” and Smith, Thomas C., “Landlords' Sons in the Business Elite,” both in Economic Development and Cultural Change, Vol. IX, No. 1, Part II, Oct. 1960, 31 and 94.

7 T. C. Smith, op cit., p. 94.

8 Op cit., p. 96.

9 Op cit., p. 97.

10 Op cit., p. 94.

11 Kassalow, Everett M., “Labor Development and Economic Modernization in the Emerging Nations,” in Maghreb Digest, May-June 1966, pp. 126.

12 Op cit., p. 101.

13 See Abegglen, James C. and Mannari, Hiroshi, “Leaders of Modern Japan: Social Origins and Mobility,” Economic Development and Cultural Change, Vol. IX, No. 1, Part II, Oct. 1960, 123. The writers conclude, “The proportion of younger sons in political leadership, taken together with the rather large proportions of political leaders from rural backgrounds is of special interest as an indication that primogeniture did, in fact, operate as a substantial social and psychological factor in shaping Japan's political elite.” The significance of the percentages of successful younger sons would be reduced if one could prove that, on the average, a Japanese family had more than four children. Then, a higher percentage of younger sons in any selected male group may be said to have reflected nothing but the relatively large population of younger sons. But the average size of Japanese families has never been that large; and at any point of time the total number of younger sons must be considerably smaller than the number of eldest sons. This makes the percentages of successful younger sons all the more convincing.

14 T. C. Smith, op. cit., p. 97

15 Op cit., p. 100.

16 To call it a “lifetime commitment” is an exaggeration. But the seniority wage structure is nevertheless true. It is possible for a firm to maintain a nenko wage structure without rigidly committing itself to “lifetime” obligations to workers. Japanese labor statistics for the nineteen fifties and early nineteen sixties unmistakably show the wage progression according to the duration of workers' service in all classes of firms, but the average length of service of regular workers in any group of firms is much shorter than what would be expected if the “lifetime commitment” were really the general rule. This means that Japanese workers do not have full guarantee to collect their deferred wage payments in later years. See Division of Labor Statistics and Research, Ministry of Labor, Yearbook, of Labor Statistics (Tokyo, 1964), pp. 136–37 and 144–45; and Japan's Labor Statistics (Tokyo, 1967), pp. 8081.

17 See Taira, Koji, “Characteristics of Japanese Labor Markets,” in Economic Development and Cultural Change, Vol. X, No. 2, Part I, Jan. 1962, 150–68; and Levine, Solomon B., “Labor Markets and Collective Bargaining in Japan,” in Lockwood, William W. (ed.), The State and Economic Enterprise in Japan: Essays in the Political Economy of Growth, 1965, pp. 633–68.

18 t can be any year before the first group of employees retire. The derivations of Wt are given in the Appendix.

19 Wo is the lower limit, that is, if r is infinite, Wt approaches Wo.

20 For instance, see Domar, Evsey D., “The Case for Accelerated Depreciation,” in the Quarterly Journal of Economics, Vol. 67, No. 1953, 493519.

21 Computed from the data given in the Japanese Bureau of Statistics, Monthly Bulletin of Statistics, No. 84, Dec. 1956, pp. 52, 60 and 61. 1955 was the only year in the postwar period up to 1965 that employment in Japanese manufacturing industry declined.

22 Monthly Statistics of Japan, July 1965, pp. 11 and 79.

23 The system of bonus payments is sometimes said to be an outgrowth of the nenko system. The former system was devised to provide more flexibility in production costs of firms in order to compensate the wage rigidity due to the latter system.

24 See Yearbook of Labor Statistics, 1964, p. 68. “Special Cash payments” are defined to include summer and year-end bonus payments, marriage allowances, emergency allowances, other cash allowances and retroactive payment of wages for past months as a result of a new agreement. Among them bonus payments are by far the most important item.

25 Computed from the data given in Monthly Statistics of Japan, No. 54, Dec. 1965, p. 118. Investments include both gross private domestic capital formation and government capital formation.

26 See Shinohara, Miyohei, Growth and Cycles in the Japanese Economy (Tokyo, 1962), p. 235. A similar view is given in Komiya, Ryutaro (ed.). Postwar Economic Growth in Japan translated from the Japanese by Robert S. Ozaki (Berkeley, 1966), pp. 157–81. In his paper, Komiya identifies the rapid increase in bonus incomes as oine of the powerful factors responsible for fast rising personal savings in postwar Japan.

27 Op cit., p. 236.

28 See Yearbook of Labor Statistics, 1964, pp. 58–59 and Japan's Labor Statistics, 1967, p. 82.

Labor Institutions in Japan and Her Economic Growth

  • Kang Chao

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