Changing Value of Lifetime Employment for the Company

Hamid Hassan

(Doctoral Program in Quantitative Finance and Management)

Advised by: Professor Yasuo Hoshino

Submitted to the Graduate School of Systems and Information Engineering

in Partial Fulfillment of the Requirements for the Degree of Master of Management

at the University Of Tsukuba

January 2004

Acknowledgment

First and foremost, I would express my heartfelt gratitude to my academic advisor,

Professor Yasuo Hoshino, for his understanding, support and guidance during all stages

of this study. His kind gestures will never be forgotten.

I would like to extend my thanks to all the Professors at the Graduate School of

Systems and Information Engineering at the University of Tsukuba for their

encouragement, helpful comments and many stimulating discussions on the theoretical

and empirical parts of thesis.

I am also obliged to the Japanese Ministry of Education, Culture, Sports, Science

and Technology (Monbukagaksho) for its financial assistance without which this study

would not have been possible.

A special word of appreciation goes to my wife for her assistance and support that

helps me gets through bad times and enjoys the good times.

Finally, I would like to express gratitude to my parents for their prayers. They

have been always a source of inspiration and endless encouragement for me.

I dedicate this work to all of them with love.

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Table of Contents Introduction…………………………………………...………………………………...5 Scope and Purpose………..………………………...………………………………....8 PART – ONE: Theory and Implications 1.1: Theoretical Review……………………………………………………………...…..13 1.2: Evolution and Growth of Lifetime Employment in Japan……….………………….14 1.3: Changing Value of Lifetime Employment…...………...……………………………17 1.4: Economic Value added Theory…………………………………………………...…24 1.5: Steeper Earning Profile of Employees in LTE System……………………..…….…31 PART – TWO: Hypothesis Development 2.1: Factors Contributing to Change the Average Employment Tenure Level in the Company…………………….………………………………...……….……………..….34 2.2: Effect on the Profitability of Company …………...………………….………..……37 2.3: Arrangement of Model………………………………………………………………39 PART – THREE: Data and Methodology 3.1: Sample selection and Data source………….………………………….................…42 3.2: Methodology……………………………………………………………………...…43 PART – FOUR: Empirical Analyses Section – 1:

4.1.1: Factors Contributing to Change the Average Employment Tenure Level in the Company……….………….……………………………………..…46 4.1.2: Results and Discussions…………………………………………………...50

Section – 2: 4.2.1: Effect on the Profitability of Company……….….............……………..…55 4.2.2: Results and Discussions ………..…………………………………………57

Section – 3: 4.3.1: Combine effect of all Variables in one Model……....………………….…61

4.3.2: Results and Discussions…………..…………………………………….…63 Conclusions..…………………………………….…………………...……………..…66 Managerial Implications………………….…………………………...………..……68 References……………………………………….…………………………..……..…..70 Appendix: List of the sampled companies in the electronics Industry in Japan……………………………………………………...………………73

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List of Tables Section-1 Table 1.1: Variable labels, Description and Expected Signs of Independent Variables…………………………….………………………..…………………………76 Table 1.2: Descriptive statistics (mean and standard deviations) for independent

variables (Combined data for 2002, 2001, 2000, and 1999)………..…….......….76 Table 1.3: Correlation matrix for independent variables (Combined data for all four

years)……………………….……………………………………………...……..77 Table 1.4: Collinearity statistics among independent variables. (Combined data

for all four years)……………………………………………………….………..77 Table 1.5: Regression results containing coefficient values and Wald statistics

(combined data for all four-year’s)……………….……………………………...78 Table 1.6: Regression results containing coefficient values and Wald statistics

(Separate Data for four-year’s)…………………………………………………..78 Section-2 Table 2.1: Variable labels, description and expected signs of independent variables………………….……………………………………………………………....79 Table 2.2: Descriptive statistics ( Mean and Standard deviations) for independent

variables (Combined data for all four years )………...………………………....79 Table 2.3: Correlation matrix of independent variables (Combine data for all

four)…………………………………………………………………………..….80 Table 2.4: Collinearity Statistics among independent variables. (Combined data

for all four years)………………………………………………………….……..80 Table 2.5:Regression results containing coefficient values and wald statistics

(combined data for all four-year’s)………………………….……………….…..81 Table 2.6:Regression results containing coefficient values and Wald statistics

(Separate Data for four-year’s)…………………………………………………..81 List of Figures Figure: 1.3.1: Average Employment Tenure of Employees with a Company in the Electronic Industry…………………...………..………………………………….20 Figure: 1.3.2: Average Age of Employees in the Electronic Industry……………….…..21 Figure: 1.3.3: Increase of share of population age 65 and older from 7% to 14%............22 Figure: 1.3.4: Share of population age 65 and above 1985-2005. Figures

for 2005 are estimated……………………………......………………………….23 Figure: 1.4.1: Value of Permanent workers as a function of demand volatility……........29 Figure: 2.3.1: Arrangement of the Model………………………………………………..40 Figure: 4.3.3: LISREL output, showing the coefficients and signs of all variables

in one model. …………………………………………………………..………..64

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Introduction

The business environment has changed dramatically in recent years. In this highly

dynamic environment, Japanese companies are facing new challenges that were not even

imaginable a few years back. Management in the new era needs to be value oriented. The

rapid aging of society specifically in Japan1 , and people becoming more informed,

sensitive and responsive about their personal career development generally in the world

has changed the scenario of human resource management (HRM). These demographic

changes have made HRM more demanding, and new prospects need to be included in the

long-term employment planning of the company. Additionally, the globalization of the

economy and intensified price competition in the international market has made some

traditional Japanese management practices, such as lifetime employment (LTE) and

seniority based pay and promotion system, especially vulnerable. The lifetime

employment system has benefits as well as cost burden for the company and value of

LTE depends upon how much cost burdens a company has to bear in order to get those

advantages. The composition of these cost burdens and benefits is not static; rather it is

changing over time and with variations relative to other environmental factors. This

study aims to examine the changes in the value of lifetime employment2 in context of the

long history of LTE system prevailing in Japanese companies and the recent slow down

1 Ishi (1996) shows the data of increase of share of population age 65 and older from 7% to 14% in different countries; Japan has reached this stage most rapidly. This trend is expected to continue and in 2005, it is expected that Japan will take the lead among other countries as the greater proportion of people aged 65 or more. 2 Kandel & Pearson (2001) defined the value of lifetime employment as the contribution of lifetime employment contracts in the total value of the firm. They explained that this value contribution depends on several other factors and when those factors are changed, the value of LTE changes for the company.

5

in economic growth, decrease in demand, global competition and the rapid aging of

Japanese society.

This change in the value of LTE has an effect on the profitability of Japanese companies,

which is considered to be, the ‘Bottom line’ for every business.

In a new challenging environment, there is a need to see the every aspect of the

organizational long and short-term strategy with the perspective of creating value for the

company. The focus of business in the new millennium is on results, but results looked

on with a new perspective, the results that can create value. A value driven management

approach is becoming increasingly a preferred choice, suitable for companies to survive

in this demanding environment. The most important dynamic in the entire world of

business and management is what people value. What people value is what drives their

behavior, what drives their actions, and this is the major determinant of the strategy of

every business organization. Ironically, what people value is also a major cause of

problems in organizations (Pohlman & Gardiner, 2000).

With the advent of this new phase of business, where job security does not arrive

with a cradle to grave employment contract, but needs a continuous value creation and a

win-win relationship, both employer and employees are responsible for their own part of

contract. Employees are considered responsible for their own career and are expected to

be naturally loyal, first towards their own career development and only after that towards

the employer. In this situation, there are a number of challenges for Japanese companies

where the long tradition of lifetime employment has prevailed for several decades.

Japanese Human Resources Management has the distinctive practice of Lifetime

employment. Main features of Japanese lifetime employment (Shushin-Koyo) are:

6

(1)Permanent employment, job security and long tenure with the company (2)Wages and

promotions based on seniority (Nenko) and (3) A steeper wage-tenure profile for

employees to discourage early quitting. Many previous studies explored a number of

advantages of LTE for companies. With the new perspective of value creation, we will

try to see what is the value of traditional lifetime employment system for the profitability

of a company in the new era. LTE has both advantages and cost burden and the value of

LTE depends on how much burden a company has to bear in order to get those

advantages (Yang, 1984). The composition of these advantages/costs is not static but

changes over time and with variations in other factors. The changing value of LTE has

two perspectives. Firstly, the value of lifetime employment is very sensitive to changes in

the environment and can be negative in slow economic growth and while demand is

decreasing (Kandel & Pearson 2001, Sullivan & Peterson, 1991). Secondly, the Costs

concealed in lifetime employment become more evident after the implementation years,

when the number of long tenured, highly paid, permanent employees turn out to be more

frequent with the company (Kandel & Pearson, 2001).

7

Scope and Purpose

Almost all competitive companies nowadays have innovative technology,

sophisticated electronic systems, and superior database management. Nevertheless, their

reputations all come back to the people who work there. In the fast-paced complex and

multidimensional world of contemporary business, companies have to focus on creating

value and maximizing it over time. Management has to think, act, and decide with regard

to creating value. Every aspect of organizational long-term and short-term strategy has to

be reconsidered to see what its value is for the organization. A value driven management

approach looks at the bottom line problem issue with a new perspective of creating and

maximizing the value of the organization. Employees, who are free and open in their job

decisions, and more knowledgeable about their career development, are expected to be

more value creating for the organization. In the new era, job security comes not from the

promise of an employment contract, but from the acquisition and constant upgrading the

skills. This trend brings forth a new way of thinking among the employees. This new

group of workers is oriented more towards their personal success, rather than to

organizational success alone. Their first loyalty is to themselves rather than to their

employers, which is the natural behavior of human beings. We must be bold enough to

accept this fact and must not try to camouflage it with an over-emphasis on

organizational loyalty. Japanese traditional human resource practices of lifetime

employment and seniority based pay and promotion are specifically vulnerable in this

context. In Japan, these practices have prevailed for several decades. It is worth seeing

what opportunities and threats are with relation to new trends and what changes are

needed to cope with the new requirements. In the new environment, where individuals

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dare to take the responsibilities of personal happiness and growth by themselves, and

know very well that it is not the responsibility of their employer specifically.

Management has to think then, what is the value of LTE for the organization.

One’s personal career is the major motive for personal development, satisfaction,

and fulfillment. Therefore, deciding about one’s career is the core responsibility of

individuals; development in this way will bring more satisfaction and happiness, and will

be psychologically better when someone does it by him/herself. Where traditional job

rules have been changed irreversibly, hosts of new opportunities have been raised for

people as well as for organizations to maximize their values. The traditional relationship

in which employers act like parents responsible for looking after a loyal but dependent

child for life time has gone by the boards. Now consenting adults engage in a consensual

relationship to create value. Every one is not only responsible for the conditions of his or

her current job but also responsible for the personal career development and whether it is

suitable or not for him or her to continue in their current job for creating values for him or

herself and for the organization.

Similarly, organizations are also free and flexible in their decisions to continue or

change the relationship depending on their requirements to create and maximize the value

of the company over time. With the advent of this new era, many Japanese companies

have taken steps accordingly and traditional LTE system is considered to be under

serious changes during last one decade. However, a long presence of this traditional

system since 1950s in some Japanese companies has its effects very much visible even

now. Average tenure of employees in many Japanese companies is still very high and has

increased drastically as compared to the figures 10 years ago. A steeper wage profile as

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reported by Hashimoto and Raisian (1985, 1989, and 1992), is evident even today and is

the main indicator that seniority based pay and promotion system is still in use for some

extent to retain the employees within a company for a longer time. Although, the

traditional LTE system is not fully in use, and has been modified in most of Japanese

companies, one cannot overlook those factors that are actually the byproducts of the

historically long presence of this system and are still threatening the performance of

companies. Due to the long presence of LTE, there is a concentration of long tenured,

highly paid, permanent employees in many Japanese companies. This concentration

decreases the flexibility, and exposes the company to a number of disadvantages.

Increased labor costs due to highly paid permanent employees become more vulnerable,

when company has to compete in the global market with an intense fight on low price. It

also creates a disparity with the coincident of slow down in economic growth and the

rapidly aging society. This increased proportion of long tenured highly paid permanent

employees is a byproduct of LTE system, but its intensity is increased by many other

factors.

This study should be specifically seen with the context of historical presence of

LTE and seniority based pay and promotion system in Japanese companies. Despite the

fact that traditional LTE has changed, at least partially, if not fully, but there is a strong

evidence that many of its byproducts are still present in many Japanese companies and

are creating problems due to incompatibility with the new requirements. Additionally, as

stated by Takao Kato (2001) in his famous paper “End of lifetime employment in Japan”

the LTE system is being disguised not eliminated. With this background, in the beginning,

we have analyzed different factors contributing to increase the proportion of highly

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tenured, highly paid and permanent employees in the company. These factors include

some of the historical factors due to the long presence of LTE system, and some due to

incompatibility of current environmental changes in Japanese business and demographic

environment. As a second step, we have investigated the effect of this concentration of

average tenure level on profitability. We propose that traditional LTE and seniority based

wage system, which has been prevailing successfully since World-war II is gradually

turning into a burden for the company due to current environmental changes. It does not

mean that LTE is obsolete and cannot give benefits any more; rather we propose that

without loosing the core benefits, there is a need to modify this system and employer-

employee relationships should be redefined to cope with future demands. The flexibility

of a company to adjust the number of its employees is crucial when more fluctuations in

demand are expected. The company’s strict adherence to the traditional system is

exposed to the disadvantage of low flexibility3, which is of critical importance in the

current era of globalization and rapid changes in demand. Despite many modifications

and changes in the traditional LTE system during the last few years the problem of an

increased proportion of long tenured highly paid permanent employees is increasing in

many companies. Due to this increased proportion of long tenured employees, a company

has to bear extra cost in the form of high wages payment to the senior employees.

Additionally, when there is a seniority based pay and promotion system, presence of a

large number of equally senior employees waiting for few available promotion positions

3 Kalleberg, Reskin & Hudson, (2000); Matusik & Hill, (1998) explained that ‘flexibility’ is the responsiveness of a company to the changes in labor demand resulting from technological and environmental factors. This increases their ability to handle long or short-term projects without commitment and cost associated with the permanent workers, and the potential to diminish fixed labor cost.

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creates a frustration among employees. This increased proportion of long tenured

employees generally causes problems for profitability4.

Actually, the LTE system is not a problem, rather the byproduct of the system in

the form of high proportion of long tenured highly paid permanent employees is a source

of problem. To solve this problem without loosing the core benefits of lifetime

employment system, companies can divide their employees in different groups and only

core employees should be dealt with the LTE policy. The rest of the employees should be

given competitive salaries but a comparatively more flexible employment contract.

In this way, companies can offer full lifetime employment to the core employees

group and get all the benefits of LTE without exposing to the disadvantage of low

flexibility and a high concentration of long tenured highly paid employees.

“Core employees group” should consist of those employees, who are

indispensable and basic employees of the company, and company needs them in either

low or high demand. By doing this, companies can maintain the benefits of retaining core

employees and can make investment on specific human capital in the form of training and

education of core employees as well as maintaining the flexibility regarding fluctuations

in demand through other employees.

4 A high proportion of the highly tenured, highly paid, employees put an extra cost burden on a company in the form of high wages payment, because of steeper earning-tenure profiles under lifetime employment defined by Hashimoto & Raisian (1985, 1989, 1992).

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PART – ONE: Theory and Implications 1.1: Theoretical Review According to value driven management theory, organizations that make

use of a self-directed work force are usually more productive, particularly over time, than

those that are exploitative and authoritarian. More free will is required for employees if

we are to expect, greater value creation by them. In LTE system where employees are

hired from school and remain with the same employer until retirement, there are

extremely narrow chances of getting free information about their career development

opportunities other than their current employer. It makes employees stagnant and

dependent on their employer, and whenever there are chances of downsizing, these

employees feel themselves in a very difficult situation with regard to finding new jobs

(Suzuki, 1996). Additionally, these employees gradually become burdens on their

organizations because of their limited exposure to the outside world5. They are unable to

develop their skills and knowledge to cope with the ever-changing requirements of

business organizations other than their current employer6. One way through which value

driven management can open up an organization is to make sure that employees have all

the information they need to make decisions about their jobs and the problems that go far

beyond their immediate job responsibilities.

5 Pohlman & Gardiner (2000) argued that too much experience in the same company creates serious inability to move to other company. 6 Crawford R.(1998) described that Japanese system strengthens the firm-specificity of labor in two senses; the specificity of skill formation on the one hand and the specificity of skill evaluation on the other hand. Particularly the latter specificity is the direct result of the LTE system that is specific to each company. However, most of the skill formation and training that employees receive is useless outside the hermetic culture of specific company.

13

Value driven management makes open and free information sharing effective and this

openness begins to create knowledge throughout the organization. In most cases too

much experience in the same field led to a serious inability to accurately perceive new

developments; a phenomenon usually referred as “old file folder system of mind” in

psychology. When our file folders become old, and we are unable to replace them, we

become rapidly dysfunctional in a world in which change is the real and ongoing process.

In a traditional lifetime employment system, the relationship between employer and

employees is considered a parent-child relationship in which an employer act as a parent

to protect and retain its employee, and in return, employees remain loyal to their

employer. Nevertheless, at the same time it seriously limits the chances of employees to

move to another organization. (Pohlman & Gardiner, 2000). From an organizational point

of view, when there is a concentration of long tenured highly paid employees in a

company, it creates a number of problems. For instance, low flexibility can seriously

damage profitability when there are more fluctuations in demand. Moreover, high wage

payments to senior employees become an extra burden for the organization. Many of the

Japanese companies are facing the problem of overstaffing due to the slow down in

economic growth (Suzuki, 1996). To analyze how long presence of LTE system

contributed to increase the average tenure of employees in Japanese companies, we will

start with the evolution and growth of LTE system in Japan from the very beginning.

1.2: Evolution and Growth of Lifetime Employment in Japan

The evolution of lifetime employment in Japan has been frequently discussed in

the research literature. Many studies have concentrated on the beginning and growth of

14

LTE system in Japan. Some of them found the roots of LTE in the cultural values of

Japanese society ( Karsh, Bernard 1984). Japanese society has traditions of obedience

from below and benevolence from the top, which is consistent with the philosophy of

LTE system.

Some others researchers linked the beginning of system to the 1937 pro-soviet

economic policies (Sullivan and Peterson, 1991). In that year, government policies were

more centralized and it created the idea of long-term relationship with the employees.

While some of them associated it with the pressure of unions and desire of management

to have more control over employees. As it is common that unions put pressure on

management for more advantages for their members, including increased job security,

management can use LTE policy as a tool to get more negotiating powers to deal with

unions.

However, the consensus is that the current structure of the LTE system was

started in the post World war-II era. During that time, democratization of the work force

brought more powers to the hands of unions. Companies provided lifetime employment

to have more control over employees and to get the power to negotiate with unions. The

fast pace of economic growth and the rapid expansion of manufacturing industries in

1950s provided further opportunity to hire and retain employees for a long time (Freeman

& Rebick, 1989). In this way, companies not only acquired the chances of hiring and

retaining more and more people in growing markets where labor supply was in shortage

but also it gave the management more powers to deal with unions. As labor supply was

not growing considerably fast enough to fulfill the requirement of the fast growing

economy, it was favorable to adopt the LTE policy to retain people within the company.

15

LTE makes it possible to discourage early quitting by using a steeper wage-tenure profile

for employees, in which the rate of increase of pay is low in the beginning years and

increases with seniority (Hashimoto & Raisian, 1985). By implementing LTE, managers

not only get commitment and loyalty of employees but also successfully oblige them to

accept and achieve difficult targets. Throughout the last few decades, the LTE system

gave valuable results by this successful combination with the increasing demand and fast

growth in the economy.

A highly productive workforce is a major advantage of LTE (Milgrom & Robert

1995, Fujiwara, 1989). Additionally, by reducing the turnover, it increases the

commitment, loyalty and mutual empathy among workers and justifies a company’s

expenditures on their training and education. Workers are willing to tradeoff better pay

for job security, and the company saves them from outside competition by eliminating the

concerns of continuation of employment.

Many researchers have explored different aspects of this system on the long and

short-term strategic planning of Japanese organizations and consequently its effects on

their employee’s lives. Hashimoto in 1985 in his famous and frequently cited paper

prescribed a steeper wage-tenure profile of Japanese employees because of the seniority

based pay and promotion system.

Companies also use LTE to preserve knowledge and skills inside the company

and similarly, it provides a chance to increase investment in specific human capital (Dirks,

Hemmert, Legwie, Meyer-Ohle and Waldenberger, 2000).

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1.3: Changing Value of Lifetime Employment

This practice of LTE fruitfully went on through the 1960s, 1970s and 1980s when

the Japanese economy was undergoing the post-war economic miracle. Growth was fast

and expectations for the expansion of companies was so high that in some cases,

companies even hired talented people not because they needed them to work, but just that

they would not work for competitors. Companies retained these employees with an

expectation of creating some work for them by future growth and expansion. This

phenomenon created the in-company unemployment; the redundant employees who

remained on the company payroll but do little or no work. These employees can be seen

even today in many Japanese companies and are called “window gazers” (Madogiwazoku)

and “marginal employees” (Genkai shain). These practices are clearly affordable for

companies during periods of growth. Companies can expand and create new positions for

the employees waiting for career progress, and promotion. Employees can tie their fate to

the company’s progress, show loyalty, and will to work. However, the same system can

produce negative results in the time of economic slow down.

Despite all the advantages of LTE, it also has negative aspects7. The composition

of these positive and negative features defines the value of LTE for the company. This

composition is not static; rather it changes over time and with variations due to other

factors.

7 The LTE system is an 'expensive' one in the sense that it has to expend significant cost to maintain itself. First is the cost of the additional payment to promoted workers. As experience is evaluated according to the length in the workplace, the employees are promoted according to their tenure, so-called ‘nenko’ promotion. As a result, as more workers are being promoted, the cost of their cumulative salaries increases. Furthermore, as workers' ages are rising due to the aging of Japanese population, such costs are rising proportionately.

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Unlike many distant viewers, who explained LTE as one of the keys to a

company’s success, a more balanced view placed it as the result of three fundamental

pillars of Japanese success, i.e. fast economic growth, large companies and an educated

work force (Crawford Robert, 1998). Many studies explored the optimistic and

constructive view of LTE, but its cost burdens on the company were rarely addressed.

LTE has both advantages and drawbacks (Yang, 1984). Some of them are concealed in

itself while others are associated with the fluctuations in demand and the changes in

economic growth (Waterman, R., Waterman, A., & Collard, A.1994).

After the burst of bubble economy in 1990, the advantages turned out to be more

expensive as compared to the disadvantages of low flexibility, and the system, which

worked successfully for many decades started working negatively (Suzuki, 1996, Hori,

1993).

Another reason explaining this situation is that, generally, the costs concealed in

adopting LTE remains hidden in the beginning years but become comparatively more

evident in the subsequent years when companies are exposed to an unwanted

concentration of long tenured highly paid permanent employees (Kandel & Pearson,

2001). The rapidly aging workforce in Japan, as it is shown in figure 1.3.3, further

created a disparity with the traditional LTE system (Dirks, Hemmert, Legwie, Meyer-

Ohle and Waldenberger 2000, Clark and Ogawa 1992). While considering an

employment system, a company has to tradeoff between LTE and flexibility8.

8 P. Lepak, Takeuchi Riki & A. Snell (2003) describes that flexibility is an ability of a firm to fundamentally alter the number of employees working on its behalf. In these scenarios, the ability to quickly assemble needed levels and types of human capital would logically be related to the efficiency by which firms utilize their human capital and, as a result, enhance firm performance.

18

The value of LTE is very sensitive to changes in demand and it can be very low in

the case of low growth of demand. In such cases, flexibility is more valuable (Kandel &

Pearson, 2001).

Moreover, commitment to avoid layoff or discharge, results in an inevitable

overstaffing in recession (Suzuki, 1996). By implementing LTE, a firm looses the control

over ability to dismiss shirking workers. The future, costs of LTE are hidden and become

more evident, when the relative number of highly paid senior workers increases in the

company. Advancement by seniority not only decreases the performance competition

among employees but also creates a jam-effect9, when there is large number of senior

employees waiting for few managerial positions (Dirks, Hemmert, Legwie, Meyer-Ohle

and Waldenberger, 2000). In an aging society, retirement and pension payments for later

retirement age become more expansive for a company because of the steeper wage-tenure

structure of LTE.

Lifetime employment (Shushin-koyo) and seniority-based wages (Nenko) are

different but complementary to each other and LTE system supports the wages and

promotion based on the length of tenure with the company (Hashimoto & Raisian, 1989).

Consequently, in the presence of the above systems, an increase in the proportion of long

tenured employees becomes problematic for the company. Most of the disadvantages of

LTE are associated with the concentration of long tenured highly paid permanent

9 Dirks, Hemmert, Legwie, Meyer-Ohle and Waldenberger (2000) explained that generally in any organization, more number of employees is striving for less number of promotion positions because employees in the lower layers of organizational structure are greater than the upper levels. However, if the promotion is on the bases of seniority then equally senior employees will feel frustration and a “jam effect”, when they cannot go to next level with the other equally senior people.

19

employees in the company. We can measure this phenomenon as an increase in the

average tenure of employees in the company.

Throughout 1990s after the burst of bubble economy most of Japanese companies

kept on dealing with the problems of overstaffing and low flexibility due to the LTE

system. However, a system, which persists for several decades, has effects that are more

lasting, and even today the byproducts of the system, such as a high proportion of long

tenured employees, and overstaffing are present in Japanese companies and are the

source of problems for profitability.

1985 1986 1987 1988 1999 2000 2001 2002

(Years)

Figure: 1.3.1: Average employment tenure of employees with a company in the electronics Industry.

Figure 1.3.1 shows the average employment tenure of employees with a single

company in electronic industry in different years. Average employment tenure level of

employees in 1985 was 11.99 years, and although it is argued that, there was a decreasing

20

trend in LTE during 1990s. The average employment tenure level of employees with the

company goes on increasing and reaches 15.69 years per employee by the year 2002.

Similarly, as shown in Figure 1.3.2, due to the rapidly aging Japanese society, the

average age of the employees in the electronic industry also increased from 34.46 years

in 1985 to 38.61 years in 2002.

An increase in the average employment tenure of employees with an increase in

the average age of employees in a company is itself an indicator that LTE is prevailing in

that company. Yet, there are many other reasons explaining this increase in average

employment tenure level.

1985 1986 1987 1988 1999 2000 2001 2002

(Years)

Figure: 1.3.2: Average Age of Employees in the Electronic Industry.

21

First, these figures indicate that the traditional system is just disguised, not

eliminated and the long presence of the system with the combination of some other

factors is still having its effects in the companies.

Second, when economy is growing rapidly and companies are expanding, it goes

on hiring new employees. This continuous addition of new employees does not let the

average employment tenure level increase from a certain limit. However, when

companies stop hiring new employees average employment tenure level is increased.

Existing employees mostly remain within the company mainly because seniority is

considered the major factor for pay and promotion and seniority in one company is only

valuable within the same company. Additionally, the secondary job market in Japan is

not developed due to its history of LTE and there are limited chances of finding jobs

again.

Time span (Years)

Figure: 1.3.3: Increase of share of population age 65 and older from 7% to 14%. Source: Data taken from Ishi (1996)

22

Finding a job is also difficult for mid-career employees because, when one joins a

Japanese company as a core employee, the traditional system guarantees the job security

and pay, but this make it almost impossible to move to another company due to lack of

experience and skills to work in a different environment.

Third, it seems to be a general law that economic development slows down

population growth and together with longer life expectancy, lead eventually to an aging

population (Dirks, Hemmert, Legwie, Meyer-Ohle and Waldenberger, 2000). Japanese

average age has increased quickly during the last few decades. Figure 1.3.3 shows an

increase in the share of population age 65 and older from 7% to 14% in different

countries. Japan has reached this stage within just 24 years, quite faster than in other

countries. In the future same trend is expected to continue.

Figure: 1.3.4: Share of population age 65 and above 1985-2005. Figures for 2005 are estimated. Source: Data taken from Ishi (1996)

23

Fig 1.3.4 demonstrates the percentage of people ages 65 or more in different

countries from 1985 to 2005. The figures for 2005 are estimated. In 2005, it is expected

that Japan will take the lead among other countries as the greater proportion of people

aged 65 or more. Among other countries, only Germany shows the similar trends.

With this picture in mind, a rapid increase in the average age of society during the

last two decades, it is evident that the average employment tenure of employees has also

increased due to lifetime employment practices.

Most of the disadvantages of the LTE system are associated with the increase in

the average employment tenure level of the employees in the company. This, not only

increases the cost burden on the company in the form of wage payments, but also causes

a jam effect leading to frustration among employees. This increase in the average

employment tenure level becomes more vulnerable with the coincident of a decrease in

demand and the slow pace of economic growth (Kandel & Pearson, 2001). Inevitable

competition with low cost countries in the globalize market makes the situation even

more difficult.

1.4: Economic Value Added Theory

In a highly competitive global market where the low cost of production is

becoming increasingly decisive for success, it is extremely important to see every part of

an organization creating value that can contribute to its profitability.

24

In these circumstances, Japanese companies need to reconsider the costs and

benefits of LTE system with reference to its long presence and find out the value of LTE

for the company.

It is said that the main goal of a company is to maximize its profit. However, it

does not mean book profit, but economic profit. According to economic value-added

theory, total value of the firm depends on book value of its assets and its ability for value

addition through management of human resources. Al Ehrbar (1998) explained the

concept of economic value addition by the following equation;

If “ ” is the total value of the firm, oP

∑∞

= ++=

0 )1(tt

too k

AP β

Where °β is the book value of the assets in hand, is abnormal earning and is

the cost of capital.

tA tk)1( +

This equation consists of retained earnings and “Good will” towards the company. The

origin of “Good will” is human assets. The value of human resources depends upon how

well the human assets are managed in the company.

According to the value driven management approach, the most important factor in

the entire world of business and management is what people value. What people value is

what drives their behavior and actions (Pohlman & Gardiner, 2000). When employees are

given an open choice in their job decisions and provided with information and knowledge

about their career development, it is expected to be more valuable for them, as well as for

the organization.

25

Meanwhile, on one hand, most employees want to be proud of their jobs and

employer. They enjoy their job, their co-workers and their job is the major positive force

in their lives. It provides a higher level of self-esteem and self-satisfaction, on the other

hand, they also fear that they will lose their jobs, and consequently their job and career

can also be a negative force.

Where traditional job rules have been changed irreversibly, a host of new

opportunities has been created for people to maximize their values. The traditional

relationship in which an employer used to act as a parent responsible for looking after a

loyal but dependent child for lifetime is no longer an appropriate choice for either side.

In the new era, an adult-adult relationship between employer and employee is not only

essential but also attractive for both parties. According to this new way of thinking, every

one involves in this contract is only responsible for their own part of the terms and is free

to choose any alternative beyond these limits.

However, this boom and the benefits of the boom have largely been limited to

those people and organizations that accepted this challenge and responded to the

requirements of the time, men and women who have upgraded their skills according to

the needs of the time.

Additionally, it also has two major developments in the field of human resources

management; the end of loyalty, as it was understood by the traditional values, and the

end of lifetime employment. Now life long employment needs competency and

productivity levels to be maintained and creating value for oneself as well as for the

company.

26

In this new era, job security comes not from the promise of employment contract,

but from the acquisition and constant upgrading the skills and creating value for the

organization and for oneself. Long and short-term employment policies of the company

must reflect the value creation process. Japanese traditional human resource practices of

lifetime employment and seniority based pay and promotion system are specifically

vulnerable in this context. Although Japanese human resources management practices

have undergone drastic changes during last one decade, but due to the long lasting

traditional LTE and seniority based pay and promotion system, since 1950s, the long

tenured highly paid and permanent employees are still in greater proportion in the

companies. This especially does not match with recent changes in the economic,

demographic and business environment. Some companies that are comparatively slow to

respond to these changing requirements are loosing their edge in the market.

During the time of a slow down in economic growth, when demand expectations

are very low, and companies are generally not able to utilize all permanent workers, the

LTE become a burden for the companies10.

This problem becomes highlighted when LTE policy has been prevailing in a

company for many years. In such cases, a large number of high tenured, highly paid

permanent employees become a financial stress for the company. This paper presents the

picture of this low value LTE problem with the background of a long presence of this

system in Japanese companies.

10 Kandel & Pearson (2001) argued that the proportion of highly tenured people is increased with the long presence of LTE policy in a company, but it remains invisible until the company continues to grow and expand rapidly and keep on hiring a significant number of new employees every year. However, in case of slow down in growth and demand, company is unable to utilize this large number of permanent workers.

27

When demand is fluctuating or it is very low, especially in case of recession, the

value of lifetime employment is very low, and maintaining flexibility is more useful in

such cases. Kandel and Pearson (2001), described the value of LTE as a function of

demand volatility.

If the value of additional profit due to permanent workers is = V-Lk. “V” as a

value of profit due to permanent workforce. “L” represents the number of permanent

workers. “k” is the ratio of wages of permanent workers “w” and cost of capital “r”.

When “F” is the value of the option to hire additional permanent worker and “T” is the

value of the firm under the assumption that only temporary workers are hired. The total

value of employment contracts of the firm = V-Lk +F +T

The value of a lifetime employment contract between a firm and workers with a

given level of permanent workers is = V-Lk+F. The proportion of the LTE contract value

out of the total value of the optimal structure of the firm is = V-Lk+F/ V-Lk+F+T

Figure 1.5 shows the ratio = V-Lk+F/ V-Lk+F+T and V-kL +F as the function of

demand volatility. A low value of the ratio of V-Lk+F/ V-Lk+F+T indicates the lower

value of lifetime employment for the company.

When demand decreases or when there are expectations of more fluctuation in

demand, it is difficult for a company to fulfill its promise of LTE and the value of LTE

decreases for the firm.

28

Figure: 1.4.1: Value of Permanent workers as a function of demand volatility. Source: Kandel and Pearson (2001, p 526)

This not only creates extra costs in the form of high wage payments to highly

tenured but redundant employees, but also becomes a source of stress and de-motivation

among the employees11 (Dirks, Hemmert, Legwie, Meyer-Ohle and Waldenberger, 2000).

In such conditions, the value of LTE becomes very low for the company.

Specifically, with the context of our previous discussion about the advent of a value

driven management approach, a free and open choice for both employer and employee

can produce a better environment for value creation. The traditional LTE syetm does not

integrate with this requirement and can become a burden for the performance of the

11 Suzuki (1996) explained that LTE is a source of attraction for employees only in favorable environment. When environment is unfavorable employees are surrounded by two hostile forces, on one hand, they don’t see any opportunity for promotion in the same company, rather they feel the fear of downsizing, and on the other hand, due to firm specific skill formation, employees feel it difficult to move to other companies. This creates a feeling of frustration.

29

company. As this practice has been prevailing in Japanese companies for several decades,

it has produced a high level of average employment tenure in the companies.

This high level of average employment tenure indicates the presence of large

number of highly paid permanent employees in the company. This concentration of a

high level of average employment tenure in the company creates a disparity with the

external environmental changes such as, a slowdown in economic growth, decrease in

demand, and global market competition with the companies from those countries having

low cost of labor. As LTE system and retaining the employees within the company for

longer years necessarily support the seniority based pay and promotion, this increases the

cost of production in the company. Increase in the level of wage payment is not very

visible in the early years of LTE, because, despite the LTE presence in the company, the

number of highly tenured employees is limited, but it increases gradually with the

passage of time and becomes very evident when LTE prevails for a long time in the

company. It is on this account that many previous researchers argued that costs concealed

with LTE remain hidden in the beginning years but become more visible in the

subsequent years. This increase in the production cost due to long presence of LTE has

become more problematic in recent times because of intensified competition on price in

the globalize market12.

Additionally the rapid aging of Japanese society also creates a disparity with the

traditional LTE system. Specifically, most of the problems and costs associated with the

12 The advantage of the traditional Japanese employment system has lied in the areas of non-price competition concerning the qualities, functions and the developments of new products. However, price competition is intensified more and more as the global economy becomes dominant and Japanese companies are losing competitiveness in these areas. Moreover, Japanese companies are also forced price competition in the domestic markets due to the pressure of deregulation and deflationary economy.

30

LTE system are related with the presence of a high concentration of long tenured, highly

paid permanent employees in the company.

In the first step, we have tried to figure out how different traditional and economic

factors can contribute to increase the level of average employment tenure in the company.

In the second step, we have tried to find out the effect of this higher level of average

employment tenure on the profitability of the company. Finally, we have analyzed all the

factors in single model to see the combined effect of all of them simultaneously.

1.5: Steeper Earning Profile of Employees in LTE System

Hashimoto and Raisian (1985) in their widely cited article showed that earning-

tenure profiles for Japanese workers are steeper due to the long tenure of Japanese

workers with the single company.

This steeper earning-tenure profile reflects that the rate of increase in pay is lower

in the beginning years of employment and increases rapidly in the following years. They

also found that an additional year of tenure in the same company increases the earnings

more than an additional year of general market experience does.

In fact, under the lifetime employment system, employees are willing to accept

comparatively lower pay in the beginning, because of attraction of lifetime employment

in the contract. Hence, the contribution of the employees is more than their pay in the

beginning years. This also makes the early quitting of job, unattractive for the employees

because they prefer to be with the company and wait for the benefits of the following

years. In the subsequent years, however, when tenure of an employee is higher with the

31

company, he or she is usually getting more pay than the contribution to the company13.

Clark and Ogawa (1992) in The American Economic Review presented a comment on the

article of Hashimoto & Raisian (1985) and argued that due to some changes in the labor

market the earning-tenure profile of Japanese workers may not be same as it was

measured in 1985. However, in the same year, Hashimoto and Raisian (1992) replied to

the ‘Comment’ of Clark and Ogawa by using fresh data. They showed that despite some

changes have occurred in the earning profiles of workers in Japan like, economic

fluctuations and aging of the society, generally the earning-tenure profile is still steeper in

Japan due to the presence of lifetime employment system.

Lifetime employment is an investment in specific human capital and employers

plan to retain employees for a longer time for a number of reasons. The benefits of the

system come first, and the cost burdens, last. Initially, due to the attraction of a

permanent employment contract, the company is able to hire new and young employees

at a comparatively low salary than their contribution to the company and offer a steeper

earning profile in which the rate of increase of salaries is more rapid in later years.

However, problems occur when an LTE system prevails in a company for many years

and most of the employees reach the stage of the higher rate of increase in salary.

Consequently, their contributions are less than their wage payments. This creates an extra

cost burden on the company as compared to its competitors. We propose that in addition

to other environmental factors causing a disparity with the traditional LTE system and

having a negative effect on profitability, this cause of increased wage payments due to a

13 Hashimoto and Raisian (1985) explained that under a lifetime employment system, contribution of employees is greater than their wages in the beginning years, but in the subsequent years, their wages are greater than their contributions.

32

high proportion of long tenured employees present in the company also has a direct

negative effect on the profitability. A company with a high proportion of highly tenured,

highly paid people has to bear an extra cost in the form of increased wages.

33

PART – TWO: Hypothesis Development

The long presence of lifetime employment in a company gradually increases the

proportion of long tenured highly paid senior employees. This is not very visible in the

beginning but in time, it becomes more visible and turns into a problem. There are many

factors inside and outside the organization, which have an effect on increasing or

decreasing this proportion in the company. When these factors match with each other, it

does not let the average tenure level increase, and creates a successful combination for

the company. However, some time when these factors create a mismatch, due to

environmental changes, it increases the average tenure level in the company. This

increase in the level of average tenure becomes a source of problems and has a negative

effect on the profitability of the company. We have made six hypotheses about different

factors having an effect on the increasing or decreasing level of average tenure in the

company. In second step, three more hypotheses define the effect of increase in average

tenure level, and other factors on the profitability of company.

2.1: Factors Contributing to Change the Average Employment Tenure Level

in the Company

2.1.1: Traditional Factors

LTE has prevailed in most of Japanese companies for several decades and has

traditional and cultural reasons. According to our discussion above, the increase in the

average employment tenure level is not visible in the beginning years but becomes more

34

evident with the passage of time. The age of the company is expected to be positively

associated with the level of average tenure in the company.

Hypothesis: h-1.1: The Average employment tenure level in the company

increases with the age of company.

As defined by Hashimoto & Raisian (1989) the practice of lifetime employment

in Japan is, hiring employees immediately after graduation, training on the job and retain

them with the same company until the retirement age. This implies that the age and

tenure of people increases simultaneously in the company and a company with a greater

number of aged people is likely to have more long tenured employees.

Hypothesis: h-1.2: The average Age of employees is positively associated with the

level of the average employment tenure in the company.

2.1.5: Ability of company to adopt long-term employment policy

Large companies are likely to have a greater number of long tenure employees

than small companies, again due to two reasons. First, large companies have less chance

of failure in the short-term; they can invest in training and educating employees and keep

them for longer periods. Second, in large companies the internal labor market is more

developed (Hashimoto and Raisian 1989).

Hypothesis: h-1.3: Big companies are likely to have a higher level of average

employment tenure than small companies.

2.1.3: Presence of a union

A number of previous studies argued that management feel a union presence

unpleasant and a threat to good control, because it challenges the powers of management

(Fred K. Foulkes, 1981, Hoerr John 1991, Cooke William, 2001). Additionally, unions

35

apply pressure against laying-off employees, and demand more job security. In a

unionized company, management offers job security as a tool to negotiate with the unions

(Sullivan & Peterson, 1991). Consequently, it is likely that a long-term presence of a

union increases the average tenure of employees in a company.

Hypothesis: h-1.4: Long-term presence of a union increases the level of average

employment tenure in the company.

2.1.4: Variety of knowledge/skill requirements of company

A company dealing in many business segments is expected to have a greater

chance of having less number of long tenured employees, due to two reasons. Firstly, it is

relatively difficult to transfer employees of one segment to another, because of the

specific nature of knowledge/education needed in each segment, and it is favorable to

hire a new person having the required skills (Kandel & Pearson, 2001). Secondly, most

companies start with one target segment and expand by gradually including other

segments. A new segment is usually based on some new technology and requires, people

having related education and skills. A company serving in more product segments is

expected to have a relatively small proportion of long tenured employees.

Hypothesis: h-1.5: Companies serving in more business segments are likely to

have lower level of average employment tenure.

2.1.2: Tendency of hiring new employees

In the case of downsizing in Japanese companies, a common practice is that,

rather than laying off any existing employee, the company reduces or stops completely

hiring new employees and adjusts the existing employees until retirement age (Kato,

2001). When a company is not hiring new employees, the level of tenure per employee

36

for existing employees will increase. Furthermore, it also indicates that in the case of fast

growth this increase in the average employment tenure level is not visible due to a

continuous increase in employees.

Hypothesis: h-1.6: Tendency of hiring new employees decreases the level of average

employment tenure in the company.

2.2: Effects on the Profitability of Company

2.2.1: Increase in the Average Employment Tenure Level

According to the idea of a steeper earning-tenure profile of employees under the

LTE system, presented by Hashimoto and Riasian (1985), the contribution of an

employee is more than the payment in the beginning years but in the following years,

payment is greater than the contribution in the company. If this is true, the presence of

big proportion of highly tenured employees in the company is a cause of extra wage

payment higher than their contribution. A company with higher level of average

employment tenure will be comparatively lagging behind its competitors with respect to

cost efficiency. Because, such company would have a greater proportion of such

employees, who are getting greater payment than their contribution to the company.

Additionally, a company having a large number of long tenured permanent employees is

exposed to a number of other disadvantages, i.e. low flexibility, and a number of equally

senior employees striving for a single promotion position, causing a jam effect. Job

security and seniority-based wages also decrease the performance competition. Therefore,

it is predictable that a high level of average employment tenure in a company will put a

negative effect on profitability.

37

Hypothesis: h-2.1: A high level of average employment tenure in a company has a

negative effect on profitability.

2.2.2: Over staffing in a company

The commitment under LTE not to lay off employees creates a serious problem of

overstaffing during recessions. In recent years, due to a slow down in economic growth,

after the burst of the bubble economy many companies are fighting with the problem of

overstaffing. Redundant employees on the company payroll without responsibilities put

extra burden on the company in the form of wages (Suzuki, 1996). A ratio of total

employees to total assets can present the level of employment in the company. A higher

value of this ratio indicates the problem of over employment and negatively effects

profitability.

Hypothesis: h-2.2: Overstaffing has a negative effect on the profitability of a

company.

2.2.3: Tendency of hiring new employees

A decrease in the number of employees not only indicates a decline in demand,

but also shows the signs of a negative growth rate of a company. Profitable companies

usually have a tendency to hire new people to expand their business.

Hypothesis: h-2.3: Profitable companies are likely to hire a greater number of

new employees.

2.2.4: Historical performance and increase in sale

Historical performance reflects the future expectations of a company’s

profitability. Similarly, an increase in sales is considered a positive sign for profitability.

These two indicators are used as control variables for profitability.

38

Hypothesis: h-2.4: Historical performance and increase in sales has a positive

association with the profitability of the company.

2.3: Arrangement of the Model

The historical presence of LTE in Japanese companies, along with other factors

has an effect to increase the level of average employment tenure in the company. This

increase in the level of average employment tenure in the company negatively affects the

profitability of the company, especially with a decrease in demand, a slow down in

economic growth and the rapid aging of Japanese society. The value of lifetime

employment, which is very sensitive to decreases in demand, can be defined as the

increase in the costs associated with the LTE.

This increase in the costs as compared to benefits is multi-dimensional and

includes a number of factors inter-acting with each other. Some costs are hidden inside

LTE, while others come across with the changes in other factors, which cause an increase

in the level of average tenure of a company. There is a fine-tuning between them to create

a positive value for the company. When these changes interact positively, it does not let

the value of LTE decrease. A key determinant, creating the positive interaction between

these factors is growth. When there is a higher level of economic growth, it allows the

system to run positively. In such cases, companies regularly hire new employees every

year. These employees start their career from the very beginning and in the meantime,

some of the employees retire after reaching their retirement age every year. Consequently,

on average there is very minimum change in the average employment tenure level of the

company. It creates a positive value and company is able to hire more employees again in

the following year. In this way, system runs repeatedly in a positive direction and does

39

not let the value of LTE decrease. However, when there is a decrease in demand and the

growth rate of economy is slow, it starts running negatively.

Figure: 2.3.1: Arrangement of the Model

Furthermore, demographic changes like the rapid aging of society, and the

changes in the business environment also have an effect on the value of LTE for the

company. Nevertheless, it is not viable to measure all these factors independently; rather

all of them create a positive adjustment by interacting with each other in times of fast

Age of Employees

Age of Company

Tendency of Hiring New Employees

Presence of Union

Skill/knowledge Requirements

Size of Company Average employment

Tenure

Profitability

Over Staffing

Sale Change

h-1.1 (+)

h-1.2 (+)

h-1.3 (+)

h-1.4 (+)

Historical Performance

h-1.5 (-) h-2.1 (-)

h-1.6 (-)

h-2.3 (+)

h-2.4 (+) h-2.2 (-) h-2.4 (+)

40

economic growth. This adjustment is disturbed whenever there is a slowdown in

economic growth.

With a view of the historical presence of LTE in Japanese companies and changes

in the business and general environment, we have suggested the arrangement of our

model as shown in figure 2.3.1. A hypothesis defining each relationship and expected

signs are also shown in the figure. Six factors define the level of average tenure in the

company. Some of these factors tend to increase while others decrease employment the

level of average tenure in the company. When these factors are in a good combination,

average tenure level remains at a lower stage. On the other hand, when this combination

does not match, it increases the average tenure level in the company. This increase in the

average tenure is the source of all the problems and drawbacks associated with a lifetime

employment system. By increasing the average employment tenure level, it maximizes

the costs associated with LTE. A slow pace of economic growth, a decrease in demand

coinciding with the rapid aging of society and the long presence LTE in Japanese

companies, have created a disparity among these factors and the level of average tenure is

increased. This disparity is more detrimental for those companies, which are, strictly

adhere to a traditional lifetime employment system. Overstaffing is another problem

created by the commitment to not laying off large number of permanent employees.

Profitability of a company directly affects the company’s tendency of hiring new

employees, as it is an indicator of growth. This defines the reality, that in the case of high

economic growth, not only the environment is favorable for profitability, but also it

decreases the negative aspects of LTE, and creates a successful combination. However, in

the case of slow economic growth same system starts working negatively.

41

PART – THREE: Data and Methodology

3.1: Sample selection and Data Source

The Japanese electronics industry has been selected as a sample for empirical

analysis. This sample was selected for a number of reasons. Firstly, as the electronics

industry is one of the major industries contributing to the Japanese economy, it presents

an appropriate sample. Secondly, due to its key role, since 1950s in the fast industrial

growth of Japan, it can demonstrate a true picture of the evolution, growth and long-term

presence of a lifetime employment system. Additionally, electronics companies are

competing globally, and have to face tough competition, especially with companies from

countries having a lower cost of labor. In this situation, an increase in the cost of labor

due to a steeper wage profile under the seniority based pay and promotion become more

critical.

Initially, a sample of 218 companies was taken from the Nikkei Data-base. The

average age of the companies in the electronics industry is 55 years and average tenure of

employees with the present employer is 15 years for this industry. For new companies

having an age of less than 15 years it is not possible to reflect the true value of this

important variable. Therefore, a criterion was applied to include only those companies,

which have more than 15 years of age. This reduces the sample from 218 to 199

companies. For some variables like historical presence of a union and historical profit

trends, continuous data was required for the last 15 years. Some companies have to be

excluded from the sample the data of which were not available for last 15 years on a row.

42

This further reduced the sample from 199 to 158. Thus, the final sample of 158

companies was used in the analysis.

The Nikkei Annual Corporation reports publish every year were utilized for data

collection. EDI-net database available on the website of FSA (Financial Services Agency)

was also utilized, when some information was not available in Nikkei database. Data was

collected for the years 2002, 2001, 2000, and 1999, but some variables (i.e. Union) are

taken for the last 15 years.

3.2: Methodology

This study is done with special reference to the historical presence of LTE system

in Japanese companies for several decades. According to our proposed model, we have

tried to see the effect of different factors on increasing or decreasing the level of average

employment tenure in a company. These include traditional factors such as a long

presence of LTE in the company, as well as environmental factors. As we have proposed,

it is obvious that average employment tenure level of employees use to increase when a

lifetime employment system exists in a company for a long time. However, its intensity

can be increased further by changes in some of the environmental factors. In the first

stage, we used linear regression to see whether the effect of different factors on

increasing/decreasing the level of average tenure in the company. Many of these factors,

which have an effect on the level of average tenure, are due to a historical presence of an

LTE system in Japanese companies. An increase in the age of a company and an increase

in the average age of employees cause an increase in the level of average employment

tenure due to historical presence of LTE in a company.

43

The presence of a union and the size of a company also have some long historical

influence to increase the average employment tenure of employees in a company. Other

factors like, knowledge and skill requirements and the tendency of hiring new employees

are the factors, which are created due to the recent slow down in economic growth and

the decrease in demand. We used linear regression to show the effects of these factors on

the level of average employment tenure in the current situation of the companies in this

industry. This environment has been created by continuous practice of LTE for several

decades and current environmental changes.

Fast economic growth actually encourages and facilitates the LTE system, which

in turn increases the possible potential of increasing the level of average employment

tenure in the company. The problem of increase in the average tenure level remains

hidden in a favorable environment but become visible suddenly, in case of decrease in

economic growth and demand. When this unfavorable environment creates a disparity

with the LTE system, it not only decreases profitability but also creates other problems

related to a higher level of average tenure in the company. It is on this account that

despite a decreasing trend towards LTE system after the burst of the bubble economy, the

average tenure level of employees is continuously increasing in Japanese companies. This

increase in average employment tenure level is the by-product of the long presence of

LTE, which has become more visible now, due to changes in the economic environment.

Therefore, the first stage describes the current situation in which the level of

average tenure in a company becomes more visible, and presents different factors

defining this increase. This increased level of average employment tenure has a negative

effect on profitability. When demand is decreasing the promise of not laying off

44

employees creates a serious problem of overstaffing in a company. These two factors

reduce the value of lifetime employment for the company. Profitability of a company also

depends on a number of other features such as a brand image of the company, the nature

of their product line, style, trend and marketing efforts. All these can be reflected by

historical performance of a company and a current increasing or decreasing trend in the

sale of a company. In the second stage, we run another linear regression including

average tenure, overstaffing and two control variables for the profitability of a company.

To define the value of lifetime employment for a company in certain conditions,

and monitor any changes in this value, it is necessary to see all the above factors

interacting in one model. Average employment tenure of employees, which is a

dependent variable in the first stage, becomes independent variable in second stage.

Changes in the number of employees in a company define the variations in the demand of

labor. Profitable and growing companies sign up new employees every year. This factor

does not let the average tenure level increase. Thus, change in the number of employees

is dependent on the profitability but on the other hand, it contributes to change the

average employment tenure level of a company. We used LISREL to see all these factors

interacting simultaneously.

45

PART – FOUR: Empirical Analysis

Section - 1:

4.1.1: Factors Contributing to Change in the Average Employment Tenure

Level in the Company

In this section, we have analyzed six hypotheses, hypothesis h-1.1 to h-1.6. This

section defines the current situation in which different factors have contributed to an

increase in the level of average employment tenure in a company. Some of these factors

correspond to the long presence of LTE in the company, while others represent the

changes in economic and demographic environment. All of these aspects contribute to

increase or decrease the level of average employment tenure in a company. We use the

following variables to describe these factors in the linear regression analysis.

Dependent Variable

A company, in which LTE system has prevailed for several years, is expected to

have a large number of employees having long employment tenure. These employees

would have joined the company under a lifetime employment policy and remains with the

same company for a long time. Since the burst of the bubble economy in 1990s, most of

the companies did not feel it possible to continue the LTE system and they gradually

started changing their policy towards employment contracts. However, it is not possible

to change the system in the short-term, because LTE system has been evolved and

developed over almost last five decades and has strong roots in the companies.

Consequently, effects and by-products of the system are still present in many Japanese

companies in the form of large numbers of long tenured permanent employees. These

46

employees are mostly in their 40s and 50s and are highly paid due to their seniority in the

company. On the other hand, many of them have little or no work to perform due to the

decrease in the growth and demand. This problem is especially more visible in those

companies who hired extensively during the bubble economy, not because they needed

employees but because they expected to create jobs for those new employees with future

growth and expansions. In the current era when growth is decreasing and so is the

expansion rate of companies, it is not possible to create jobs for those employees.

Generally, the level of average employment tenure of total employees in the company can

be an indicator of how many long tenured employees are present in the company. When

there are a large number of long tenured employees in the company, the average tenure

level in the company is high.

This level of average employment tenure in the company is taken as a dependent

variable in this section. This is denoted by AVTENUR and is measured as average tenure

of total employees in the company.

Independent Variables

Six independent variables are used in the regression analysis. These variables

define six hypotheses made earlier. Firstly, as it is defined by Kandel and Pearson (2001)

that when company starts LTE policy, in the beginning the costs associated with the

system remain hidden, but those costs become more evident in subsequent years. It is also

evident that in the beginning the average level of employment tenure in the company is

not very high, because a large number of employees had just started their careers and

their total tenure in the company is not very high. However, with the passage of time, the

number of employees having longer employment tenure with the company increases

47

gradually and overall average employment tenure level increases in the company. Hence,

we can say that age of a company is an indicator of a higher level of average employment

tenure in the company. In a country like Japan, where LTE has been prevailing for

several decades, the age of the company can be taken as a factor causing an increase in

the average employment tenure level of the employees. Age of company AGECOMP is

taken as independent variable and is measured as the total number of year since company

was established.

As discussed earlier, Japanese society is among the most rapidly aging societies

and is expected to have same trend in coming years. An increase in the average age of

population has an effect on increasing the average employment tenure level of employees

in a company if LTE is prevails in the company. Unlike many other researchers who

argued that, LTE is no longer in practice in Japanese companies after the burst if the

bubble economy, we assume that the system not only prevails but also having more

visible effects now than ever before. We expect that the increase in the average age of

Japanese society have an effect on the level of average employment tenure in the

company due to the LTE system. A company with a large number of aged people is

expected to have a higher level of average employment tenure. The increase in the level

of average employment tenure due to the increase in the average age of employees can be

a clear indicator that the LTE system is still present in Japanese companies. This is

contrary to those views which present that LTE is no longer in use in Japanese companies.

Kato (2001) presented the same idea that LTE is not eliminated rather it is present but in

disguised form. Age of employees is measured as the average age in years, for total

employees in the company and is denoted as AGEMPL.

48

Traditionally big companies went more for LTE. So, large companies are

expected to have the higher level of average employment tenure than small companies.

We divided our sample in two groups, big companies having more than 1000 employees

and small companies having 1000 or less employees. It is referred to as COMPSIZE and

is measured as a dummy variable having value one for big companies and zero otherwise.

Management of companies generally dislikes the presence of unions because they

challenge the authority of management, increases the pressure of demands for more job

security and sometimes can even slow down the implementation of new plans. Job

security is the major issue usually on the agendas of unions. Those companies in which a

union is present for many years are expected to have more long tenured employees due to

the pressure of unions on the management to maintain the policy of LTE. Apart from this,

many previous researchers have argued that especially in many Japanese companies

management has been using LTE policy as a tool to negotiate with unions. By offering

LTE, management took the power out of the hands of unions and obliged their employees

to accept and achieve difficult targets.

The presence of a union only for a few years cannot have a significant effect on

increasing or decreasing the average employment tenure of employees. It needs a long

and continuous presence of a union in a company to increase the overall average

employment tenure level. Therefore, we have collected the data for continuous presence

of union in the company for the last 15 years. UNION is represented by a dummy

variable in the regression, having value one in the case a union is present in the company

continuously for last 15 years and zero otherwise.

49

Knowledge and skill requirements of the company also have an effect on the level

of average tenure. It is comparatively difficult for a company having a variety of skill

requirements to retain the same employees and manage them in different departments.

The total number of business segments in which a company is operating can indicate the

skill requirements of the company. This is symbolized as SEGMENT.

When there is a continuous increase in the number of employees, it does not let

the average employment tenure level increase in the company. When there is a decrease

in demand, companies stop hiring new employees, the total number of employees does

not increase in the company. Since existing employees increase their tenure years with

every subsequent year, it increases the overall average employment tenure level in the

company. As an increase or decrease in the number of employees indicates the trend of

hiring new employees rather than the actual number of employees hired, a dummy

variable is taken for this increasing or decreasing trend. The tendency for hiring new

employees is denoted as NEWEMPL and is measured as dummy variable having value

one in the case of an increase in the number of employees and zero otherwise.

4.1.2: Results & Discussion

Results of our regression analysis are shown in the at the end of paper. As data

was collected for four consecutive years, initially, we ran four different regressions for

the years 1999, 2000, 2001, and 2002. Finally, we ran a single regression using the

combined data for all four years. Table 1.6 at the end of the paper shows the results of

regressions for four different years. AGECOMP and AGEMPL got the predicted positive

signs and significant values of coefficients for all four years. This primarily proves that

average employment tenure level of employees in the company increases with an increase

50

in the age of the company and with an increase in the average age of the employees of the

company. This is contrary to the idea that LTE is not prevailing in Japanese companies

nowadays. The positive relationship between the age of the company and the age of the

employees with the average employment tenure level of employees is due to the long

history of the LTE system in Japanese companies.

This shows that the consequences of the long presence of the LTE system are still

present in companies even if LTE itself is not present in its traditional form. The

companies who adopted the system many years ago are still paying the penalty due to

disparity of the system with the current environmental changes. This is also in line with

the idea that the benefits of LTE come first and burdens, last. Costs remain hidden in the

beginning years and become very visible in the subsequent years. That is why; many of

the companies have eliminated the traditional system during last one decade but by-

products of the system in the form of large number of long tenured highly paid permanent

employees are still there. This research is conducted with special reference to the long

history of the LTE system in Japan. These results confirm the situation in which the

consequences of the LTE are present even after one decade of changing trend towards the

traditional LTE system.

COMPSIZE got positive significant coefficients for all four years. This proves

our hypothesis h-1.6 about the size of the company having a positive effect on the level

of average tenure. Traditionally big companies went more for LTE due to two reasons.

Firstly, in order to adopt a LTE system a company needs reasonable initial investment on

human assets, which only big companies can manage to pay for. Secondly, big companies

can expect to retain the employees for a longer time because they have less chance of

51

failure in the short-term. They can invest on the specific human capital and can expect to

get the benefits of this investment over a long period. Throughout the last decades of LTE

history in Japan, most of the big companies consistently went for LTE. This increases the

level of average employment tenure in big companies than in small companies.

UNION got the predicted positive signs for all four years from 1999 to 2002, but

it could have significant coefficient at 5 percent level only for the 2000 data. These

results show that historical presence of a union in a company tends to increase the level

of average employment tenure in the company. SEGMENT got predicted negative signs

for the years 2002, 2001 and 1999, but could not get significant coefficient for any year.

For the year 2000 it got positive sign but its coefficient value it very minute. In our

hypothesis h-1.5, we proposed that it is comparatively difficult to transfer the employees

from one segment to another for the companies serving in large number of business

segments and due to special skill and knowledge requirements in each segment, such

companies prefer to hire employees from out side rather than transferring existing

employees within the company. Based on this we suggested that level of average

employment tenure was expected to be lower in such companies. Although our

hypotheses is partially proved because coefficients got the predicted signs for three years

and for one year when it could not get the predicted sign the value of coefficient is very

minute. However, coefficients could not get significant value for any year; this may be

because of the two reasons. First is the practice of “job rotation” in Japanese companies,

which is another typical feature of Japanese human resources management. Due to Job

rotation, it is expected that companies having more number of business segments does

not feel it difficult to transfer the employees within the company and are not different

52

from those companies with small number of segments. This phenomenon of job rotation

creates the internal re-employment easier, and this might have minimized the effect of

SEGMENT on the level of average employment tenure in the company. Second reason

explaining the situation can be, that most of the companies with large number of

segments are big in size and in a big company internal job market is more developed and

they can retain the employees within the company. These two factors might have affected

our results.

NEWEMPL got the significant coefficient at one percent level only for the year

2002 but it got predicted negative signs for all four years. Hiring new employees

decreases the average employment tenure level in the company, because new employees

having short tenure decrease the over all average employment tenure level in the

company. This proves the fact that when companies are growing they can routinely keep

the average tenure level to a certain point by continuously injecting new employees. In

this way, new employees entering the company from bottom and old employees after

reaching their retirement age leaving the company from top keep the average tenure in

the company at a certain level. Even it can decrease the average employment tenure level,

if large number of employees is entering the company every year. It is on this account

that in the times of fast economic growth, the increase in average employment tenure

level in the companies is not visible, but it become very much evident when there is

decease in the growth rate and number of new employees entering the company is

reduced.

That is why when economic growth rate decreases after the burst of bubble

economy in 1990, and number of new employees entering the companies started reducing,

53

the existing employees with the company obviously increased the average tenure level

with every subsequent year. Expected negative signs of coefficients in all four years show

that when there is an increase in the number of employees in a company, it reduces the

average employment tenure level of the employees. This also indicates that according to

the traditions of LTE system prevailing in the companies even nowadays, most of the

employees enter the companies in Japan from bottom, and mid-career job changing is not

very common. As mid-career job market is not fully developed in Japan, most of the

employees do not feel it easy to find new jobs. That is why they hesitate to change jobs

and try to stick to the same company.

Finally, we use combine data for all four years in one regression. Table 1.5 shows

the results of regression using combine four year’s data. These results proved all six

hypotheses formulated in part one. All the variables got predicted signs. Age of company

has a positive and significant coefficient, which proves that traditionally those companies,

who adopted lifetime employment several years ago, are now feeling the problem of high

level of average employment tenure. In the implementation, stage of LTE it was hidden

and not instantly visible but it become more visible with the passage of time. Results

prove that increase in average age of employees increases the tenure concentration in the

company. This confirms that rapid aging of Japanese society in recent years is one of the

reasons of increase in average employment tenure level in the Japanese companies.

Presence of union got a positive and significant coefficient, verifying that pressure

from unions for job security is a significant factor for long employment tenure in

Japanese companies. This also shows that in addition to the traditional factor, need of

management to use LTE as a tool to negotiate with unions is also a motive for adopting

54

LTE system. Tendency of hiring new employees decreases the tenure concentration

because induction of new employees decreases the over all employment tenure per

employee in the company. This proves the fact that in fast economic growth, when

demand is positive the problem of tenure concentration is not so visible because

continuous addition of new employees disguises this problem. Hypotheses about

segments could not get a significant coefficient but it got the predicted, negative sign.

This may be because mostly large companies have more number of segments.

Additionally, Japanese management practice of job rotation might have deceased the

effect of segments on the average employment tenure level in the company.

Big companies are having high value of average tenure, for the reason that big

companies traditionally went more for LTE policy because they can adopt LTE more

easily as they have, less chances of failure in short-term and can invest in

training/educating employees and retain them for long time.

Section - 2:

4.2.1: Effects on the Profitability of Company

In this section, we have investigated the effect of average employment tenure

level, together with other factors on the profitability of the company. Higher level of

average tenure is expected to have a negative effect on the profitability of the company.

We used simple linear regression to analyze two hypotheses, h-2.1 and h-2.2. As

profitability is affected by many other factors, two comprehensive control variables were

also included in the regression.

55

Dependent Variable

Profitability of the company is taken as dependent variable. Return on assets ratio

is commonly used in research literature as an indicator of the profitability of a company.

We used the actual value of ROA at the end of each fiscal year as profitability of a

company. It is symbolized as PROFITAB.

Independent Variables

Level of average employment tenure of employees in the company, is used as an

independent variable in this section. In the previous section, this variable was used as

dependent variable. Previous section defines the situation in which level of average

tenure is increased due to a number of historical and environmental factors. Here we have

seen the role of this increase in the level of average employment tenure as a cause of

negative effect for the financial performance of the company. Codification and

measurement of this variable is similar to section-one.

Over employment is another problem caused by a long presence of the LTE

system. This problem is more serious especially for those companies, which hired

extensively during the time of the bubble economy, with an expectation that they can

create jobs for new staff with expansion plans. Nevertheless, when the growth rate

decreased, these companies are left with a large number of abandon employees on

company payroll. This became a cost burden and affected the performance of the

company negatively. Total number of employees divided by the total assets of a company

gives the level of employment in the company. Different industries require different level

of this human/financial assets ratio. By choosing, only electronic industry as our sample,

we have controlled the effect of the industry. A higher value of this ratio indicates that

56

greater human assets are hired against the available financial assets of the company and

indicates the problem of over employment. It is denoted as OVSTAFF for the regression

analysis.

Control Variables

Profitability of the company depends on many factors. When we use profitability

as dependent variable, we have to take into consideration a number of other factors,

which have an effect on the profitability. Some companies have historically positive trend

in profitability, due to some brand power, innovative product, modern technology or

some other competitive advantage. All these factors can be summarized into one variable

of historical performance of the company. For this purpose, we calculated the average of

the last five years return on assets and used as an indicator of the historical performance

of a company. It is denoted as HISTPERF. Strong or week advertising campaign or new

product development can have a positive or negative trend in sales in short-term. Such

factors can be sum up in an increase or decrease in sales. For increase or decrease in sale,

we have included a dummy variable having value one in case of an increase in sales from

last year’s sale and zero otherwise. This is denoted as SALCHANG.

4.2.2: Results & Discussion

Results of our regression analysis are shown at the end of paper. Parallel

to our analyses in section-one, in the beginning, we ran four regressions separately for

different years from 1999 to 2002 and then we combined the data for these four years in

one regression.

57

Table 2.6 at the end of paper shows the results of four regressions using the data

of four consecutive years. AVTENUR got the negative predicted signs for all years with

coefficients significant at one percent level for the year 2001 and significant at five

percent level for the years, 2002, 2000, and 1999. These results prove our hypothesis h-

2.1, that an increase in the average employment tenure level in the company has a

negative effect on the financial performance of the company. An increase in the average

employment tenure level means that concentration of long tenured highly paid employees

is increased in the company. This increased concentration of long tenured employees that

is actually a byproduct of the LTE system is the source of many problems for the

company. Mainly it increases the cost burden on the company in the form of high wages

payment to these long tenured employees due to ‘nenko’ system and additionally, when a

large number of senior employees are looking for only few possible promotion positions

in the company, it creates a jam effect and produce frustration among the employees.

While, this problem is obvious in any organization regardless of LTE. Because the

number of employees who can reach core managerial positions is limited by

organizational structure. Therefore, this universal problem also confronts any

organization in Japan. Traditionally, Japanese companies dealt with the problem of career

plateau by maintaining continuous corporate growth that allowed the creation of new

managerial positions every year. Employees could then be promoted, at the appropriate

age, along with those who joined the company in the same year. However, it is logical

that it become more serious in such organizations where great number of equally senior

employees are waiting for promotion on the bases of seniority. During the time of fast

58

economic growth companies expand rapidly and regularly and cerate new positions for

the employees but in the time of slow down in growth it become impossible.

Additionally, though LTE and seniority based pay and promotion are different

but they are complementary to each other and a company having long history of LTE

system, also have traditions of seniority based pay and promotion systems. Many

companies have eliminated these traditions and make the performance based pay and

promotion system, but still a number of others are struggling to get out of the dilemma. In

such companies presence of large number of senior employees cerates an extra cost

burden in the form of increased wages payments. These highly paid senior employees are

usually on the upper stage of the steeper wage profile system where their contributions

are less than their wage payments. Hence, presence of large number of such employees in

is a burden for the company, especially when company has to compete in the global

market with the competitors from low labor cost countries.

These results are explainable especially with the context of long history of LTE

system in Japanese companies. From the employee’s pint of view, LTE is attractive only

when it can guarantee the future growth and development in the personal career. When a

company can expand and create new managerial positions to meet the aspirations of its

employees, they can identify their career progress with the success of the company. This

strengthens the employees will, to work and loyalty to the organization. Nevertheless,

when these hope of expansion and progress is not visible, it is not wise to expect

employee’s loyalty and productivity just on the bases of tying his/her career with the

organization. Thus, even with respect to employee’s preferences, the system that works

59

advantageously in the time of growth can work negatively in the time of economic slow

down.

In addition to the changes in the business environment, the changes in the general

environment and thinking of the people also have a role in changing the value of LTE

both for employees and for employer. In most cases, too much experience in the same

field led to a serious inability to accurately perceive new developments. Employees in the

same company for many years feel themselves bound and immovable because of very

little chances of getting new job if they have to leave the company by themselves or due

to some downsizing/rightsizing policy. Therefore, long employment tenure with the

company that has been used as a force to get more loyalty and productivity of the

employees remains no more practical when environment changes. In the new era, the

employees give his or her employer an honest effort and in return receive the opportunity

to broaden the horizon by moving easily from one to other company. In such an

environment, those companies that are adherently stick to the traditional system are

loosing their edge in the market.

OVSTAFF got the predicted negative sign for all four years and coefficient

significant at 10 percent level for the year 2002. In some measure, this proves our

hypothesis about negative effect of overstaffing in the Japanese companies. Many

researchers previously reported the problem of overstaffing in Japanese companies.

Suzuki in 1996 explains that there are about 2.5 to 3.5 million employees that fall under

the definition of in-company unemployed. During the fast expansion phase it was

common practice in Japanese companies to hire extra employees not because company

need them but for the reason that company expect to create new jobs for them by

60

expansion in future, and even in many cases just because company did not want to let

them work for the competitors. Due to these practices most of the companies find

themselves just in the middle of the over employment problem after the burst of bubble

economy.

Control variables HISPERF and SALCHANG got the predicted positive signs

and significant coefficients sings for all years.

Table 2.5 in the appendix shows the results of combine data for all four

years in a single regression. Both independent variables are significant and got predicted

signs. An increase in average tenure level has a negative effect on the profitability of a

company. This confirms that increase in proportion of high tenured, highly paid

permanent employees in the company increase the cost of wages and decreases the

performance competition among workers due to seniority based pay and promotion.

Additionally long presence of LTE has created a disparity with the current environmental

changes. Large number of redundant workers without responsibilities on company

payroll generates a cost burden on the company and decreases the profitability. These

results also prove the fact that fast economic growth is crucial for the successful

performance of LTE system.

Section – 3

4.3.1: Combine Effect of all Variables in one Model

In this section, we have analyzed the combine effect of all the variables in one

model using LISREL. Analyses were made in two steps previously, but it is important to

61

merge both steps and see the combine effect of all the variables simultaneously.

Additionally hypothesis h-2.3 about the effect of profitability on the tendency of hiring

new employees that has not been considered in any of previous sections is also included

in full model.

As this study is being done with the special context of long history of lifetime

employment prevailing in Japanese companies, many factors historically act to increase

the level of average employment tenure level, while others are due to mismatch with the

internal changes and variations in external environment. We included six different

variables to present these factors. An increased level of average employment tenure in a

company put a negative effect on the profitability. Our proposed model shows that six

different factors causing the change in the level of average tenure in the company. When

these factors are, in good match, they do not let the average employment tenure level

increase but when there is a mismatch between them, it increases the average tenure level

in the company.

This increase in the average employment tenure level affects the performance

negatively due to a number of reasons. Firstly, it creates an extra cost burden on the

company in the form of high wage payments to the highly tenured highly paid permanent

employees. Second, it creates a jam effect for the employees waiting for promotion based

on seniority and creates a feeling of frustration among them. Although, traditionally, long

tenure has been used, as a positive sign for the loyalty and productivity of the employees,

but it is attractive for the employees only when it can guarantee the promotion and

growth of their career. In the environment of slow growth and Jam-effect inside the

organization, this long employment tenure becomes a source of frustration rather than

62

attraction. Additionally, long attachment with the same employer reduces the chances and

ability of employees to get new jobs and develop their career in some other company. In

such situation, employees value more for their employability rather than go for job

security as a source of loyalty to the organization.

These negative aspects decrease the profitability of such company having a large

number of long tenured employees. Similarly, over employment also has a negative effect

on the financial performance of the company.

As we have proposed in our hypothesis h-2.3, the profitability of the company is

expected to have positive effect on the tendency of company to hire new employees.

Decrease in the profitability seriously reduces the induction of new employees in the

company. This reduction in the tendency of hiring new employee’s further cause an

increase in the level of average tenure next year and process can start working negatively.

4.3.2: Results and Discussion

This section is the confirmation of previous results, which we already got in

regression analyses. Here, we put all the variables used in section one and section two in

a single model and used LISREL to check the coefficients and model fit indexes. Pearson

correlation matrix was utilized for this purpose. All the variables got same predicted signs

and almost same value of coefficients as we got in regression analyses. Coefficient of

SEGMENT could not get the significant value, although it got the predicted negative sign.

The modification index proposed a reduction in the chi- square by including a negative

relationship of age of the company and its profitability. As this relationship does not have,

any logical basis so it was not included. Although, p-value of the model is low, but other

fit indexes show a good fit for proposed model.

63

Figure: 4.3.3 presents the results of LISREL output, showing the coefficient

values, signs and significant levels for each path. Hypothesis h-2.3 is proved by these

results. The Profitability of the company positively affect the tendency of the company to

hire new employees, it got the positive significant coefficient. On the other hand, a

greater tendency of hiring new employees decreases the average employment tenure level

in the company.

**significant at 5 percent level Note: numbers in parentheses are Wald statistics Chi- square = 9.90 Goodness of Fit Index (GFI) = 0.95 Degree of freedom = 16 Comparative Fit Index (CFI) = 0.96 P- Value = 0.000 I Incremental Fit Index (IFI ) = 0.96 Figure: 4.3.3: LISREL output, showing the coefficients and signs of all variables in one model.

Age of Employees

Age of Company

Tendency of Hiring New Employees

Presence of Union

Skill/knowledge Requirements

Size of Company Average

Employment Tenure

Profitability

Over Staffing

Sale Change

0.142** (8.31)

0.811** (46.78)

0.139** ( 8.68)

0.035** (2.15)

Historical Performance

-0.001 (-0.00) -0.200** (-5.63)

-0.030** (-2.06)

0.270** (6.90)

-0.080** (-2.40) 0.302** (8.31) 0.302** (8.97)

64

Average employment tenure level of the employees in a company has a negative

effect on the profitability of the company. While tendency of hiring new employees is

decreased with a decline in profitability. This reduction in tendency of hiring new

employees in turn causes a further increase in the average employment tenure level.

Hence, these results show that this process can run negatively way in an unsuitable

environment. However, when there is a good match between the internal and external

environment it gives positive results. Obviously, many other factors also have their role

to make this process negative or positive. In case of fast economic growth this process

necessarily run in a positive way because of continuous induction of new employees in

the company, but in case of low level of growth, it is comparatively difficult to be

positively. However, situation becomes more vulnerable when other factors involved also

cerate a mismatch and start increasing the level of average employment tenure in the

company. In such a situation, process runs negatively.

Value of LTE for the company depends upon how much environment is

supporting to run this process positively. As LTE policy is included in the long-term

strategy of the company, it is important while planning to take into considerations the

future expectations of demand fluctuations and economic growth rate to calculate the

value of lifetime employment for the company.

65

Conclusions

Japan has long history of lifetime employment system since post World War-II

eras. This study is done with the special perspectives of the long presence of LTE system

in Japanese companies. Our results are consistent with the other studies in this area.

There are many factors, which gradually cause to increase the level of average

employment tenure in the company. In many Japanese companies, this increase remained

hidden until the recent changes in the economic and general environment. However, after

the burst of bubble economy, throughout 1990s this problem grows to be more visible

and turn out to be a source of problem for the profitability of many companies.

Changes in the value of lifetime employment are due to verity of reasons. Some

of them are due to changes in business and general environment, while others have been

hidden inside LTE from the very beginning and become evident with the passage of time.

The changes in the environment can create a disparity with the changes inside LTE over

time. This disparity increases the proportion of long tenured highly paid permanent

employees in the company. Pilling up of this tenure concentration start putting negative

effect on the profitability. Increased average employment tenure of employees in the

company decreases the flexibility of the company and exposes it to a number of cost

disadvantages against its competitors with a low cost of labor.

The value of lifetime employment depends upon how much cost burdens a

company has to bear in order to get the benefits of the system. Usually, in the beginning,

cost burden remain hidden and benefits come first. However, various other factors of

internal and external environment of the company also have an effect on changing the

composition of these costs and benefits. Another problem with the LTE policy is that it is

66

difficult to adopt or leave the policy in short-term. As it takes many years to implement

and establish LTE traditions and policies in the company, same is the case when

company wants to change the policy. Consequences of the LTE and seniority based pay

and promotion system remains with the company for many subsequent years, if the

company fails to predict the possible changeability in the environment and delay in

responding to it. Manufacturing industries are highly cost sensitive for the reason that

they are most strongly exposed to the international competition.

Many Japanese companies try to solve the problem of increased age and

employment tenure by shifting the employees to small affiliated companies, but this

further cause frustration and discouragement among the employees of those affiliates. As

we have proposed in the bagging, that problem is not with the LTE system rather it is

with the byproduct of the system which become evident in the form of high proportion of

long tenured highly paid employees after the long presence of LTE in the company. We

propose that without loosing the original benefits of the system it is required to modify it,

in such a way that company can avoid the drawbacks and maximize the benefits. To

achieve this goal, rather than going for full LTE of all the employees in the organization,

only a limited group of core employees of the company can be considered for LTE and

other employees should be hired at comparatively more flexible terms and appropriate

salary package to maintain the flexibility in response to fluctuations in demand.

There are many prepositions to modify the LTE system. However, a new and

widely publicized proposal of a new human resource management model initiated by

Japan Federation of Economic Organizations (Nikkerein, 1995) can be seen appealing to

increases the flexibility in terms of a greater ability for the firms to adjust their labor costs

67

according to short and long-term trends in the wider economy. This preposition is for

multi-track personal systems in Japanese firms by distinguishing between a “Core group”

of long-term employees, “Specialists group” who work on a specific, possibly short term,

problems and a, “Peripheral group” that is likely to concentrate on simple, routine tasks

that do not entertain long-term orientations for the company. To solve the problem of

wage to age, job content, and performance, the less of the first is needed, when

remuneration is tied closely to the latter two, actual work contents and output.

Managerial implications

With the advent of value driven management philosophy, two major changes

come across the human resource management, first is the change in the idea of loyalty as

it was understood traditionally, and second is the end of lifetime employment. In the new

world of global competition, where all the companies have easy access to modern

machinery, superior technology and computerized database control, these factors can no

more serve as a competitive edge for the company. Emphasis comes back to the success

of human resources management and efficient use human assets for creating and

maximizing the value for the organization.

New challenges in the ever-dynamic business environment call for modifications

in the old practices of HRM to cope with the problems of the new era. Every aspect of the

organizational long and short-term planning should be viewed with a new perspective of

value creation. Strategic planning should be oriented towards the creation and

enhancement of value for the organization, rather than merely achieving results.

68

Managers have to tradeoff between flexibility and Lifetime employment while

deciding about the long-term employment policy of the company. Proportion of long

tenured employees, that is not very visible in the beginning, can become evident in the

subsequent years of LTE policy. It can be helpful to consider this factor before planning

to go for LTE. Especially, when expectations about future demand growth are not very

optimistic, an inclination towards LTE can be detrimental in the following years. In such

cases, maintaining flexibility is more useful to keep the company responsive to

fluctuations in demand. Lifetime employment with the presence of wages and promotion

based on seniority decreases the performance competition among the employees, not only

within the company but also with potential people outside. Due to this, company is

unable to assess and utilize competent people available out side the organization. A

performance based wages and promotion system can be helpful to solve the situation.

Factors that can potentially create a disparity and diminish the value of LTE

should be considered while planning about the long-term employment policy of the

company. In the current era of fast and rapid changes in environment and competition in

global market place, the key question faced by the companies is that up to what extent a

company can go for lifetime employment policy without exposing to a negative value. A

comprehensive examination of the factors contributing to increase the average

employment tenure level and creating a disparity with LTE structure can help to answer

the question.

69

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Hashimoto, M., & Raisian, J. (1992). Employment Tenure and Earning Profiles in Japan and United States. Reply. The American Economic Review. Vol. 82, No. (1), 346-354. Hori, S. (1993) Fixing Japan’s White Collar Economy: A Personal View. Harvard Business Review, November-December, 157-172. Hoerr, J. (1991). What Should Unions Do. Harvard Business Review, May-Jun, 30-45. Ishi, H. (1996). Zaisei kozokaikaku hakusho (White paper on the Structural Reforms of Public Finance) Kalleberg, A. L. Reskin, B. F., & Hudson, K. (2000) Bad Jobs in America: Standard and non standard employment practices and job security in the united states. American Sociological Review, (65), 265-278. Kandel, E., & Pearson, N. (2001). Flexibility versus Commitment in Personal Management. Journal of Japanese and International Economics (15), 515-556. Karsh, B. (1984). Human Resource Management in Large-Scale Industry. Journal of Industrial Relations. Kato, T. (2001). The End of Lifetime Employment in Japan: Evidence from National Surveys and Field Research. Journal of Japanese and International Economies, (15), 489-514. Matusik, S. F., & Hill, C. W. L. (1998). The utilization of contingent work, knowledge creation, and competitive advantage. Academy of Management review, 24, 31-48. Milgrom, P, and Roberts, J. (1995). Complementarities and Fit strategy, structure and organizational change in manufacturing. Journal of Accounting & Economics (19), 179-208. P. Lepak, Takeuchi Riki & A. Snell (2003). Employment Flexibility and firm Performance: Examining the interaction Effects of Employment Mode, environmental Dynamism, and technological Intensity. Journal of Management, 29(5), 681-703 Pohlman, R., & Gardiner, G. (2000). Value Driven Management. How to Create and Maximize Value Over Time for Organizational Success. Sullivan, J., & Peterson, R. (1991). A Test of Theories Underlying the Japanese Lifetime Employment System. Journal of International Business Studies, First Quarter, 79-97 . Small, M., & Yasin, M. (2000). Human Factors in the Adoption and Performance of Advanced Manufacturing Technology in unionized Firms. Industrial Management & Data Systems 100/8, 389-40 .

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Nikkei Annual Corporation Reports (1984 to 2003) Representing Facts and Financial results at the end of each fiscal year. Suzuki, N. (1996). Middle-Aged and Older Employees in Japanese Corporations Journal of Management Development. Vol. 15, No. (8), 8-16. Skinner, W. (1981). Managing Human Resources. Harvard Business Review, September-October, 106-114. Waterman, R. H., Waterman, J. A., & Collard, B. A. (1994). Towards a Career Resilience Workforce. Harvard Business Review, July-August, 87-95. Yang, C. (1984). Demystifying Japanese Management Practices. Harvard Business Review, November-December, 172-176.

72

APPENDIX List of the sampled companies in the electronics industry in Japan

Aichi Electric Co., Ltd.

Aiphone Co., Ltd.

Alpine Electronics, Inc.

Alps Electric Co., Ltd.

Anritsu Corp.

Asti Corp.

Casio Computer Co., Ltd.

Chino Corp.

Clarion Co., Ltd.

CMK Corp.

Cosel Co., Ltd.

Daido Signal Co., Ltd.

Daihen Corp.

Daishinku Corp.

Denki Kogyo Co., Ltd.

Densei-Lambda K.K.

Denso Corp.

Denyo Co., Ltd.

Diamond Electronics Engineering Co., Ltd.

DKK Toa Corp.

Elna Co., Ltd.

Endo Lighting Corp.

Energy Support Corp.

Enplas Corp.

Espec Corp.

Fanuc Ltd.

FDK Ltd.

Foster Electric Co., Ltd.

Fuji Electric Co., Ltd.

Fujitsu General Ltd.

Fujitsu Ltd.

Funai Electric Co., Ltd.

Furuno Electric Co., Ltd.

Futaba Corp.

Hamamatsu Photonics K. K.

Hirose Electric Co., Ltd.

Hitachi Koki Co., Ltd.

Hitachi Kokusai Electric Inc.

Hitachi, Ltd.

Hitachi Maxell Co., Ltd.

Hitachi Medical Corp.

Hochiki Corp.

Hokuriko Electric Industry Co., Ltd.

Horiba, Ltd.

Hosiden Corp.

Icom Inc.

Idec Izumi Corp.

Iwasaki Electric Co., Ltd.

Iwatsu Electric Co., Ltd.

Japan Aviation Electronics Industry, Ltd.

73

Japan Digital Laboratory Co., Ltd.

Japan Radio Co., Ltd.

Japan Servo Co., Ltd.

Japan Storage Battery Co., Ltd.

JOEL Ltd.

Kasuga Electric Works, Ltd.

Keyence Corp

Kinseki Ltd.

Kitagawa Industries Co., Ltd.

KOA Corp.

Koito Industries, Ltd.

Kokusen Denki Co., Ltd.

Kyocera Corp.

Kyoei Sangyo Co., Ltd.

Kyosan Electric Mfg. Co., Ltd.

Kyowa Electronics Instruments Co., Ltd.

Kyushu Matsushita Electric Co., Ltd.

Mabuchi Motor Co., Ltd.

Makita Corp.

Maspro Denkoh corp.

Matsuo Electric Co., Ltd.

Matsushita Communication Industrial Co., Ltd.

Matsushita Electric Industrial Co., Ltd.

Matsushita Electric Works, Ltd.

Matsushita Seiko Co., Ltd.

Meidensha Corp.

Meisei Electric Co., Ltd.

Melco Inc.

Mitsubishi Electric Corp.

Mitsui High–tech Inc.

Mitsumi Electric Co., Ltd.

Morio Denki Co., Ltd.

Murata Mfg. Co., Ltd.

NEC Corp.

NEC Infrontia Corp.

NEC Tokin Corp.

Nichicon Corp.

Nidec Corp.

Nihon Dempa Kogyo Co., Ltd.

Nihon Inter Electronics Corp.

Nihon Kohden Corp.

Nippon Avionics Co., Ltd.

Nippon Ceramics Co., Ltd.

Nippon Chemi-Con Corp.

Nippon Conlux Co., Ltd.

Nippon Tungsten Co., Ltd.

Nissan Electric Co., Ltd.

Nitto Denko Corp.

Nitto Electric Works, Ltd.

Nohmi Bosai Ltd.

Oki Electric Industry Co., Ltd.

Omron Corp.

Origin Electric Co., Ltd.

Osaki Electric Co., Ltd.

Pioneer Corp.

Rohm Co., Ltd.

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Sanken Electric Co., Ltd.

Sanoh Industrial Co., Ltd.

Sanyo Denki Co., Ltd.

Sanyo Electric Co., Ltd.

Seiko Electric Co., Ltd.

Sharp Corp.

Shindengen Electric Mfg. Co., Ltd.

Shine-kobe Electric Machinery Co., Ltd.

Shinko Electric Co., Ltd.

Shinko Electric Industries Co., Ltd.

Shizuki Electric Co., Ltd.

SMK Corp.

Sony Corp.

SPC Electronics Corp.

Stanley Electric Co., Ltd.

Sumitomo Wiring Systems, Ltd.

Sunx Ltd.

Sysmex Corp.

Taiko Electric Works, Ltd.

Taiyo Yuden Co., Ltd.

Takaoka Electric Mfg. Co., Ltd.

Tamura Corp.

Tamura Electric works Ltd.

TDK Corp.

Teac Corp.

The Furukawa Battery Co., Ltd.

The Lead Co., Inc.

The Nippon Signal Co., Ltd.

TOA Corp.

Togami Electric Mfg. Co., Ltd.

Tokai Rika Co., Ltd.

Toko Electric Corp.

Toko Seiki Co., Ltd.

Toko, Inc.

Tokyo Denpa Co., Ltd.

Toshiba Corp.

Toshiba Tec Corp.

Toyo Communication Equipment Co., Ltd.

Toyo Electric Corp.

Toyo Electric Mfg. Co., Ltd.

Toyo Takasago Dry Battery Co., Ltd.

Twinbird Corp.

United Corp.

U-shin Ltd.

Ushio Inc.

Victor Company of Japan Ltd.

Yamataka Corp.

Yasukawa Electrical Corp.

YE Data Inc.

Yokogawa Electric Corp.

Yokowo Co., Ltd.

Zuken Inc.

75

Section – One: Table 1.1: Variable labels, description and expected signs of independent variables Variable labels Description Expected Sign

AGECOMP AGEMPL UNION SEGMENT COMPSIZE

NEWEMPL

Age of company Average age of employees Presence of union Number of segments Size of company Tendency of hiring new employees

( + ) positive ( + ) positive ( + ) negative ( + ) positive ( - ) negative ( - ) positive

Table 1.2: Descriptive statistics (Mean and standard deviations) for independent variables (Combined data for four years)

Variable labels Description Mean Standard deviations

AGECOMP AGEMPL COMPSIZE UNION SEGMENT NEWEMPL

Age of company Average age of employees Size of company Presence of union Number of segments Tendency of hiring new employees

54.227

38.161

0.569

0.816

3.458

0.260

15.274

2.825

0.495

0.387

1.465

0.440

76

Table 1.3: Correlation matrix of independent variables (Combined data for four years) 1 2 3 4 5 6

1-AGECOMP 2-AGEMPL 3- COMPSIZE 4-UNION 5-SEGMENT 6- NEWEMPL

1

0.419**

0.214**

0.170**

0.038

-0.263**

1

0.045

0.250**

-0.076

-0.290**

1

0.199**

0.137**

0.008

1

0.070

-0.001

1

0.005

1

*significant at 5 percent level;**significant at 1 percent level

Table 1.4: Collinearity statistics among independent variables (Combined data for four years)

Variable labels Description Colliniearity statistics Tolerance VIF

AGECOMP AGEMPL COMPSIZE UNION SEGMENT NEWEMPL

Age of company Average age of employees Size of company Presence of union Number of segments Tendency of hiring new Employees

0.762

0.741

0.906

0.889

0.968

0.882

1.312

1.349

1.104

1.125

1.033

1.134

77

Table 1.5: Regression results containing coefficient values, significance levels and wald statistics (Combined data for four years). Variable labels Description Coefficients Wald

statistics Intercept AGECOMP AGEMPL COMPSIZE UNION SEGMENT NEWEMPL

2R Adjusted- 2R F Degree of freedom P-value Number of cases

Age of company Average age of employees Size of company Presence of union Number of segments Tendency of hiring new employees 0.843 0.841 556.436 6 0.000 632

-27.148*** 0.146*** 0.804*** 0.138** 0.034** -0.004

-0.038**

-31.095 8.007 8.239 -2.266 2.029 -0.266 43.571

Dependent variable: AVTENUR (Average employment tenure of employees) *significant at 10 percent level;***significant at 5 percent level;***significant at 1 percent level Table 1.6: Regression results containing coefficient values, significance levels and wald statistics (Separate data for four years). 2002 2001 2000 1999 Intercept AGECOMP AGEMPL COMPSIZE UNION SEGMENT NEWEMPL

2R Adjusted- 2R F Degree of freedom P-value Number of cases

-27.539*** (-16.424) 0.081** (2.246)

0.825*** (23.482) 0.164*** (5.021) 0.026

(0.788) -0.007

(-0.233) -0.128*** (-3.934)

0.855 0.850

148.739 6

0.0000 158

-28.480*** (-19.239) 0.121*** (3.760)

0.850*** (26.464) 0.159*** (5.294) 0.008

(0.265) -0.005

(-0.176) -0.008

(-0.280)

0.880 0.875

184.461 6

0.0000 158

-26.948*** (-11.903) 0.209*** (4.816)

0.729*** (16.064) 0.085** (2.120) 0.079** (1.953) 0.001

(0.001) -0.022

(-0.543)

0.775 0.766

86.712 6

0.0000 158

-26.491*** (-16.611) 0.159*** (4.836)

0.820*** (24.303) 0.145*** (4.904) 0.027

(0.899) -0.013

(-0.446) -0.027

(-0.812)

0.885 0.880

191.981 6

0.0000 158

Dependent variable: AVTENUR (Average employment tenure of employees) *significant at 10 percent level;**significant at 5 percent level;***significant at 1 percent level Note: numbers in parentheses are Wald statistics

78

Section – 2: Table 2.1: Variable labels, description and expected signs of independent variables Variable labels Description Expected Sign

AVTENUR OVSTAFF HISPERF SALCHANG

Average employment tenure of employees Ratio of total employees to total assets Historical performance Increase in Sale

( - ) negative ( - ) negative ( + ) positive ( + ) positive

Table 2.2: Descriptive statistics (Mean and standard deviations) for independent variables (Combined data for four years) Variable labels Description Mean Standard

deviations

AVTENUR OVSTAFF HISPERF SALCHANG

Average employment tenure of employees Ratio of total employees to total assets Historical profit Increase or decrease in sale

15.226

0.018

1.794

0.470

3.653

0.013

2.658

0.499

79

Table 2.3: Correlation matrix of independent variables (Combined data for four) 1 2 3 4 1-AVTENUR 2-OVSTAFF 4-HISPERF 5-SALCHANG

1

0.153**

-0.273**

-0.098**

1

-0.156**

-0.59

1

0.032

1

*significant at 5 percent level;**significant at 1 percent level Table 2.4: Collinearity statistics among independent variables (Combined data for four years) Variable labels Description Colliniearity statistics

Tolerance VIF AVTENUR OVSTAFF HISPERF SALCHANG

Average employment tenure of employees Ratio of total employees to total assets Historical profit Increase or decrease in sale

0.903

0.958

0.912

0.986

1.107

1.043

1.096

1.015

80

Table 2.5: Regression results containing coefficient values, significance levels and wald statistics (combined data for four years)

Variable labels Description Coefficients Wald statistics

Intercept AVTENUR OVSTAFF HISPERF SALCHANG

2R Adjusted- 2R F Degree of freedom P-value Number of cases

Average employment tenure of employees Ratio of total employees to total assets Historical profit Increase or decrease in sale 0.298 0.293 65.594

4 0.0000 632

2.535***

-0.195***

-0.077**

0.297***

0.315***

3.512

-5.508

-2.242

8.435

9.272

Dependent Variable : PROFITAB ( Profitability of the company) *significant at 10 percent level;**significant at 5 percent level;***significant at 1 percent level Table 2.6: Regression results containing coefficient values, significance levels and Wald statistics (Separate data for four years) 2002 2001 2000 1999 Intercept AVTENUR OVSTAFF HISPERF SALCHANG

2R Adjusted- 2R F Degree of freedom P-value Number of cases

1.386 (0.879) -0.161** (-2.159) -0.130* (-1.876) 0.313*** (4.233) 0.273*** (3.962) 0.283 0.264 15.112 4 0.0000 158

6.622*** (4.254) -0.356*** (-5.240) -0.050 (-0.762) 0.331*** (4.872) 0.170*** (2.617) 0.372 0.355 22.644 4 0.0000 158

2.095* (1.556) -0.160** (-2.137) -0.040 (-0.541) 0.309*** (4.117) 0.193*** (2.641) 0.203 0.182 9.661 4 0.0000 158

2.029* (1.472) -0.154** (-1.956) -0.112 (-1.455) 0.297*** (3.916) 0.171** (2.238) 0.206 0.185 9.488 4 0.0000 158

Dependent Variable : PROFITAB ( Profitability of the company) *significant at 10 percent level;**significant at 5 percent level;***significant at 1 percent level Note: Numbers in parentheses are Wald statistics.

81