the gerontologist 1996 clark 627 36

Copyright 1996 byThe Cerontological Society of America

The CerontologistVol. 36, No. 5, 627-636

Substantial changes in human resource policies are occurring in Japanese firms in response tothe rapid aging of the population. Employers are reconsidering the concept of lifetime

employment, seniority-based wages, retirement policies, and employment opportunities forolder workers. In response to government pressure, mandatory retirement ages are being

raised. These trends are examined using a variety of sources of information concerningemployment practices in Japan. The analysis indicates that important changes in human

resource management practices are underway and further changes are anticipatedas the labor force continues to age.

Key Words: Human resource policies, Population aging, Japan

Human Resource Policies and OlderWorkers in Japan

Robert L. Clark, PhD1 and Naohiro Ogawa, PhD2

Japan is the most rapidly aging developed countryin the world. The rate of aging and the projected agestructure of the population in the twenty-first cen-tury are causing considerable adjustments in thehuman resource policies of Japanese employers.Population aging has produced a rapid escalation inthe cost of social security and other retirement pro-grams. These cost pressures have stimulated govern-mental efforts to prolong worklife. Modifications inhuman resource policies during the past decadehave significant implications for all firms operating inJapan. The rapid aging of the labor force and itsimplications for productivity and labor costs threatencontinued economic prosperity. Identifying the im-plications of an aging society is one of the mostdebated issues among Japanese business and gov-ernment leaders. Employers' responses to an aginglabor force in Japan provide U.S. firms with theopportunity to observe these actions and to considerhow successful they would be in the U.S.

The primary objective of this analysis is to examineresponses by Japanese firms to the aging of thepopulation and to changes in government policiesthat are influenced by current demographic trends.The aging of the population is forcing companies toreevaluate their human resource management poli-cies toward older workers. This article examineschanges in lifetime compensation policies, the age ofmandatory retirement, and other human resourcepolicies. The role of the national government in thisevolution of human resource policies is also dis-cussed. The interaction between national objectives

1 Professor of Economics and Business Management, North Carolina State

University and Senior Fellow, Center for the Study of Aging and HumanDevelopment, Duke University. Address correspondence to Robert L.Clark, PhD, North Carolina State University, Department of Business Man-agement, Box 7229, Raleigh, NC 27695-7229.

2Deputy Director, Population Research Institute and Professor, Collegeof Economics, Nihon University.

and the interests of individual firms is crucial tounderstanding the current changes that are under-way in the Japanese labor market.

Population Aging in JapanThe aging of the Japanese population has reduced

the number of young workers entering the laborforce each year and increased the number of olderworkers attaining the traditional retirement ages. In1950, workers 40 to 59 years old represented 30% ofthe labor force, while workers under 25 also ac-counted for 30% of the labor force. Today, one out ofevery two workers is 40 to 59 years of age and only10% are younger than 25 years old. The increase inthe proportion of the labor force composed of olderworkers has confronted employers with new humanresource challenges that are requiring changes in thetraditional system of industrial relations.

Changes in the age composition of the labor forceare dominated by the aging of the population. Table1 shows the dramatic changes that have occurred inthe age structure of the population since 1950. Per-haps even more importantly, the table also presentsgovernmental projections for the further aging of thepopulation during the next three decades. Theproportion of the population aged 65 and over isprojected to more than double, increasing from12.1% in 1990 to 25.8% in 2025. The absolute size ofthe population is expected to begin to decline earlyin the twenty-first century. The rapid aging of theJapanese labor force is in response to very low fertil-ity rates and continued improvements in life expec-tancy at older ages.

These demographic trends have forced significantchanges in the compensation and personnel policiesof many Japanese firms. The aging of the populationis also placing considerable stress on the govern-ment as it attempts to finance retirement and healthcare systems for the elderly. Current government

Vol.36, No. 5,1996 627

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Table 1 . Estimates and Projections of the Japanese Population

Year

19501970198019902000201020202025

TotalPopulation(millions)

(1)83.2

104.7117.1123.6127.4130.4128.3125.8

0-14

(2)35.424.023.518.215.216.415.514.5

Distribution of Population

15-64 65-plus(percentage)

(3) (4)59.768.967.369.567.862.459.059.7

4.97.19.1

12.117.021.325.525.8

75-plus

(5)1.32.13.14.86.9

10.012.514.5

Note: For each year, the entries in columns 2 to 4 represent the entire agestructure of the population and should add to 100%. Minor differences aredue to rounding.

Source: Ministry of Health and Welfare, 1993.

projections indicate that the social security payrolltax rate will need to increase from 16.5% of coveredpayroll in 1995 to 30% in 2020 in order to sustain thecurrent level of benefits (Clark, 1996; Ministry ofHealth and Welfare, 1994). Concern over the dra-matic increase in the cost of providing retirementbenefits has stimulated government policies to raisethe prevailing age of mandatory retirement in theprivate sector and to increase the age of eligibility forpublic retirement benefits (Clark, 1991; Social Insur-ance Agency [Japan], 1994).

Despite governmental pressure, Japanese firmshave been reluctant to increase retirement ages dueto the higher costs associated with the retention ofolder workers under the current compensation sys-tem. In those companies where the age of mandatoryretirement has been increased, employers also haveintroduced early retirement programs, increasedrates of transferring older workers to subsidiaries orrelated firms, and changed the lifetime pattern ofcompensation to reduce the relative cost of olderworkers (Befu & Cernosia, 1990; Hori, 1993;Morishima, 1992; Mroczkowski & Hanaoka, 1989;Nonaka, 1988; Pucik, 1984). The continued evolutionof public and private retirement policies is extremelyimportant to the future economic growth of Japanand its international competitiveness. Employers inthe United States will be faced with a similar aging ofthe labor force beginning in about 20 years. There-fore, U.S. managers have the opportunity to observehuman resource policy changes in Japan and to ex-amine their effectiveness in an aged society.

Changing Human Resource Policies in JapanHistorically, seniority wage systems and lifetime em-

ployment practices have been the two major institu-tional features of the Japanese labor market. Lifetimeemployment provided job stability to workers, who inturn exhibited a high level of loyalty to their employersin terms of their work effort and willingness to remainwith the firm until retirement. Traditionally, the em-ployer's commitment to lifetime employment endedwith mandatory retirement at a relatively early age.The current system of employment practices in Japan

was originally instituted after World War I to cope withthe scarcity of high quality labor along with high turn-over rates of skilled workers.

During the past decade, personnel and wagepolicies in Japan have been changing in response tothe aging of the labor force. There has been agradual increase in the use of merit pay systems(Mroczkowski & Hanaoka, 1989) and a reduced reli-ance on the system of lifetime employment and sen-iority pay (Peterson & Sullivan, 1990). These changeshave altered lifetime earnings profiles, turnoverrates, and retirement ages in Japanese companies(Clark & Ogawa, 1992a, 1992b; Furuya & Clark, 1993;Pollock, 1993).

For the most part, this traditional system of indus-trial relations has been limited to male workers. Fe-male workers in Japan often are part-time or marginalworkers, and have not been viewed as part of thepermanent workforce of firms (Kaminski & Paiz, 1984).As a result, the earnings of Japanese women are belowthat of men and tend to grow at a slower rate with age(Ogawa & Clark, 1995). Furthermore, Japanesewomen historically have stopped working at marriageor at the birth of their first child, and they have notbeen included in lifetime employment systems.

With the aging of the labor force, firms are recon-sidering their commitment to lifetime employmentand have been altering their retirement policies.Changes in human resource policies include re-duced reliance on seniority pay systems, new humanresource policies for older workers, increases in theage of mandatory retirement, greater use of policiesthat allow re-employment after mandatory retire-ment, and assistance in the placement of retiredworkers.

These new human resource policies have changedthe employment relationship in Japan. Growth inearnings with seniority is less assured, stability ofemployment until retirement age is threatened, andearnings are reduced for continued employment atolder ages. Changes in human resource and com-pensation policies are altering the attitudes of Japa-nese workers toward their employers (Lincoln, 1989;Morishima, 1992). The proportion of workers dissat-isfied with their current job is rising. Reduced com-pany loyalty is resulting in higher turnover ratesamong experienced workers and is adversely affect-ing the team-oriented production methods em-ployed by most Japanese firms (Hori, 1993).

Mandatory RetirementThe proportion of Japanese firms with mandatory

retirement rules has increased during the past twodecades. Over 90% of all Japanese firms have man-datory retirement policies, compared to only twothirds of firms using such policies in 1974. The in-crease in the proportion of firms with mandatoryretirement policies is mainly due to the pronouncedincrease in the proportion of small firms with manda-tory retirement policies.

Historically, the most common age of mandatoryretirement in Japan was 55. As late as 1974, more thanhalf of all firms using mandatory retirement required

628 The Gerontologist



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workers to retire at age 55 or younger. Now, overthree quarters of all firms have established manda-tory retirement ages of 60 or older. Large firms tendto have later retirement ages than smaller firms. Over95% of firms with 5,000 or more employees have acompulsory retirement age of 60 or older, comparedto about three quarters of firms with 30-99 employ-ees. Smaller firms remain more likely to use 55 as theage of mandatory retirement. These mandatory re-tirement ages are remarkably low relative to otherdeveloped countries, especially in view of the rela-tively high life expectancy in Japan. Life expectancyin Japan is among the highest in the world, with a lifeexpectancy at birth for males of 76.1 years and forfemales of 82.2 years.

This distribution of retirement ages adopted byJapanese firms can be compared to the mandatoryretirement ages that prevailed in the United Statesbefore the outlawing of mandatory retirement byamendments to the Age Discrimination in Employ-ment Act (ADEA) of 1986. Prior to 1978, most firmsthat established mandatory retirement policies set 65as the age for compulsory retirement. Amendmentsto ADEA in 1978 raised the minimum legal age formandatory retirement in most jobs to 70. Firms theneither abolished mandatory retirement or raised theage to 70. The 1986 ADEA amendments virtually elimi-nated mandatory retirement in the United States.

One of the principal obstacles to raising the man-datory retirement age in Japan is the seniority wagesystem. Under this system, the postponement ofretirement age increases labor costs by retainingmore costly older workers. Under the seniority wagesystem, salary increases with employee age, durationof service, and job responsibilities. In response tohigher ages of mandatory retirement, firms havebeen modifying this traditional system of compensa-tion. More firms have introduced merit pay compo-nents into their salary structure (Hori, 1993). There isalso a trend towards reducing longevity increases inearnings past a certain age and, in some cases, cap-ping salary at age 45 or 50 (Morishima, 1992;Mroczkowski & Hanaoka, 1989; Pucik, 1984).

Another deterrent to the extension of retirementage is related to the provision of lump sum severancebenefits, which are basically a function of the years ofservice and final earnings. The amount of severancepay varies considerably with educational attainment,tenure, and firm size. For example, a male workerwith a junior high school education and 20-24 yearsof service in a firm with 30-99 employees typicallywill receive severance benefits equal to slightly lessthan two years of final pay. In contrast, a male workerwith senior high school education and more than 35years of service in a firm with 1,000 employees ormore can expect a payment equal to almost five yearsof final pay. Unless benefit formulas are changed,raising the age of mandatory retirement can signifi-cantly increase the cost of these payments. In re-sponse to higher retirement ages, some firms havebegun to use only a portion of wage increases todetermine retirement benefits.

In response to government pressure, many Japa-

nese companies have increased the age of manda-tory retirement to around age 60, and the govern-ment continues to urge firms to raise mandatoryretirement ages to 65. Given the prevailing compen-sation system, higher ages of mandatory retirementresult in substantially higher labor costs. Thus, mostemployers oppose further extension of the age ofmandatory retirement. In addition, new human re-source policies are being introduced in an effort tomitigate the cost pressures associated with an in-crease in the number of older workers.

Work After Mandatory RetirementMany Japanese companies allow selected workers

to remain with the firm after mandatory retirement.There are two types of postretirement employmentprograms: re-employment and employment prolon-gation. Re-employment plans require that workersfirst terminate their employment with the firm beforebeing rehired. Employment prolongation allows se-lected workers to continue working after attainingthe mandatory retirement age. These programs pro-vide greater flexibility to management than do uni-form increases in the retirement age because thefirm is able to decide which workers will remain withthe company. Older workers selected for re-employment typically are relegated to lower statusjobs, have less responsibility, and are paid substan-tially lower wages (generally, wages are reduced 10-20%). Seventy percent of all companies with 30 ormore employees had adopted at least one of thesepersonnel policies. During the past two decades, theproportion of firms with one of these policies hasincreased as employers have struggled with the ef-fects of an aging labor force.

The proport ion of firms with either a re-employment or an employment prolongation pro-gram varies with the size of the firm. Large compan-ies are less likely to use these policies because manyolder employees in large firms are transferred tosubsidiaries well in advance of the retirement age.Retirement ages are normally higher in the subsidi-ary companies than in their "parent" company. Inaddition, larger businesses have a greater variety ofother programs for their elderly workers than dosmaller firms. These programs include (1) assistancein finding new employment opportunities, (2) provi-sion of training for employment in other firms, (3)counseling services, and (4) assistance in setting upnew businesses after retirement.

In response to an aging work force, Japanese firmshave become increasingly likely to retain older work-ers after they have reached the age of mandatoryretirement. These personnel policies extend the ca-reers of older persons beyond the age of mandatoryretirement. However, this re-employment comes atthe cost of lower wages and a decline in job status.While effective in keeping older workers on the job,these policies would clearly be illegal under currentage discrimination policies in the United States. Pol-icy analysts observing the high rate of labor forceparticipation among older Japanese must recognize

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that the systematic reduction of wages of older work-ers after mandatory retirement is an important rea-son for the higher demand for older workers inJapan.

Human Resource Policies for Older WorkersMany Japanese firms have been developing a vari-

ety of programs to cope with the aging of their laborforces. In the past several years, a number of innova-tive policies have attracted the public's attention. Toexamine these changes in human resource policiestoward older workers, the Japanese governmentconducted case studies of 14 firms. The objective ofthese studies was to determine how these firms wereresponding to the aging of the labor force (Employ-ment Information Center, 1990). All interviews wereconducted by the Ministry of Labor in 1989. Com-pany managers involved in these interviews werepromised that the name of their firm would not bepublished in the report. The main objective of suchconfidentiality was to insure that each respondentwould provide a maximum amount of requestedinformation. Most of the companies included in thestudy were in the manufacturing sector and wererelatively large firms. Five of the companies hadmore than 5,000 workers, eight had employmentranging from 1,000 to 4,999 employees, and only onefirm had less than 1,000 workers on its payroll.

Table 2 provides a summary of findings obtainedfrom the interviews. For reasons of confidentiality,the companies are referred to by the letters A to N.Examining the human resource policies of thesefirms provides several important findings. First, com-panies tended to enforce mandatory retirement atlower ages for persons in administrative and mana-gerial posts. Second, the importance of seniority insalary determination had been reduced in many ofthese companies. Third, all the companies had re-employment policies. In many cases, the amount ofpension benefits available to re-employed workersaged 60 and over was taken into account in determin-ing their wages. Fourth, earnings for older workerswere systematically reduced in many firms.

A brief analysis of some personnel policies of indi-vidual companies is now provided to illustrate spe-cific actions of Japanese firms in response to theaging of the labor force. In company A (a textilemanufacturer), the proportion of elderly workerswas relatively high. The mandatory retirement agehad been raised from 55 to 60; however, individualswho continued to work past age 55 had their basicwage lowered by 20% (see Table 2). Company B (ayoung, rapidly growing producer of machinery) hada mandatory retirement age of 60; however, thewage level was reduced by 15% at age 57. Due to itsrapid growth, company B had a shortage of qualifiedindividuals for administrative and managerial posts.To fill this void, consultant contracts were availablefor the re-employing of older workers beyond age60. The persons who were re-employed as consul-tants received wages that were 15-25% lower thantheir previous salaries.

Company D (a leading producer of electrical ma-chinery) had alternative mandatory retirement agesranging from 56 to 60 for workers in top managerialpositions: Workers who reached the age limit werere-employed as consultants, and their contracts wererenewable up to age 65. The wages of these consul-tants were reduced by 25% even though those re-employed as consultants normally continued to per-form the same jobs as before. Company G (amanufacturer of machine ducts) had a mandatoryretirement age of 60; however, high-level adminis-trative and managerial workers were required to re-tire at ages ranging from 55 to 57. When company Graised the mandatory retirement age to 60, two modi-fications were made to its compensation system.Annual wage increases were changed from beingbased on seniority to being based on ability. A re-employment program was established to employ el-derly workers up to age 65.

Company H (a major producer of electrical appli-ances) offered older workers comprehensivecourses for old-age planning. Participants in thesecourses made retirement plans, and chose one of thefollowing late career options: (1) staying with his/hercareer employer, (2) working for one of the subsidi-ary firms, or (3) starting his/her own new business.Company J (a medium-size confectionery) had amandatory retirement age of 65. The annual salaryincrements were reduced by 50% for persons aged55-59 who continued to work. No annual wage in-crease was offered to elderly workers aged 60-64.Continued employment beyond age 65 was arrangedon an informal basis with a 50% salary reduction.

Company L (one of the largest department storesin Japan) had an early retirement program for work-ers at ages 40 and over. The primary objective of thisprogram was to make it easier for a worker to plan forhis/her late career. If workers decided to leave thecompany under this program, they received largerretirement benefits. In addition, the company as-sisted early retirees by providing low interest hous-ing loans, one-year leaves for developing skills fortheir second careers, and flexible working hours forone year prior to their retirements.

These cases illustrate the diversity of personnelpolicies that have recently been developed in theprivate sector to cope with the wide range of prob-lems relating to the employment of older workers.Some of the policies are well established, whileothers are still at an early stage of development. Theyalso differ considerably with firm size and acrossindustrial groups. Moreover, these specific examplesare based on the recent experiences of relatively largefirms and do not necessarily represent personnelpolicy changes in Japan's business sector in general.

Patterns of Work After Mandatory RetirementDespite the widespread use of mandatory retire-

ment, Japan has the highest labor force participationrates for older men among developed countries.Over 90% of men in their late fifties remain in thelabor force, and participation rates for men 60 to 64




ownloaded from

Tabl

e 2.

Pe

rson

nel P

olici

es fo

r O

lder

W

orke

rs in

14

Se

lecte

d Co

mpa

nies

Z p 1* A

Mai

nC

ompa

ny

Prod

uct

Num

ber

of

Wor

kers

Man

dato

ryR

etire

men

tAg

e

Num

ber

of

Retir

ees

Per

Year

Num

ber

ofTr

ansf

erre

dW

orke

rs

Age

for

Ret

iring

From

M

anag

eria

lPo

sts

Stru

ctur

e o

fW

ages

fo

rO

lder

W

orke

rs

Con

tinue

d Em

ploy

men

t

Empl

oym

ent

Syste

mW

age

Syste

m

Text

ile1,6

8560

13-2

723

755

20%

w

age

re

duct

ion

from

ag

e 56

.

Ret

irem

ent

bene

fits

prov

ided

at

ag

e 56

.

Re-

empl

oym

ent

for

adm

inis

trativ

e a

nd

ma

na

geria

l wo

rker

s is

ava

ilabl

e. Pe

riod

of

re-e

mpl

oym

ent

is tw

oye

ars.

B C

Mac

hine

ry

Aut

omob

ilepa

rts

1,24

2

2,64

3

60 60

2-10 10

Neg

ligib

le

80

Non

e

45-5

8, de

pend

ing

on

po

sts

15%

w

age

re

duct

ion,

begi

nnin

g fro

mag

e 57

.

No

incr

ease

in

the

basic

w

age

com

pone

nt fro

m ag

e55

.

Re-

empl

oyed

as

co

nsu

ltant

su

p to

ag

e 65

.

The

re-e

mpl

oym

ent

prog

ram

a

vaila

ble

for

wo

rker

s w

ith sp

ecifi

cdu

ties.

N

o ag

e lim

it.

Wag

es a

re re

duce

d by

15-2

5%.

Decr

ease

in

w

ages

by

20-2

5%.

Elec

tric

ma

chin

ery

12,7

7660

fo

r o

rdin

ary

wo

rker

s; 56

-60

for

thos

e ho

ldin

ga

dmin

istra

tive

an

dm

an

age

rial p

osts

.

152-

354

7,00

0N

o in

crea

se in

w

age

s,e

xce

pt fo

r a

parti

alpr

ice-

prod

uctiv

itya

djustm

ent.

Re-

empl

oyed

as

co

nsu

ltant

su

p to

ag

e 65

. Th

is pr

ogra

mis

ava

ilabl

e to

th

ose

who

a

rere

quire

d to

re

tire

befo

reag

e 60

.

Wag

es lo

wer

ed by

25

% if

the

wo

rker

is

un

der

60.

For

wo

rker

s ag

ed 60

a

nd

ove

r, w

ages

a

re a

djuste

dso

th

at th

ey re

ceiv

e 80

%o

f the

fu

ll pe

nsio

nbe

nefit

s.

Elec

tric

ma

chin

ery

5,57

360

60-9

080

057

No

furth

er in

crea

se,

begi

nnin

g at

ag

e 57

.

Wag

es fo

r th

ose

hold

ing

adm

inis

trativ

e a

nd

ma

na

geria

l pos

tsre

duce

d by

10

-20%

.

Re-

empl

oyed

as

con

sulta

nts,

po

ssib

ly u

p to

age

67

.

No

est

ablis

hed

rule

s, bu

tw

ages

a

re re

duce

d in

mo

st ca

ses.

Elec

troni

cm

ach

iner

y2,

509

603-

22

Avai

labl

e fo

r 50

fo

r se

ctio

nco

ntin

ued

head

, a

nd

55 fo

re

mpl

oym

ent.

depu

ty di

visi

onhe

ad o

r hi

gher

.

The

abi

lity

com

pone

nt o

f wag

esin

crea

ses

with

a

ge.

Re-

empl

oyed

as

a

sso

ciat

edw

ork

ers

up

to ag

e 65

.

Wag

e re

duct

ion

by

30-4

0%, a

nd

wag

es ar

ede

term

ined

by

ta

king

in

toa

cco

un

t the

a

mo

un

t o

fpe

nsio

n be

nefit

s.

Con

trol

ma

chin

ery

3,84

560

18-3

557

fo

r de

partm

ent

head

, 55

fo

r o

ther

post

s.

Ord

inar

y w

ork

ers:

Annu

al in

crem

ents

depr

esse

d fro

m ag

e49

. M

anag

eria

lw

ork

ers:

w

ages

in

th

epo

stre

tirem

ent

perio

dm

ay n

ot b

e re

duce

d,su

bject

to pe

riodi

ce

valu

atio

ns.

Flex

tim

e is

est

ablis

hed.

Re-

empl

oyed

as

a

dvis

ory

staf

f me

mbe

rs.

Wag

es a

djuste

d,de

pend

ing

on

pe

nsio

nbe

nefit

s. Bo

nuse

se

quiv

alen

t to

4-26

m

on

ths

are

pr

ovid

ed.

Cont

inue

d o

n n

ext

pa

ge



ownloaded from

Tabl

e 2.

Pe

rson

nel P

olic

ies

for

Old

er W

orke

rs in

14

Se

lecte

d Co

mpa

nies

(C

ontin

ued)

Com

pany

H

Num

ber

Man

dato

ry

Num

ber

of

Num

ber

of

Age

for

Retir

ing

Stru

cture

of

Mai

n of

Re

tirem

ent

Retire

es

Tran

sferre

d Fr

om M

anag

erial

W

ages

fo

rPr

oduc

t W

orke

rs

Age

Per

Year

W

orke

rs

Posts

Ol

der

Wor

kers

Cont

inued

Em

ploym

ent

Emplo

ymen

t Sys

temW

age

Syste

m

Elec

tric

appli

ance

s81

,400

6020

8-55

0Pa

rt-tim

e job

s av

ailab

le fo

rol

d w

orke

rs u

p to

65

.

Retir

emen

t age

is

55, bu

t asp

ecial

re

-em

ploym

ent

prog

ram

is

offe

red

in w

hich

old

wor

kers

ca

n co

ntin

uew

orkin

g up

to

65

.

Wag

es fo

r pa

rt-tim

e job

sra

nge

from

86

0 to

1,100

yen

per

hour

. Fo

r th

ose

re-e

mplo

yed

unde

r th

esp

ecial

re

-em

ploym

ent

prog

ram

, w

ages

ad

justed

by 50

% of

ch

ange

s in

price

s an

d pr

oduc

tivity

fo

rth

e ag

e gr

oup

55-5

9. Fo

rth

ose

aged

60

an

d ov

er,

wag

es ad

justed

,

cons

iderin

g pe

nsion

bene

fits pr

ovid

ed.

Elec

tric

mac

hine

ry1,0

1361

22 tra

nsfe

rs.

Man

ysu

bsidi

ary

optio

nsav

ailab

le.

None

No sp

ecific

ru

les.

Full-t

ime

and

part-

time

cons

ultan

ts.Fo

r ful

l-tim

e co

nsul

tant

s,w

ages

re

duce

d by

30-4

0%.

Conf

ectio

nery

to

427

regu

larem

ploye

es,

98 pa

rt-tim

eem

ploye

es.

651-

4An

nual

in

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atio

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), 19

90.



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range from 70-85%. Over half the Japanese men arein the labor force up to age 70. These rates are muchhigher than those of the United States and Europe.The labor force participation rate for men 65 and overis 16% in the U.S, and is less than 10% in mostwestern European countries.

In Japan, very high labor force participation ratesfor older men coexist with personnel policies thatrequire workers to retire from their career jobs intheir late fifties. This apparent labor market paradoxis due to the high incidence of work after mandatoryretirement. In Japan, several transitional job experi-ences are possible. First, workers may be included inre-employment and employment prolongation pro-grams at their career firms. Second, they may benefitfrom the assistance of their employer in finding newemployment with one of the career firm's subsidi-aries or clients. Japanese companies are often closelylinked with other firms who may be their suppliers orcustomers. This placement is usually from largerfirms to smaller firms. Third, workers may move tonew firms with no ties to their career employer.These transitional jobs may be in the same or differ-ent industries. Finally, many retirees shift to self-employment.

Available evidence clearly indicates that older Jap-anese men want to remain at work. A recent surveyon the aging of Japan undertaken by the Prime Minis-ter's office provides additional support for the desireamong older persons for continued employment.Asked whether they wanted to work beyond age 60,55% wanted to work as long as they were able, 13%wanted to work until 65, and 4% to 70. Only 21 % wereunwilling to work after age 60. The proportion ofolder men wanting to work is higher than that foundin a similar survey conducted in 1986 (Japan ForeignPress Center, 1992). These findings are consistentwith the results of a national survey on an agingsociety conducted by Mainichi Newspapers in 1992.In this survey, 70% of the respondents indicated thatthey or their spouse wanted to keep working afterthey had attained the age of eligibility for receivingsocial security (Clark & Ogawa, in press). The desireto work remains high among persons of all agegroups, although many persons worry about theavailability of jobs in their later working years.

The transition from career jobs to full time retire-ment is examined for a group of men who weremandatorily retired from their career jobs. The infor-mation on retirement transitions is provided in theSurvey of Mandatory Retirees conducted by the As-sociation for Older Worker Employment Develop-ment. This survey included 2,239 men 60 and over.All of the men had left their career employers at thetime of the survey, and most had been mandatorilyretired from their career jobs at relatively youngages. Despite being forced to retire from their careeremployer, most of the men were still in the laborforce. The labor force status of older men differedsubstantially across various personal characteristics(Clark & Ogawa, 1995). For example, the proportionof men who continued to work is greater amongthose residing in Tokyo (52%) than those in other

cities (45%) or other areas around Japan (40%). Over60% of the men with university degrees remained atwork, while only 39% of those with junior highschool educations had a job in 1987.

A higher proportion of men who had achievedupper level management positions remained em-ployed. Among company directors, 72% were still atwork in 1987, while 56% of the men who hadachieved the rank of division manager and 48% ofthose reaching section chief were employed. Lowerlevel managers and those not reaching the manage-rial ranks had employment rates of around 40%.

Just over one third of the men who were mandato-rily retired from their career employer continued towork for some time for this firm after their retire-ment. Re-employment is generally less likely amongworkers who retired from large firms, and is mostlikely for workers who attained the rank of companydirector and division manager. The Japanese corpo-rate structure consists of many interlocking compan-ies that continuously do business with each other.These companies may be subsidiaries, suppliers, orcustomers of each other.

After a worker is forced to retire from a careeremployer, the company may assist the retiree infinding a new position with one of its subsidiaries orclients. Among men in the Survey of MandatoryRetirees who had left their career employer and werestill employed, 35% were working for a subsidiaryand 16% were working for a client of their careeremployer. An additional 49% were working with anunrelated employer. Workers who resided in Tokyowere more likely to work for firms that were relatedto their career employers and men with universitydegrees were much more likely to be employed by asubsidiary or client of their career employer. In addi-tion, a higher percentage of upper-level managersmoved to firms that were related to their careeremployers. Workers in smaller firms more oftenshifted to unrelated employers as do workers inmining and the public sector.

Almost 95% of the workers who continue to workafter being mandatorily retired were employed atsmaller firms. This movement to smaller firms is animportant aspect of the transition from career jobs toretirement. This transition often involves moving toless prestigious jobs after being forced to retire fromone's career job. Forty-five percent of the men in theSurvey of Mandatory Retirees who had changed em-ployers had moved to less prestigious jobs, while26% had similar-level jobs and, surprisingly, 29%were in more prestigious positions. Virtually all ofthese men had moved to smaller firms so that theymight have a more prestigious job at a smaller, lesswell known firm.

Despite the early ages of mandatory retirement,most Japanese workers continued to work through-out their 60s. On average, these men worked anadditional five years after being mandatorily retiredfrom their career job (Rebick, 1992). However, mostsuffered sharp reductions in their earnings aftermandatory retirement. Persons who were re-employed by their career employer typically had

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wage reductions of around 20%, while persons whofound new jobs with the assistance of their careeremployer had over a 35% reduction in their wages.Workers who found new jobs without the assistanceof their career employer had wage reductions of over40% (Rebick, 1993).

Several implications of the Japanese system of life-time employment are apparent. First, older workerssuffer a sharp reduction in earning power after theyreach the age of mandatory retirement. Second, thelower earnings reduce the costs to firms of employingolder workers. The lower employment cost is one ofthe main reasons for the high proportion of older menwho remain employed. Third, assistance by careeremployers reduces the decline in compensation forpostretirement work. Fourth, the earlier analysisshowed that new human resource policies in re-sponse to increases in the age of mandatory retire-ment have resulted in wage reductions for older work-ers even before they reach mandatory retirement.

Government Policies Encouraging Employmentof Older Workers

Currently, Japanese men can begin receiving socialsecurity benefits at age 60, and women begin receiv-ing benefits at age 58. The normal retirement age willgradually increase to age 65 during the next two dec-ades (Murakami, 1995). Since many older employeesare required to retire from their firms before theyreach age 60, this change in the age of eligibility forsocial security benefits may pose serious difficultiesunless the mandatory retirement age is raised accord-ingly and/or the employment opportunities for workafter mandatory retirement are expanded.

Consistent with these policy goals, the govern-ment has recently been implementing a variety ofprograms and measures aimed at facilitating the in-crease in the retirement ages. In 1986, the govern-ment implemented the Law Concerning Stabilizationof Employment for Older Persons and subsequentlyrevised this law in 1990. This legislation establishedthe goal of raising the mandatory retirement age to atleast age 60 in every Japanese company. The law doesnot include any significant sanctions for noncompli-ance. In December 1993, the Employment Council(an advisory body to the Minister of Labor) submit-ted a report calling for further legislation encourag-ing employers to raise the retirement age to 65 and toestablish a legal mandatory retirement age of no lessthan 60.

The Law Concerning Stabilization of Employmentfor Older Persons also established subsidy programsto promote the employment of older workers.Among these programs, the Subsidy for Encourage-ment of Older Workers' Employment constitutes themost important component. Under this program, acompany that has more than 4% of its total employ-ees aged 60-64 is entitled to receive an incentive foreach additional older worker it hires. The amount ofincentive provided for each additional worker variesconsiderably with the proportion of older workersemployed and the size of the firm. In fiscal 1992, a

total of 5.7 billion yen was allocated for this program,which covered almost 200,000 older workers in over20,000 firms. Estimated expenditures for these subsi-dies in 1993 were 7.1 billion yen. Beginning in fiscal1993, firms that qualified for the program of Subsidyfor Encouragement of Older Workers' Employmentcould apply for a special subsidy for improving facili-ties and installing equipment for older workers. Toreceive the subsidy, the firm was required to submita project outline to the Association for Older WorkerEmployment Development. Subject to the Associa-tion's evaluation, the Ministry of Labor provided asubsidy for three years. The amount of the subsidyvaries with the number of older workers to be em-ployed in the proposed project. For 1993, a total of140 million yen was allocated for this new program.

Furthermore, Japanese policy makers have re-cently begun working on the next stage of retire-ment-age planning. The long range objective is toraise retirement ages to 65. To facilitate this increasein the age of retirement, the Ministry of Labor of-fered subsidies to companies that raised the manda-tory retirement age or introduced employment pro-longation or re-employment programs. Under thisnew program, called Subsidy for Encouragement ofContinued Employment, a firm that adopts the rec-ommended system for continued employment forthe elderly received a payment. In 1992, the Ministryof Labor implemented a new subsidy program forencouraging continued employment for older work-ers. Employers who provided short leaves of absenceto their older employees, before they moved to pos-tretirement jobs, were entitled to receive the subsidyunder this new program. The amount of subsidyvaried with an employee's work status: 60,000 yenper month for full-time employment and 30,000 yenper month for part-time employment. The subsidycould continue for up to three months.

Since 1989, the Ministry of Labor has been provid-ing subsidies under the program entitled Retiring-Workers-to-Be Re-employment Assistance Promo-tion Subsidy. Under this program, employees age 60and over, who are expected to retire within one year,are sent to the public vocational school to learn newskills. The firm must pay workers during the trainingperiod; however, the government reimburses thefirm for part of the salary of the trainees. Large firmsreceive subsidies equal to one quarter of the employ-ees' wages, while medium and small firms receivesubsidies equal to one third of wage payments.

In addition to these subsidy programs, the govern-ment of Japan has a wide range of other programs topromote an increase in the mandatory retirementage and to increase employment opportunities ofelderly workers. For instance, the Ministry of Laborhas been organizing a series of regional meetings tomake employers recognize the importance of solvingemployment problems faced by workers in theirearly 60s.

The Ministry has also been encouraging employersto appoint older worker's employment promoters,who will play leading roles in promoting voluntarycorporate efforts to ensure the continued employ-




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ment of older workers. To help older workers findnew jobs, the government has implemented the Self-Introduction Video Program, in which self-introductions by elderly job seekers are made intovideos. The purpose of the videos is to provideprospective employers with relevant information onthe older job seeker. Silver Human Resources Cen-ters have been established for providing supplemen-tary or short-term employment opportunities relatedto daily activities of the local community. The Cen-ters are also intended to contribute to the vitalizationof each local community. The cost of managing thesecenters is partially subsidized by the government.

The objective of the government in these policiesis to increase employment opportunities for olderworkers in order to reduce the financial problemsassociated with raising the normal retirement age forsocial security benefits. Increasing the mandatoryretirement results in higher labor costs for employ-ers. As a result, firms are opposing the efforts by thegovernment to increase retirement ages. The tensionbetween government objectives and the concerns offirms will continue to increase during the next dec-ade. In addition, younger workers are now voicingan increasing concern with regard to the adverseeffect of the further extension of the retirement agesupon their future promotional opportunities. Objec-tions by younger workers to reduced promotionalprospects and limited earnings growth may restrictfuture government policies.

ImplicationsThe evolution of human resource policies in Japan

in response to an aging society has required consid-erable modifications in the traditional system of life-time employment. Many of the policy initiatives havebeen made voluntarily by firms as they seek to estab-lish desirable personnel policies for an aging laborforce. However, the government has played an im-portant role in influencing changes in compensationand retirement policies. This article has examinedmany of the. important changes in human resourcepolicies in Japan. Population aging and the accompa-nying changes in employment and compensationhave important implications for labor costs, produc-tivity, and the future competitiveness of Japanesefirms. Key findings of this analysis are:

With a seniority wage system, an aging labor forceincreases the cost of production. Raising the age ofmandatory retirement exacerbates this problem byincreasing the duration of employment whenworkers are the most expensive. In response tothese changes, firms have adopted a series of newpolicies aimed at reducing the cost implicationsassociated with an increasing number of olderworkers. These include the introduction of meritpay systems, the reduction of earnings growth forolder workers, and in many cases, actually cuttingthe wage of workers who reach certain ages.

The modification of the traditional system of com-pensation is causing a decline in worker loyalty.

Manifestations of this change in worker attitudesare higher turnover rates and greater dissatisfac-tion on the job. These responses will adverselyaffect firm productivity and reduce the advantageof team-oriented production.

Most firms offer selected workers the opportunityto remain with the company after mandatory retire-ment. These workers typically suffer substantialreductions in wages and are relegated to lower-level jobs. These policies provide firms the oppor-tunity to retain desirable workers while forcingmost older workers to retire. The ability to reducewages for older workers should increase the de-mand for their services and help firms offset thehigher costs of an aging labor force. Such policieswould be illegal in the U.S. and as a result, manyU.S.-owned firms may find it difficult to institutesuch policies for their subsidiaries in Japan.

To facilitate the retirement of older workers, manylarge firms assist their retirees in finding new em-ployment with their subsidiaries or clients. Theseplacements allow retirees to continue their careersin jobs related to their previous experience. Theseindividuals suffer considerable declines in theirwages; however, the declines are generally lessthan the worker would have encountered withoutthe assistance of their former employer. To theextent that this is an important component of theemployment relationship, many U.S. companieswill be at a disadvantage in recruiting workers dueto their lack of business relationships in Japan.

The government is pressing for higher retirementages and greater employment opportunities forolder workers. Employers believe that these poli-cies are increasing their labor costs and hinderingtheir ability to compete. The divergence betweenpublic and private interests will continue to widenin the future. Government proposals to increasethe retirement age and to increase the employ-ment opportunities for older workers will con-tinue to challenge private employers and forcethem to find new ways to counteract the upwardpressure on labor costs.

Currently, some of the effects of an aging laborforce are being masked by the ongoing recessionin Japan. During the recession, the demand forworkers has remained low. Therefore, the contin-uing decline in the number of new entrants intothe labor force associated with the aging of thepopulation has not been seen as a problem. Firmshave been more concerned with reducing thenumber of workers. As the economy recovers andthe population continues to age, however, theproblem of an imbalance in new entrants relativeto workers of retirement age will intensify. At thatpoint, firms will recognize that it is in their owninterest to develop human resource policies tocoexist with an aged labor force.

Japan's future shortage of young workers can bepartially remedied by (1) the further developmentof labor-saving technologies such as robots andautomated production methods, (2) more effec-tive utilization of female workers, and (3) in-

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creased use of immigrant labor. Each of theseoptions will require further changes in humanresource policies of Japanese firms.Although various policy options are available to

Japan, the task of identifying an optimal blend ofpolicy alternatives is extremely challenging given therapid pace of population aging. There is not muchtime for Japan to develop new, more appropriateretirement policies before the impact of rapid popu-lation aging in the next decade begins to directlyaffect the economy. Public and private retirementpolicies must be altered further if Japan is to avoid anextremely rapid increase in social security taxes,sharp increases in labor costs of production, andlabor shortages. The primary challenge facing Japa-nese firms is to develop human resource and com-pensation policies that accommodate more olderworkers and the extension of work life without ad-versely affecting their global competitiveness.

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Clark, R. L. (1991). Retirement systems in Japan. Homewood, IL: Irwin.Clark, R. L. (1996). Japanese pension plans in transition. Benefits Quarterly,

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Received August 23, 1995Accepted January 25, 7996




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