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Government and Economy

What to Make of the Free Firing Zone?
- Just the Facts Please -

Yutaka Harada
Professor, School of Political Science and Economics, Waseda University

After spending so much effort cooking up a plan to deregulate labor (dubbed, the "free firing zone measures," by much of the media) in Japan's new strategic economic zones, it looks like the Abe administration has now decided to leave it on the back burner. Designed to attract foreign companies and start-ups, the proposals for deregulation focused on three areas: dismissal rules, working-hours, and fixed-term employment that would be applicable only to Japan's "national strategic zones." The proposals were shelved after they were challenged by the Ministry of Health, Labor and Welfare, which argued that it would be unconstitutional to have one set of labor regulations governing inside the national strategic zones and another for outside.

The first proposal would have allowed employers to make their own rules regarding termination, giving them greater freedom to dismiss employees. The second proposal would have allowed companies to get away with not paying overtime to white-collar workers, whose performance is not necessarily measured by the number of hours worked, if their salary is above a certain level. The third proposal would have revised regulations on fixed-term employment, which were implemented throughout Japan in April of this year. The regulations require employers to make contractual employees, for example one-year hires, permanent if they have worked for the same employer for more than five consecutive years in total. The government has decided to revise this regulation nationwide, not just within the national strategic zones (as reported by the press on October 20, 2013).

Foundation of the labor law built on the idea that workers and employers are not on an equal footing

If two parties freely enter a contract on an equal footing, the outcome will always be good for both parties. No one would be willing to enter a contract if it were otherwise. Some economists have used this premise to argue that the government's interference in labor contracts will only put a damper on economic efficiency and, you could say, hamper freedom. Others say that government involvement is necessary to reinforce the workers' position because they don't stand on an equal footing with employers.

The foundation of labor law was built squarely with the latter view in mind. It's only natural that the Ministry of Health, Labour and Welfare, which oversees labor laws and regulations, opposed the proposal on constitutional grounds. If workers and employers could enter a contract on equal terms, there would be no need for either labor laws, or for the Ministry of Health, Labour and Welfare.

Now, which economists' view is right? First of all, it would be wrong to think that the key to stabilized employment lies in prohibiting companies from freely dismissing their employees. Revising fixed-term employment regulations (proposal three) is necessary. Prior to this April, companies would routinely dismiss one-year contractual employees whose period of service had hit four years and 11 months just to duck their obligation of making them permanent employees after five consecutive years. So here we have a regulation that was designed to stabilize employment, but that in practice does anything but.

Changing the working-hour rules (proposal two) is also necessary because employees' performance cannot be measured on the basis of the number of hours they work. Companies can still avoid paying overtime to researchers, journalists, outside sales reps, managers, etc. by paying them a flat allowance. I don't recall seeing any specific debate in the media about jobs that should be compensated with allowances other than overtime pay because they couldn't be managed on the basis of hours worked. I don't think Japanese companies really understand the merits of matching the right person with the right job and the benefits of optimal personnel placement.

Bring up the subject of revising dismissal rules (proposal one) in any debate on whether workers and employers are really on an equal footing, and you'll soon find yourself running around in circles. That's why I prefer a more dialectical approach to dismissal rights. As I mentioned earlier, making it difficult for employers to dismiss their workers doesn't necessarily lead to increased employment opportunities or job security because companies will just do their best not to hire anybody if they cannot easily dismiss them. Give them the power to fire who they want and companies will hire people in a heartbeat. That's why giving companies the right to fire employees will actually increase employment. Could this be true?

Dialectical structure of the debate on dismissal rights

This argument seems to make sense when you look at high unemployment rates in Europe, where companies cannot fire employees at will. That argument no longer shines, however, when you look at it in light of the U.S. and the U.K.—two countries where dismissal is easier but unemployment rates much higher than in Japan.

There are two types of hiring practices in Japan, lifetime (permanent) employment and fixed-term (nonpermanent) employment. While dismissal is difficult when it comes to lifetime employment, companies can easily fire employees on fixed-term employment contracts once their contract periods expire. When the economy goes sour, nonpermanent jobs are sacrificed to protect permanent ones. Some argue that this kind of discriminatory practice should be stopped. They say that if companies were allowed to fire any employee either at any time or after a certain period of time, it would not only eliminate the gap between permanent and nonpermanent employees, but that it would also increase and stabilize employment.

I would agree with this view if it weren't for the fact that fixed-term employees account for only 36 percent of the workforce—although their number is on the rise. The truth is, there are more permanent employees than contractual employees. Even if you were a nonpermanent worker, I’m sure that you wouldn't want to make firing permanent employees very easy if your spouse were a permanent employee. It might even explain why deregulation of employee dismissal rules is such a rarity.

I can understand why someone would be skeptical of such a dialectic coming from the mouth of someone who has risen up through the Japanese employment system or somebody who has a secure permanent position.

How hard is it to fire somebody in Japan anyway? Personnel reductions are common at small and medium-sized companies as well as venture businesses. Even large corporations easily resort to downsizing when faced with a crisis. While large companies shy away from layoffs when times are good, they have no qualms about offering incentives for early retirement.

Looking back, maybe the debate on labor market deregulation should have been focused on factual data that could have painted an accurate picture of labor practices today and the impact of current employment regulations, but the media, at least, didn't paint it that way. Dialectical or non-dialectical discussions aside, a debate driven by factual evidence would have made better sense.

Yutaka Harada
Professor, School of Political Science and Economics, Waseda University

[Profile]

Born in 1950, Professor Yutaka Harada graduated from the University of Tokyo in 1974 and entered the Economic Planning Agency (EPA). He served in various EPA posts, including Director of the Social Research Division and the Overseas Research Division. He was vice-president of the Finance Ministry’s Policy Research Institute, and became chief economist and senior managing director of the Daiwa Institute of Research before assuming his current position in 2012. He received a PhD in economics from Gakushuin University. His major publications include TPP Makes Japan Stronger [TPP de Sarani Tsuyokunaru Nippon] (co-author), Reflation Revives Japanese Economy [Rifure ga Nihon Keizai o Fukkatsusaseru] (co-author/editor), Post-Quake Reconstruction: Pattern of Deception [Shinsai Fukko - Giman no Kozo], Why So Many People Are Poor in Japan? [Nihon wa Naze Mazushii Hitoga Ooinoka], Principles of Japan [Nihonkoku no Gensoku] (winner of the Ishibashi Tanzan Award), No Need to Fear Society with Declining Population [Jinko Gensho Shakai wa Kowakunai] (co-author), Study of Showa Depression [Showa Kyoko no Kenkyu] (co-author, winner of the Nikkei Prize for Excellent Books in Economic Science), and more.