Beginning from the end of 2012 and up to recently, approximately 4 million new jobs have been created in Japan and the unemployment rate has fallen to the low 2% range, showing a great improvement in employment conditions. At the same time, however, the average wage level of workers remains at pre-1997 levels. In this study we analyze the reasons why wage levels remain stagnant in the Japanese economy.
   Our analysis reveals the following reasons. The first is a change in the composition of the Japanese workforce. Female workers, elderly workers, and non-regular workers, who on average receive lower wages, now represent a larger proportion of the workforce and employment has increased in industries with lower wage levels. For instance, the percentage of female employees has increased from 32% in 1970 to 45% recently. The shares of non-regular workers increased from 20.2% in 1990 to 37.6% as of the 1st quarter of 2018. On average, non-regular workers and part-time workers receive 67% and 75% of the wages of regular workers, respectively.
   Our study also identifies certain structural factors contributing to the situation. The aging of regular employees leads to a sharp increase in labor costs, and a flattening of the wage curve has begun in response to this. Another factor is that foreign shareholders have increased greatly, contributing to the spread of shareholder-oriented corporate governance and performance-based pay schemes.
   Japanese corporations have revamped their business strategies as well. Since the mid-1990s Japanese businesses have recognized the need to reduce overall labor costs as an important element of their strategies to gain competitiveness amidst steeper international competition. This has led to a shrinking in the regular workforce and subsequent increase in non-regular workers, and the curbing of seniority-based payment. Due to the downward rigidity of wages, compensation levels are slow to rise despite short-term recovery in the economy.
   We also observe a cohort effect contributing to this trend. The so-called “employment ice age” generation in Japan, who finished education and entered the labor market between the years of 1993 to 2005, have faced various disadvantages compared to other generations in terms of wage levels or the forms of employment offered in the market. Among these, middle-aged “freeters” (free arbeiter) – non-regular workers between the age of 35 to 54 (excluding married women) – were mostly men and working under low-wage and unstable employment conditions, totaling approximately 2.73 million people in 2015. As such, a large portion of a particular generation has remained in unfavorable conditions in terms of employment and wages. Failure to resolve this situation has contributed to sluggish wage growth.
   The results of our study provide the following implications. First, it is very important to maintain the competitiveness of the manufacturing sector in the domestic context. The Japanese manufacturing sector shows a significantly lower percentage of non-regular employment and higher productivity compared to other sectors, thus providing better job security. While employment has sharply increased over the past 20 years in sectors related to healthcare and welfare, food and beverage services and accommodations, wholesale and retail, and other services, wage levels in these sectors remain below the overall average. Elevating productivity in these services sectors is at the crux of increasing the average wage level across all sectors.
   Another important agenda is to create an environment where more women and elderly workers can participate in the labor market. We can see how the “employment ice age” generation in Japan struggled with unstable employment and relatively lower wages, and how failing to resolve this situation over the years led to further social problems. Korea as well is faced with acute difficulties as its younger generation continues to struggle in the job market, and there is a significant possibility of a similar situation unfolding in Korea over the next couple of decades.
   The aging population and stagnation in productivity lie at the root of Japan’s sluggish wage growth. Employee compensation schemes formulated during the nation’s period of rapid growth have continued to falter since the mid-1990s as the Japanese society experienced the adverse shocks of an aging population. Ultimately, the only way to increase wage levels is to elevate international competitiveness in the manufacturing sector and productivity in the services industry, where employment has increased significantly.