Sunday, January 6, 2008

Using Temps Hurts Japan

January 7, 2008
Growing Reliance on Temps Holds Back Japan's Rebound
Firms Increasingly Add Part-Time Workers; Spending Power Lags

January 7, 2008; Page A1, Wall Stree Journal

TOKYO -- Five years ago, Japan chugged back into expansion mode after a decadelong slump. Yet its economy remains lethargic, its consumer spending anemic, its corporations cautious about capital spending and its stock market fragile.

With the rest of the world battered by continuing credit problems emanating from the U.S., the state of the world's No. 2 economy -- key to world economic health -- is an increasing concern.

Such worries have sparked a heavy selloff in Japanese stocks in recent months. The benchmark Nikkei stock average tumbled 4% Friday, the first trading day of the year, after falling 11.1% in 2007, its first losing year in the last five.

One reason Japan's rebound hasn't gotten traction: companies' growing reliance on temporary workers, who earn less -- and spend less -- than full-time employees. The shift in hiring can be seen at companies like Hino Motors Ltd. The truck-making unit of Toyota Motor Corp. is paying record dividends this year. But it also has been filling thousands of factory jobs with temporary workers, who start at $10 an hour and get few benefits.

"I always look for the cheapest meat to cook with, usually ground chicken or shreds of pork," says Ikkei Ikeda, 28 years old, who worked as a temp at Hino setting heavy metal discs onto machines for 2½ years before quitting in August. He says he rode his bike wherever he could to save train fare, because his monthly take-home pay averaged just $1,300. In other words, although Mr. Ikeda was employed, he wasn't doing much to boost consumer demand.

Companies across Japan have gone on a binge of hiring temps in the past few years. They earn about two-thirds of what full-timers do and can often be hired and fired with just a few days' notice. More than a third of the people in Japan's labor force are categorized as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compares with 23% in 1997 and 18% in 1987.

The trend has been good for Japan's economy in some ways. Use of temps gives companies flexibility and cost control, helping them succeed in highly competitive global industries like manufacturing. Big Japanese companies have reported earnings growth for five straight years.

Yet the heavy use of temps also has created an obstacle to the virtuous cycle typically seen in an expanding economy: When companies make better profits they eventually raise wages, which boosts consumer spending -- and leads to more corporate profits.

In the past decade, average wages in Japan have fallen every year except two because of an increase in temps and stagnant wages for full-timers. Consumption by working families declined on a year-on-year basis in six of the past eight quarters. This even though the Japanese are also saving less: A Bank of Japan survey showed that some 23% of households had no savings last year, compared with just 10% in 1996.

The result is sluggish domestic demand and growth that is supported by exports to a lopsided extent. In the July-September quarter, when Japan's economy grew at an annualized rate of 1.5%, exports were rising at an annualized 11% rate and domestic demand was shrinking slightly. Personal consumption is so weak in Japan that it accounts for only a little over half of the economy, compared with 70% in the U.S.

The temp-hiring trend thus adds to other elements restraining Japan's growth. The population is aging rapidly, and an increase in the number of frugal retirees has also meant lower spending on everything from clothing to electric appliances. Sharp cuts in regional public-works spending, part of the government effort to reduce its huge fiscal deficit, have hurt local economies and consumption. Capital spending by corporations has been strong until recently, propping up the economy along with exports. But there are signs that companies are also beginning to slow down their spending because of a recent rise in the yen's value and concerns about problems in the global credit market.

Its reliance on exports has left Japan's economy more vulnerable. Partly because U.S. housing-sector woes cloud the outlook for Japanese exporters, many economists have recently trimmed their forecasts for Japan's growth rate for next year.

Looking for Growth

Another slump in Japan would be bad news for the global economy, which was counting on Japan to pick up some slack as the U.S. economy stumbled. Consumption growth is also weak in Europe, leaving the world economy reliant for growth on China and other developing nations, plus stressed U.S. consumers.

As with Japan, many economists expect the euro zone's economic growth for the fourth quarter to come in at lower than in the prior one, when it was 2.6% at an annualized rate. European countries also have been relying more heavily on temporary workers, a factor that economists say may be slowing the growth of their consumption.

Countries have different definitions of temporary workers. In Germany, temps last year made up 14% of the work force, according to the Organization for Economic Cooperation and Development. In the U.S., "contingent" workers -- those lacking permanent job arrangements -- totaled only about 4% of the work force in 2005, a Labor Department survey showed. By any definition, Japan's reliance on temps is among the highest in developed nations.

In Japan, the proliferation of temps is creating a new social divide. For decades, big Japanese companies hired workers fresh out of school on a full-time basis, offered years of training and all but guaranteed steady pay increases. This afforded a middle-class lifestyle to nearly everyone.

Now, the media are filled with stories about the "working poor." The number of families receiving public financial support for children is soaring. There's even a new kind of homeless people -- young folks who sleep at Internet caf├ęs. The opposition Democratic Party of Japan scored a major election victory in July by making the growing income gap its main issue.

The rise of temps began in the 1990s as Japan entered its long slump and low-cost nations such as China posed unprecedented competition. To compete, Japanese companies shifted large chunks of their manufacturing capacities overseas. At home, cost-cutting came slowly, partly because layoffs were taboo.

Then, labor-law deregulation gave companies a new way to restructure, while keeping some of their treasured manufacturing capabilities in Japan.

Until the late '90s, worker-friendly laws forbade temporary-labor contracts except for a few specialized areas, such as computer programming. A change in 1999 allowed temp agencies to dispatch workers to many more types of jobs. And in 2004, manufacturers were allowed to use workers sent by temporary-help agencies.

That change encouraged companies such as Toyota and Canon Inc. to start hiring temps en masse. At Canon and its subsidiaries and affiliates, the number of part-timers and temps nearly quadrupled from 2003 to last June, to about 40,000, according to securities filings. Full-timers are more numerous, at 127,000, but their numbers rose a more modest 24%.

Temps find it difficult to become full-time. When the economy began recovering about five years ago and companies needed more full-time workers, they got them by hiring fresh graduates. In a 2006 survey by staffing agency Pasona Group, two-thirds of companies responding said they were reluctant to make part-timers or temps full time. Many firms cited a lack of skills. Temps rarely get much training from their employers.

Longtime temps say conditions have deteriorated. Yoko Mitome, 49, was a sales executive at a travel agency for two decades, jetting about and planning package tours to exotic spots. She lost this $50,000-a-year job in 1998 as the employer sought to cope with falling sales near the bottom of Japan's long slump. She got a temp job as an operator for international calls at a unit of phone company KDDI Corp.

Since then, the hourly wages have stayed fairly stable but the company has stopped paying transportation expenses and good-attendance bonuses, has shortened breaks and has shortened employment contracts to three or six months from a year.

The annual pay of operators comes to less than $20,000 for six-hour work days, before taxes and social security contributions. Ms. Mitome lives with her mother and works a second job but still has to economize. Long gone are her days of buying $400 suits; now she shops only at casual-clothing stores where T-shirts go for $9.

"At least I own a house and have savings from my previous job," she says. "Things are very grim for a lot of my young co-workers."

Her employer, KDDI Evolva Inc., says changes in employment conditions have come as demand for phone operators has declined. It says it has mitigated the impact by measures such as raising hourly pay to try to make up for the loss of transportation aid.

Temp agencies are proliferating. One called sends workers emails on their cellphones about short-term jobs, often for the following morning. The service is used by companies that want workers when they need them, without the trouble of recruiting them or insuring them.

One temp agency, Goodwill Inc., has been around for 12 years and says it has 2.9 million people registered for job placement. Masami Fujino has been registered with it for seven years. He has often worked a different job every day, ranging from disposing of industrial waste to stocking food warehouses.

"The absolute worst," he says, "was when I had to haul household items out of a home in foreclosure, over the heads of crying kids." A full day of work leaves Mr. Fujino with about $55 after taxes and transportation, barely enough to get by in Tokyo.

Companies are seeking more labor deregulation so they can use temp workers even more flexibly. They want to abolish a rule that says if a company fills a job with a temp for three years, it has to make that job a full-time one. Companies commonly get around this by changing the job description slightly and starting the three-year clock running again.

Age Gap

As the number of temps grows, some experts see worrying long-term effects. While many temps are older workers who lost full-time jobs, the sharpest rise is among people in their late 20s and 30s, who finished school during Japan's economic slump and never got a full-time job. Among workers aged 25 to 34, about 26% are temps, compared with 14% a decade ago.

Some companies are concerned about workplace tension in this two-tier system. As earnings have improved, a few have started to convert temp workers to full-timers. Sumitomo Mitsui Banking Corp. recently decided it would turn 2,000 temps and affiliated-company employees working as tellers or loan assistants into permanent staffers of the parent company.

Toyota's all-union labor federation has begun inviting temps and part-time workers to join, saying the increase in the number of nonpermanent workers is threatening unity in the work place.

But for companies like Hino Motors, temps remain an important resource. Between 1998 and 2002, Hino reduced full-time workers to 8,600 from 9,500. When sales picked up and it needed more workers, Hino turned to temp agencies. As of March 31, Hino had 4,770 temps and part-time workers, up from 684 in 1998.

The company doesn't disclose pay scales. According to an ad by a staffing agency, a temp job at Hino pays about $10 an hour. This translates to pretax pay of about $21,000 a year. The average pay for all of its full-time people, including executives, was about $55,000 in the year ended March 31.

"The level of our production fluctuates sharply each year," a Hino spokesman says. "Bringing in temporary people whenever we have a shortage is simply what we have to do in manufacturing."

When Mr. Ikeda failed three years ago to get a job as a teacher, he found that signing up at a temp agency swiftly landed him temp work at Hino. But when he missed work for three days because of food poisoning, the staffing company called up to say he would be asked to quit if he doesn't come back soon. Though he survived that, he quit later, and now is looking for another temp job. "I don't mind the factory work at all," he says. "But as long as I'm a temp, I have to live with the fear that the job may be gone tomorrow."

Write to Yuka Hayashi at yuka.hayashi@wsj.com1

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