To: Mr. Katsunobu Kato, Minister of Health, Labor and Welfare

From: Youth Policy Analyst

Subject: Policy Alternatives in addressing the problem of shrinking workforce in Japan

Date: 10^th Dec 2019

According to the research conducted by the Health, Labor and Welfare ministry of Japan, the total number of workers will be shrunk to only 52.5 million in 2040. The size of workforce will be shrunk by nearly 20% as compared with 65.1 million this year. The problem of shrinking labor force is largely due to aging population. Currently, nearly 35% of of the Japanese population is above 60 years old. It is also estimated that the number of senior citizens above 65 years is going to reach one-third of Japan’s total population by the end of 2050. Even worse, Japan is also facing a critical problem of low fertility rate. It is largely because the younger generation is pressurized by the poor economic growth of Japan in the past decade. Many of them are mentally and economically resisting marriages as they are not willing to compromise their currently living standard and the quality of life. However, when the fertility rate is dropping, Japan’s economy cannot have sufficient labor force to support production activities in the near future. As a result, the overall economic performance will also be adversely affected and trapped in a vicious cycle.

In this memo, two policy alternatives will be proposed to address the problem of shrinking workforce in Japan. The first policy alternative is to increase the mandatory retirement age so as to reduce the shortage of labor in the job markets. The second alternative is to attract foreign talents and labor to work in Japan. Basically, three criteria will be used to assess the applicability and credibility of the two proposed alternatives, including 1) Loyalty and identity, 2) Quality of labor, and 3)impact on Japan’s economic growth.

Alternative One: Raise Mandatory Age

Under such context, the Ministry of Health, Labor and Welfare decides to raise the mandatory retirement age from 60 to 65 years old. The logic behind is that the shortage of labor can be addressed by employing more people from the retiring group. In fact, not only Japan but many other countries such as the U.K, Germany, etc, have already taken similar measures to address the problem of aging population. Due to technological development, the national and global life expectancy have been increased very significantly. In other words, it is still possible for people to continue working after 60. The Japanese government should be responsible for shortening the gap between the retirement age and the increasing life expectancy. However, companies may still choose to recruit younger people as they are more energetic and productive in the workplace. As such, the government should provide subsidies to incentivize local companies to recruit retiree-age employees. The shortage of labor can thus be effectively reduced in this way. Besides, the pension eligibility should also be modified in order to encourage people to have a late retirement. For instance, the qualifying age for pension payments should be increased by five years according to the adjustment in the mandatory retirement age as well. Besides, currently Japanese people can still receive their pension at 60. It should be re-adjusted to 65 years old.

Projecting Outcome

According to the World Population Prospects 2019, the average life expectancy of Japan’s citizens will increase from 82.1 this year to 87.3 in 2050. The standard of living and quality of life in Japan will keep increasing in the next two or three decades. Thus, it is predictable that the life expectancy of Japanese will also increase accordingly. The report of World Population Prospects 2019 also predicts that if mandatory retirement age is increased to 65 years old, the size of the workforce can be increased by 7% annually. As such, in 2050, it is feasible for Japan to restore its working-age population to the size in 2018 (See Appendix).

Alternative 1 Assessment

The workforce will be loyal to Japan because most people from the retiree-age group are Japanese citizens. They are not foreign talents or new immigrants.

However, the quality of labor may not be improved after implementing this policy. It is largely because senior citizens may have poor body fitness which disallows them from doing their work throughout the working hours. Besides, they may not produce the same quality of products and amount of outputs as the young workers. Therefore, the whole productivity may be worsening.

In the short run, the problem of shortage of labor can be addressed. Companies and organizations can continue their production activities and business operations with existing labor. But the retiree-age workers may not accomplish the full working hours due to body fitness and health issue. It will has a medium impact on Japan’s economy. In the long run, as shown in the Appendix 1, the shortage of labor can be effectively addressed as the workforce can be restored to the level of 2018 by the end of 2050. But the quality of labor does not really improve very much as the retiree-age workers can only generate limited economic outputs. Therefore, it has a medium impact on Japan’s economic growth.

Alternative 2: Recruiting Foreign Talents and Labor

The second alternative is to attract foreign talents and make them work for Japan. It does not mean that Japan has to loosen its current immigration policy but rather offering work permits for foreign workers. Due to the aging population problem, many companies in Japan cannot have sufficient labor to support their production and business activities. However, people from other countries especially from developing countries like China are more than willing to work in Japan because they can earn more salary and enjoy better working conditions as compared in their home countries. Singapore, a successful island state, has very limited natural and human resources. Each year, it has to attract 50,000 to 100,000 foreign workers to boost its economic activities. Now the number of foreign workers in Singapore is about 10% of the country’s total population. Japan should also borrow the value experiences from Singapore and learn about how it manages to attract foreign labor and maintain the economic growth. It is not necessary for Japan to only attract or recruit high-end foreign talents. Construction projects, road maintenance services, and other so-called low-end jobs can also be offered to foreign cheap labor.

Projecting Outcome

Like the aforementioned, the ministry of the Health, Labor and Welfare has predicted that Japan’s workforce will be shrunk by nearly 20% in 2040. The shortage is about 13 million. In other words, in order to reduce this shortage, Japanese government has to issue about an equal number of work permits to foreign workers. It can be predicted that after implementing this policy alternative, the shortage of labor can be effectively reduced and replenished by foreign talents and workers in the near future.

Alternative 2 Assessment

However, in terms of loyalty and sense of belong, foreign workers will be only loyal to their home countries. It means that majority of their earned income will be sent back to their home countries to support their own family members. There is a risk that the recruited foreign labor may be not familiar or interested in learning local rules and regulations. Crime rate may be increased due to this newly proposed policy. Moreover, it will also be less likely for them to make their settlement in Japan and continuously contribute to Japan’s economy. They may go back immediately after their employment contract is terminated.

In terms of quality of labor, it is indisputable that the quality of foreign workers will be much higher than the retiree-age employees as being mentioned in the Alternative 1. Japanese employers will select the most qualified or cheap workforce in order to fulfill their production demands and requirements.

In addition, Japan’s economy can be positive affected after attracting foreign workers. In the short-run, the problem of labor shortage can be effectively addressed after issuing working permits for foreign talents. In the long run, foreign workers will compete vigorously with local employees. The competition between them can create a positive effect in enhancing the net productivity of all industries in Japan. For instance, when local Japanese are scared of losing their jobs, they will try to build up their own strengths through upgrading their skills, pursuing further studies, etc. Japan’s economy can be better off in this way.

Policy Recommendation

Ultimately, the recommended option will be chosen from the policy alternative 1 and alternative 2. The table below depicts the results after assessing the two alternatives.

It can be observed that apart from criterion 1, Alternative 2 is rated “high” in other other criteria. It shows that the better option is to recruit foreign talents and workers to reduce the shortage of labor.

Stakeholder Analysis

The major stakeholders in the two proposed policies may include Japanese citizens, government bodies, Japanese companies and organizations, and foreign workers. In policy alternative 1, it seems that Japanese people, especially the elderly may have a positive attitude about postponing their retirement age. Majority of the retiree-workers feel that they have no health problems. With the proposed policy, it is still possible for them to earn a good income just as other employees do. Mentally speaking, Japanese worker will feel that they are really getting old after retirement. Most of them would rather choose to stay with their companies because they feel that they are mentally young and capable of doing their work. To the Japanese government, to raise mandatory retirement age will certainly maintain the country’s economic growth and reduce the labor shortage. Thus, the Japanese will welcome the proposed policy. However, local companies are reluctant to recruit the retiree-age employees because they are biologically less capable of doing the same job or having the same work efficiency as young people. Without government subsidies, they will not recruit too many retiree-age workers. Last, the proposed policy does not really affect the foreign workers. So they will not care too much about this policy.

In the second proposed policy, Japanese citizens will be strong against it because foreign workers will take away their job opportunities. They have to compete with foreign workers in order to secure their jobs. If Government decides to issue more work permits, many Japanese people may stop voting for the ruling party as their personal interests and welfare are violated. They may also be worried about the waste of social resources such as insurance services to non-citizens. Moreover, as Japan is practicing a democratic political system, the central government has to think carefully about taking in too many foreign workers. If majority of Japanese people dislike the policy, it is less likely for Japanese government to issue work permits to foreigners. However, local companies will certainly welcome this move. It is because recruiting foreign workers will reduce the labor cost. Foreign labor are usually demanding much lower salary as compared with local people. Last, foreign workers especially those from developing countries will strongly support this policy because they can enjoy better working condition and earn more salary as compared in their home countries.

All in all, even though the most recommended option for Japanese government to address the problem of shrinking workforce is to recruit foreign workers. The ruling part should listen to the opinions of Japanese citizens. If majority turn against the second policy, the government should stop distributing additional work permits for foreign workers otherwise the ruling party will be lost to the opposition parties in the political elections. At the current stage, referendum should be held for the government to elicit opinions from the general public. Then, the Ministry of Health, Labor and Welfare should further decide whether to choose policy alternative 1 or 2.

Appendix 1:

Fig 1: Life Expectancy Trend in Japan

Source Credit: U.N, World Population Prospectus 2019

Fig 2: Percent of Working-age population in total population in Japan

Reference

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