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Japanese Economy Update

Track Record of the Shunto

Jun SAITO
  Senior Research Fellow

2016/03/10

New data on last year’s shunto outcome

Amid increasing interest in wage increase, this year’s shunto (spring wage round) is at its peak. Trade Unions have presented their demand for the wage increase earlier this year, and negotiations have been taking place. Many of the employers are expected to make their response to the union’s demand on March 16.

In preparation for assessing this year’s outcome, it would be interesting, at this point of time, to confirm what were the achievements and the limitations of last year’s shunto. For that purpose, it is informative to look at a report which has just been published by the RENGO-RIALS, a think-tank for the Rengo (Japan Trade Union Confederation).

The report was published in February 1 by a working group which supervised the analysis, a group which I happen to chair. Let me touch upon some of the interesting points. For other details, I will have to ask the readers to refer to the report itself, although it is regrettably only in Japanese.(http://rengo-soken.or.jp/report_db/file/1456719904_a.pdf)

What the new data tells us

The report is based on the data collected by Rengo at the time of last year’s shunto to monitor its outcome. The data is collected from 5469 unions which have a total of 2,727,767 members. Until today, the Rengo had only published the average outcome of the wage increases with some additional data, but had never analyzed it in depth. This year, Rengo provided the data to RENGO-RIALS, which analyzed it and published the results with additional information on the data.

The following are the main results described in the report.

First, the average wage increase achieved by the union members (weighted average of the outcomes with number of members as weights) in 2015 spring wage round was, on average 2.2 percent, or 6,345 yen. It is slightly above the average wage increase achieved by the unions (simple average of union outcomes), which was 1.9 percent of 4,483 yen, implying that larger unions had a higher wage rise.

More specifically, wage increase higher than 2.2 percent was only achieved in unions with members of more than 1000. Unions with members less than 500 only achieved less than 2 percent increase, and those with members less than 50 achieved only about 1 1/2 percent increase.

Second, if the wage increase is disaggregated into base-up (upward revision of the wage scale) and scheduled pay rise (one-year slide along the existing wage scale), it was 0.6 percent for the former, and 1.7 percent for the latter: A significant part was scheduled pay rise, and base-up, which corresponds to an increase in permanent income, was limited.

There was also a considerable dispersion across unions. For example, 25 percent of the unions, or 10 percent of the union members, received no-base ups at all.

Third, there was a considerable difference in base-ups across regions. On one hand, there are regions like Tokai (the region which includes cities like Nagoya and Toyota) which saw an increase by about 0.8 percent. On the other hand, there are regions like Hokkaido-Tohoku, Kyushu, and Shikoku, which had an increase of only about 0.4 percent. Moreover, in the three regions, the lowest quarter of the union members had no base-ups at all.

In a nutshell, even though shunto in 2015 achieved a positive base-up increase for the second year in a row, the amount of the increase on average was limited, and there is still a considerable room for improvement in smaller firms, and in regions other than Tokai.

Potential for overcoming the coordination failure

In addition, I will touch upon the evidence that is related to my recent arguments about the need for a wage increase and the way to make this happen.(Ways to Overcome the Limited Growth of Wages(2016.1.8))

My argument there was about the possibility of coordination failure taking place with regard wage increase. We all know that wage increase would not only help the households, but eventually would also help the firms through increase in private consumption. However, because firms do not want to lose competitive edge over their competitors, they do not engage in wage increase on their own. The only way to overcome this vicious circle is to pressure the firms to raise wages by a same amount at a same time. My argument was that, in this respect, shunto, which is a concerted action by the trade unions to demand firms to raise wages, may contribute in forcing the economy to shift to a better equilibrium.

The data show that wage increase has a bell shaped distribution, but with a significant peak at a certain amount of wage increase, especially on a weighted average basis: More than 15 percent of the trade union members had a wage increase of 6000~6500 yen. Accordingly, more than 20 percent had a scheduled wage increase of 5000-5500 yen, and more than 20 percent had a base-up of 500-1000yen. Since the shares are much larger than that for the simple average basis, it implies that the wage increase is more concentrated in the case of large firms.

The observation seems to suggest that shunto do have a potential for overcoming the coordination failure.

Headwind against wage increase

Since the beginning of this year, there has been a significant uncertainty surrounding the future of the global economy. It would inevitably affect the firms in a way that the firms would become cautious in raising wages.

However, the wage increase has an important implication for the private consumption, which needs to be strong enough to counter the consumption tax rate hike expected to take place in April next year.

In this respect, this year’s shunto is going to be one of the most critical events for the short-term prospect of the Japanese economy. We will hold our breath for the employers’ response next week.