Japanese Employment System Shifting from “Membership-Type” to “Job-Type” by the Impact of COVID-19

One of the great contributions from economics to Organizational Theory is the concept of transaction costs. It refers to the necessary costs needed for enforcing contracts. For example, when you make a contract with someone you don’t know well, you might spend money to hire a lawyer to check the contract and enforce it. Or you might spend money to investigate the contractor to confirm if he is trustworthy. These costs are called “transaction costs”.

When the concept of transaction costs is applied to an organization, it would explain the reason why and how an organization is formed. If you start your own business, you need to make a volume of contracts with a variety of people and spend money on transaction costs, which consist of costs for 1) exploring and comparing contractors, 2) negotiating with contractors, and 3) supervising the contractors. The bigger the scale of the business, the more you have contracts and the more you have to spend for the transactions. Forming an organization, on the other hand, would reduce such costs by using its hierarchal structure. It is rational that, as the costs of placing supervisors and building a hierarchy are lower than the costs of the similar services you purchase from the markets, you choose to build an organization.

Legacy Japanese companies’ HRM practices, called “membership-type employment”, worked very well to reduce such transaction costs. These practices required the employees to be “members” of the company and to commit to work “in any places, at any time, and for any jobs and constantly work well”. Instead, the employment was guaranteed until the age of mandatory retirement, which caused the companies to retain workers even when there were no jobs for the employees. Under the membership-type employment, there were no clear job descriptions defined so that the management could rotate the employees without any negotiations, which allowed the management to identify and assign employees to any jobs with less costs than exploring and hiring from the outside labor markets. As an employee’s career was easily controlled by the management, the employees had to read their boss’s mind, be aware of the workplace atmosphere (silent expectations), and obey the rules hidden in the workplace. Furthermore, this flexibility of job assignments also meant the management did not need to set clear goals and targets to manage employees. Instead, they kept watching their people working in the same office, sensing the total team performance and progress, and giving the employee ad-hoc orders and directions.

As a result of the above, the legacy Japanese companies maintained a high level of work ethics without spending large amounts of money on costs for supervision as well as for an effective and efficient workforce. However, with COVID-19, that unique manner of managing people is now facing challenges; i.e., can companies continue to manage the organization in the same way they used to? In the next article, I am going to describe further how the legacy membership-type of employment was developed in the previous century and why it suited the country when its economy grew very fast, and then, I will refer to how the Japanese organization management has been influenced by COVID-19, in the following article.