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

Many HR practitioners as well as academics have referred to the unique HR policies and practices of Japanese companies called “membership-type employment”. As described in my previous article, one of the critical factors of the system is the seniority-based pay, which successfully reduced transactional costs of labor negotiations in the country and resulted in boosting the growth of the economy. However, the seniority-based pay system dominated the country only from the late 1940’s to the 1970’s. After that it shifted to the capability-based pay system, and then, it moved to the job-based payment system. In this article, I will try to describe why and how the legacy Japanese human resource management system was developed in the past decades.

In 1945, after Japan surrendered to the Allied Forces, GHQ (General Headquarters of the Allied Forces) came and started to occupy the country. Their mission was to transform Japanese society to prevent the revival of militarism. One of the tasks of the transformation was to establish “healthy tension” between management and workers. To achieve this objective, they purged the top management of the companies who had seemed to be cooperative with the war and then, utilized Japanese communists, who had been in prison during the war, and had them form labor unions in the companies. There were many labor disputes occurred in many workplaces, but one of the fruits of it was so called “subsistence-based” pay, which was designed based on the cost of living for workers in accordance with age, seniority, and size of family, etc.

On the other hand, as those labor disputes got more radical, the GHQ and Japanese government had huge concerns, and started to govern the labor movement by establishing new labor laws. In addition, young Japanese employees who had been recruited into the military and then came back to college and joined companies after graduation objected to such hostile labor unions and formed “Second Unions”, which were more cooperative with the management, and such second unions became dominant in the country. The leaders of the new unions worked together with the new company management leaders and developed a new efficient manner of wage bargaining called “Spring Collective Bargaining”, where, every spring, representatives from both management and unions negotiated about increases based on merit, and that agreement was applied nationwide. This unique practice supported a good and effective labor relationship to avoid ad-hoc strikes, which nurtured a unique management culture and allowed generous pay increases based on seniority in Japan.

Japan enjoyed a fast-growing economy in the 1960’s, but, due to the crude oil price surge in the 1970’s, the economy slowed down, and many companies suffered from low profitability and could not afford to maintain generous and simple seniority-based pay. To overcome the economic challenges, the companies were forced to conduct headcount reductions to increase efficiencies in the organization. However, the Japanese court was against such redundancies and tried to protect the employment. In response to this, Japanese companies started “rotation”. It meant to allow flexible changes of assignments due to company reasons, which made the employees’ careers dependent on their employers. Instead of seniority-based pay, the companies started to introduce the capability-based pay called the “Shokunou Shikaku” HR system. The criteria of this pay determination system was the employees “capability for the job” rather than their ages; however, it was quite difficult to assess the capability itself. Instead, the companies made the assumption that the employees’ capabilities developed every year and those incremental developments would be the basis of pay increases. As the results of the assumption, the capability-based pay system became to look similar to the seniority-based pay system, and it still allowed the membership-type of the employment to continue.