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How America Can Bring the Japanese Economic Miracle Stateside
Japan’s post-World War II prosperity was so remarkable that historians refer to it as an “economic miracle.” By 1990, through a combination of corporate initiative, industrialization, trade liberalization and technological innovation, the country had become the world’s second-largest economy, behind the U.S. Only China, with a population more than 10 times Japan’s, has since displaced it.
Over the past decade, and with little international attention, the Pacific island nation has achieved a second economic miracle. Since 2012, the country has expanded its labor force by around 4.2 million even as its population has fallen by more than three million. As the U.S. struggles to meet its workforce needs, policy makers in Washington would do well to take a page out of Tokyo’s book.
The gap between supply and demand in both the Japanese and American labor forces owes in large part to fertility rates. To maintain its population, a country’s total fertility must stay at a “replacement rate” of 2.1 children per woman. Japan’s rate has been well below that mark since 1974 and was 1.25 as of 2022. Toyko has traditionally resisted immigration, and its population has begun falling.
America’s fertility rate has been declining for decades, apart from a brief recovery in the early 2000s. In May, the St. Louis Federal Reserve noted that it had reached 1.66—a level so low that legal immigration can no longer make up for the shortfall. Economists had expected labor shortages to emerge gradually, but then came the pandemic. A stream of baby-boomer retirements turned into a flood. Miguel Faria e Castro, senior economist at the St. Louis Fed, estimated that by August 2021 more than 2.4 million Americans had decided to retire earlier than expected.
The result of this “great retirement” has been only around 5.7 million unemployed workers in an economy with more than 10.1 million unfilled jobs. Yet as Japan has shown, countries don’t stagnate merely because of population shortages. In Japan the key to unlocking economic potential was breaking old habits, customs and regulations when it came to workforce development. To meet its labor needs, policy makers used both private-sector initiative along with legal and regulatory changes to engage three groups that had been under-represented in the country’s employee base, traditionally dominated by prime-age—25 to 54—men.
Older workers. Japan’s labor ministry understood that many older workers looked to find ikigai—roughly translated as “purpose”—from their work. A 2019 survey found that more than 40% of Japanese workers in their early 60s wanted to continue working part-time after 65 and that more than 60% of employers were able to hire them. To ease pension burdens and attract more older workers to the labor force, the government gradually raised the eligibility age for public-employee pensions and pushed employers either to abandon mandatory retirement ages or increase them to 65. Amendments to the employment law implemented in 2021 require employers to make “best efforts” to provide opportunities for employees up to 70, while many large Japanese companies have hired their own retirees back part-time at lower pay.
For older workers who want greater flexibility or a different line of work, the government set up a network of “Silver Jinzai” centers that offer retraining and placement services. These institutions function similar to workforce boards in U.S. states but focus exclusively on older citizens. At a given time, roughly 700,000 seniors are registered with one of the centers. Adjusted for population, this would be roughly equivalent to the U.S. discovering more than 1.8 million identifiable, job-ready workers. Japanese businesses have embraced the approach, and Silver Jinzai centers have been successful in placing an overwhelming majority of their clients.
Women. As with older workers, increasing the number of female employees in Japan has required employer initiative and government support. Josei no katsuyaku—active participation of women—became a political rallying cry during former Prime Minister Shinzo Abe’s second government (2012-20). That momentum has continued, as embodied in a recent law that asks companies with more than 300 employees to report on their female labor forces and to propose ways to close the gender gap. Even though the law doesn’t impose consequences for noncompliance, it has succeeded at stimulating change. According to Organization for Economic Cooperation and Development statistics, the labor-force participation rate among prime-age female workers in 2021 exceeded that of the U.S. and many OECD member countries. Tax law and societal norms still discourage married women from working more than parttime, and many are employed in low-paying jobs in the tourism and service sectors. Still, the expansion of the female workforce in the face of entrenched cultural obstacles is impressive.
Foreign workers. Japan has long had a training program for foreign workers from developing economies on the understanding that they would eventually return to their homelands. In recent years, this program has sidestepped its original purpose and now provides workers for low-skill, low-pay roles in the Japanese economy. A 2018 law created a pathway for 260,000 to 345,000 guest workers across 14 industries.
Japan’s example shows how necessity can change attitudes. It’s important to note that government policy alone didn’t drive change in Japan. According to a 2019 survey from the Japan Institute for Labor Policy and Training, nearly 70% of Japanese firms had devised their own plans—or intended to make plans in the near future—to tackle their labor issues. U.S. business must first accept that a real labor shortage exists and, like the Japanese, lead the way in incorporating talent that has long been neglected. In the U.S., that means finding ways to employ workers who lack traditional credentials or who have been marginalized by such factors as poverty, substance abuse and criminal records.
As in Japan, success for the business community will lie in promoting labor where it can be found today, not where it was in the past. Mr. Nakajima is founder of Cedar Sake and a former economist at Evercore ISI. Mr. Korzenik is chief economist of Fifth Third Commercial Bank and author of “Untapped Talent: How Second Chance Hiring Works for Your Business and the Community.”
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