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        HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends : The Unprecedented Deterioration of Domestic Hiring Conditions is About to Become Serious


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        Takahide Kiuchi's View - Insight into World Economic Trends : The Unprecedented Deterioration of Domestic Hiring Conditions is About to Become Serious

        Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

        Market Analysis

        Takahide Kiuchi

        Jun. 12, 2020

        The state of emergency in Japan was lifted completely on May 25, and personal consumption is bottoming out for the moment. However, the unprecedented deterioration in Japan’s hiring situation is going to become truly serious. Given the circumstances, helping the “hidden unemployed” will assuredly become an urgent policy issue.

        The difference between hiring conditions in Japan and the US lies in the layoff system

        The May employment statistics announced by the US Department of Labor on June 5 showed improvement despite earlier expectations of deterioration, and revealed that the US economy—having dramatically worsened from the Coronavirus pandemic—was bottoming out for the moment. Non-farm payrolls added 2.509 million jobs, while the unemployment rate fell to 13.3% from the April figure of 14.7%, which was the highest level ever since 1948 when these statistics began to be tabulated. Prior to this, a further drop in employment figures and an increase in the unemployment rate were both expected.
        Meanwhile, in Japan, it is inconceivable that hiring conditions will suddenly improve from their drastic deterioration as they have in the US. The reason that people can go from being employed to being unemployed so quickly in the US is the presence of the layoff system.
        There is a customary “layoff” practice in automotive and other manufacturing, whereby those who have been let go are rehired once the business environment improves. Laid-off workers can apply for unemployment insurance and become unemployed, but there are likely many cases where they wait to be rehired by the same company, without searching for other work.
        Meanwhile, from a company’s perspective, when its business situation deteriorates, its employees can temporarily become unemployed and receive public aid in the form of unemployment benefits. Then when business conditions improve, the company can simply rehire those it laid off, without having to recruit anyone new. This is surely one reason that the US labor market changes so dynamically.

        In Japan, the focus is on the leave system

        Yet in Japan, those who are let go on the presumption of being rehired later are not eligible to receive unemployment benefits in principle. Those who have truly lost their jobs, and who are job-hunting with a desire to work, can receive unemployment benefits and become officially unemployed.
        Japan’s leave system cannot be considered similar to the layoff system in the US. The number of persons on leave who have been told to stay at home and are receiving leave allowances from their companies stood at 5.97 million in April, spiking by nearly 3.5 million from the previous month. If you want to track the changes in hiring conditions in Japan, keeping an eye on the trends in the number of persons on leave is an effective way to do so.

        Peak unemployment in Japan coming in the first half of next year?

        Persons on leave due to company circumstances are also unemployed reserve forces. If a company no longer has the resources to keep paying leave allowance, or if it goes bankrupt or out of business, those on leave will end up being unemployed. During economic crises, companies can try to stay afloat somehow, but if harsh economic conditions persist, they will eventually be unable to endure, and will be in jeopardy of going bankrupt or going under. That often happens after a time once economic conditions have bottomed out.
        Changes in Japan’s hiring conditions can thus easily arise following changes in the country’s economic conditions. Even if the Japanese economy has now gone through the worst of it and is bottoming out, unless it experiences a dramatic rebound, the deterioration of hiring conditions will only continue, with the unemployment rate likely to peak sometime in the first half of next year. It is expected that unemployment will hit around 6% at that time.

        The “hidden unemployed” problem will grow more severe

        Incidentally, the ones to whom the government most urgently needs to lend a helping hand right now are not actually those on leave or the unemployed. This would be the so-called “hidden unemployed”, those whose employment contracts with their companies are still active but who have not gone on leave. The “hidden unemployed” have been asked to stay at home and are technically on leaves of absence, but they are not able to receive leave allowances from their companies or receive unemployment benefits.
        The Labor Standards Act obligates companies, in cases where economic downturns, worsening business conditions, or other company circumstances force them to have employees take leaves of absence, to pay such personnel at least 60% of their average salaries. Yet in actuality, there are considerable numbers of “hidden unemployed” who are not being paid any leave allowances.
        With the business environment being so severe, there are likely also cases where companies cannot afford to pay such leave allowance, or where paying them would put the companies at risk of financial deadlock and ultimately bankruptcy.

        The problems with the employment adjustment subsidy system

        What is expected to reduce the numbers of these “hidden unemployed” is Japan’s employment adjustment subsidy system, by which the government provides aid to companies equivalent to the leave allowances that they give. However, this permanent system seems not to have functioned fully in times of crisis. The number of company applications to take part in this system has not risen as expected.
        There are certain factors potentially hampering such applications, the first and foremost being the significant administrative burden that the process places on companies, since they are required to submit large quantities of paperwork and supporting documents. The second is that although the Ministry of Health, Labor and Welfare says it aims to complete the application-to-payment process in as little as two weeks, in fact this can often take between one and two months. The third is the “post-payment method”, whereby companies can receive their first subsidies only after they have paid out the leave allowances. Companies facing harsh cash flow positions likely cannot afford to apply.
        Given recent simplifications made to the procedures involved, the number of applications does finally seem to be on the rise, but the “hidden unemployed” probably comprise a very small portion of those being helped.

        Can a new on-leave support system help the “hidden unemployed”?

        That being said, the government’s second supplementary budget proposal included plans for a new system whereby companies would no longer be the ones applying, and instead the employees effectively on leave would themselves apply to receive allowances equivalent to unemployment benefits. This system was also used in the case of the Great East Japan Earthquake, and is referred to as a “deemed unemployment system”.
        Those on de-facto leave would receive proof of their absence from the company, and would then personally apply online or otherwise at a job placement office. It is said that this would allow them to be paid within around one week after sending their applications.
        My strong hope is that with this new system, the “hidden unemployed” can quickly be rescued from the extremely severe living environment in which they now find themselves.

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