Assessing BOJ’s Claim That Companies Are Now Competing For Workers

The Growing Salary Bifurcation of the Labor Force

Source: https://www.boj.or.jp/en/about/press/koen_2025/data/ko250824a1.pdf Note: High/low productivity firms are defined as those in the top/bottom tercile within each period and each industry who responded to a survey. The bands indicate 95% confidence intervals.

FLASH: Financial Times cites me on the reason for Japan’s low productivity. “Japan’s economic output per hour worked is only worth $53 adjusted for purchasing power, compared with a G7 average of $75, according to the International Labour Organization. Richard Katz, an economist and longtime Japan-watcher, said the country’s low productivity was a feature of an “extremely severe dual economy” in which many sectors had consistently performed poorly over decades. “Japan’s productivity problem is one of capital allocation. Normally labour and capital should move over time from the sectors that are failing to the ones that are rising, but that has not happened in Japan,” Katz said. There is more on this topic in today’s blog.

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In Part 1 of this series, I argued that the main reason the labor shortage has not pushed up wages is that, aside from especially skilled people and new recruits, companies do not have to compete all that much for workers. This is due to the combination of lifetime employment and the rise of non-regular workers.

In a recent speech, Bank of Japan (BOJ) Governor Kazuo Ueda claimed that this situation is rapidly changing. “In the past, regular full-time employees rarely changed jobs, and firms faced little pressure to raise base wages to retain staff. Recently, competition for workers has intensified [emphasis added—rk].” He then pointed to the chart I have reprinted above, which shows a decrease in the number of workers employed at lower-productivity companies and an increase at higher-productivity ones. He concluded, “This may be one instance where moderate wage increases under labor shortages lead to efficiency-improving reallocation.”

If the numbers in the chart really meant what Ueda said they do, that would be good news indeed. The magnitude of the shift is not huge, a total decrease of 12% in the number of those in low-productivity companies and an 8% gain of those in higher-productivity firms. But it is still significant. If more of Japan’s labor force works at higher-productivity companies, that helps Japan grow better. Secondly, higher-productivity companies pay higher wages. On average, among companies with at least 50 employees, for every 1 percentage point that a company’s productivity level exceeds that of others, wages are 0.6% higher.

Unfortunately, Ueda misreads the numbers. First of all, his numbers refer to only half of the labor force, those working for Japan’s 900,000 incorporated companies. For the labor force as a whole, a larger portion than in the past now works in low-productivity, low-wage unincorporated companies. Secondly, while a larger share of corporate employees work in more productive companies, this is not evidence of firms competing for workers but of something else, which I’ll detail below.

Ueda’s speech reflects the tendency of BOJ leaders to see the data through rose-tinted glasses to justify their claim that wages are moving toward 3% nominal growth and 1% inflation-adjusted growth. Unless wages do that, the BOJ’s strategy for reaching healthy demand-led 2% inflation falls apart. I believe the BOJ suffers from “confirmation bias,” i.e., focusing on evidence that confirms its preconceptions.

To be sure, there are certainly encouraging signs of progress, but they’re not yet large enough to change the big picture. One-third of Japan’s GDP is produced in sectors where labor productivity declined by 1% per year over the quarter-century from 1995 to 2019. And yet, instead of labor shifting to the more dynamic sectors, the dark-side sectors now employ a larger share of aggregate hours of work in the economy than in 1995: 34% today vs. 29% in 1995. Conversely, the sectors with rising productivity suffered a decline in the share of all work-hours from 71% to 65%. I have used hours instead of workers because so many workers work part-time. (See chart below; this is similar to the situation for Total Factor Productivity discussed in this post.)

Source: https://www.rieti.go.jp/en/database/JIP2023/data/jip2023_4.xlsx

Bifurcation of the Labor Force

Japan’s workforce is becoming increasingly bifurcated. While a vital minority of the best and brightest among workers in their 20s and 30s are enjoying upward mobility, a large share of average workers, particularly among the middle-aged, are suffering downward mobility. As we’ve seen in other countries, increased downward mobility feeds right-wing populism.

The good news is that an increase in labor mobility (see this post) is creating opportunities for the best and brightest to change jobs and gain higher wages. In fact, among those who changed jobs in 2023, 35% enjoyed a pay hike of more than 10%, whether they moved to a large company or to a small or medium-sized enterprise (SME), as about half of them did. Back in 2009, only 15% of male job switchers received a pay hike of more than 10%.

On the other hand, a large proportion of job-switchers suffer a cut in pay. In 2017, the latest numbers I currently have on this issue, the same proportion enjoyed pay hikes and pay cuts of more than 10%: 26%. Age is a big dividing line. Job switchers among workers under 40 received larger pay hikes, while those over 50 suffered larger pay cuts (see table below).

Source: https://www.mhlw.go.jp/english/database/db-yl/2017/02.html

Under the seniority system, middle-aged workers earn much higher salaries than younger workers. So, replacing a middle-aged worker with a younger one may reduce a company’s labor bill, even if it gives younger workers a pay boost compared to their previous employer. In short, an increase in labor mobility does not automatically yield wage hikes for the overall labor force.

Corporate Employees Decline As Share of Total Employees and Employed

Ueda’s numbers, while accurate, do not mean what Ueda claims they mean.

As noted above, Ueda’s numbers refer only to changes in employment shares within half of the labor force: those employed by the 900,000 incorporated firms analyzed in the Ministry of Finance’s corporate statistics. This is the segment of the labor force with the highest wages and productivity (output per hour). But the corporate share of the labor force has been shrinking since the peak year of 2008. Since then, corporate employees have dropped from 70% of all employees to just 58%. They dropped from 61% of all employed people—including the self-employed and company staffers without employee status—to 53% (see chart below).

Source: https://www.mof.go.jp/english/pri/reference/ssc/historical/all.xls

As a result—considering the nearly 4 million working for all levels of government and nonprofits—the share of employees in very small unincorporated companies has risen from about 25% to 43%. So, when we look at all employees, not just corporate employees, we see a shift in the share in the direction of companies with the lowest productivity and lowest wages: the opposite of Ueda’s conclusion.

24% of all employees work in unincorporated micro enterprises with just 1-9 employees. But their productivity—value added per worker—is only 35% of that of those working at firms with 100 employees in manufacturing and 50% in services (see chart). And their wages are much lower, too. Many others work in SMEs with just 10-49 employees.

Source: Figure 2.6 at https://www.oecd.org/content/dam/oecd/en/publications/reports/2026/05/oecd-economic-surveys-japan-2026_9457bba4/54cc833d-en.pdf

There’s a second problem. Ueda asserts that the shift in employment shares is a case of firms competing for workers by bidding up wages. This is simply not the case. The reason for the shift is that, since 2008, among incorporated enterprises, the number of small firms has fallen by 25%, and the number of workers they employ has fallen by 20%. By contrast, the number of medium-sized firms has fallen less, and the number of people working at them has risen steadily and is now 60% higher than in 1996. There were fewer medium-sized companies, but they were larger (see chart below).

As a result, among all corporate employees, the share working at medium firms has grown from 14% to 20% over the last two decades, while the share at small firms has fallen from 66% to 60%. The share at big companies has stayed the same.

Workers at medium enterprises have higher productivity (value added per worker) and higher wages than those at small firms. Value added means the value contributed by the firm after deducting from sales figures the cost of inputs. It is the sum of wages, operating profits (before interest), and depreciation of capital stock (see the two charts below).

The data does not show evidence of firms competing for workers by bidding up wages on a large scale. If companies were competing, the wage share of value added would have increased. Instead, across all companies, the labor share continued to go down. The biggest decline, 7 percentage points, was in the medium-sized corporations, the segment that gained employees. Big companies showed a 6-point drop in the labor share, including a steep drop during recent years when Japan’s leaders crowed about the big nominal hikes resulting from the shunto wage negotiations (see chart below).

Meanwhile, the only segment of corporate employees to gain real wage hikes during 2022-26 were the seven million working for the 4,500 largest and most profitable companies. They saw a 2.5% total real wage hike during that period. The 7.2 million working in 26,000 medium-sized firms saw a sizeable nominal wage hike but an 0.8% drop in real wages. The 21 million working for 860,000 small firms suffered a 2.2% real wage cut. And the 26 million working for micro and small unincorporated firms likely suffered an even bigger real wage cut (though I don’t have figures on the exact amount).

Conclusion

Confirmation bias rarely yields effective policy. That’s one reason there has been such a gap between the BOJ’s inflation forecasts and the actual results (see this post). This has been going on since 2013, when Shinzo Abe’s handpicked Governor Haruhiko Kuroda confidently predicted he’d hit 2% inflation in just two years.

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