Did Wages Really Rise The Fastest In 28 Years?

You Need To Look At Wages Per Hour, Not Per Month

Source: https://www.mhlw.go.jp/english/database/db-l/monthly-labour.html

The headlines were celebratory: in May, Japanese workers enjoyed the fastest growth in nominal wages in 28 years: 1.8% compared to the year before. Of course, the articles went on to note that “enjoyment” may be a little strong since workers suffered the 14th consecutive month of decline in real, i.e., after-inflation, wages. As fast as wages grew, they still lagged behind rising prices (see chart below).

            Still, the growth in nominal wages was deemed a victory on the way to achieving the Bank of Japan’s goal of a sustained 3% annual growth in nominal wages, which it says is necessary to achieving sustainable 2% inflation. So, many of the articles focused on what the wage data meant for BOJ policy.

            The problem is that the article writers failed to let their readers know a simple but salient fact: the data they were citing reported nominal wages per month, not per hour. And the main reason regular wages (not counting overtime or bonuses) rose 1.8% during May was not a pay hike, but the simple fact that scheduled hours of work rose even more: 2.0% (see chart at the top). Consequently, wages per hour did not grow 1.8% as the articles implied; on the contrary, they fell 0.2% (see chart below). You can bet that BOJ policymakers know the difference.

            Yet, so many of these articles either stated, or implied, that the 1.8% was the result of pay hikes agreed to in this year’s shunto wage talks between big companies and their unions. In reality, such talks only cover a small sliver of the workforce, and it remains to be seen how the majority of workers will fare. But the news over the past two months has not been encouraging. For example,  a quarter of small and medium-sized businesses—who employ about 70% of all workers—did not raise hourly wages at all, according to Tokyo Shoko Research.

            It seems hard to believe that none of these article writers, or their editors, were aware of the link between wages paid and hours worked. After all, the Labor Ministry’s website is quite clear. It listed the monthly wage for scheduled hours at ¥252,132 ($1,775) for workers at firms with at least five employees and then showed it was this figure that increased 1.8% from the year earlier, while another table on the site showed that hours increased 2.0%.

            Why, then, did they choose not to mention it? Were they too focused on what this might mean for BOJ interest rate policy? Did they simply not think too deeply in reaction to the fact that the rise was twice as big as the consensus forecast? Was there bandwagon effect?

            It is still possible that nominal wages will show an acceleration from the past few years. As the charts show, hours and wages fluctuate a lot from month to month. But, if June and July figures show no significant wage hike per hour from the year before—adding up to four months since April when the wage hikes first showed up—this celebration will have proved not just premature but wrong. Whatever the newspapers may say, officials at the BOJ are being more cautious. Their policymaking for now is data-driven, and the data are far too ambiguous to spark a change in BOJ policy.

Nominal vs. Real Wages

Why are market players focusing on nominal wages rather than real wages? After all, the latter count more for living standards and consumer purchasing power. The reason is that the BOJ is watching nominal wages. It believes that if nominal wages rise at a sustained 3% per year, then consumer inflation will rise to a sustained 2%, which is its goal. In that case, it can let interest rates rise, which has a lot of significance for financial markets as well as the real economy.

            The BOJ theory is that if wages rise by 3%, and productivity (output per work hour) grows at 1%, then business employment costs will rise by 2%, i.e., 3% minus 1%. It figures companies will be able to pass this cost onto consumers. The chain of logic is as follows: if wages rise 3% per year, then the BOJ can let interest rates rise to bring inflation down to 2%, but businesses will keep raising wages by 3% per year.

            There are a lot of assumptions in this theory. One is the presumption that businesses will be willing to hike real wages. Yet, for years, Japanese companies have refused to raise wages even though they could afford to do so. Secondly, it also assumes that inflation is caused by an increase in business costs, even if there is no increase in economic demand led by rising real consumer purchasing power. Is this true? Here’s what we know.

            Japan’s real wages per month have been falling for years and, as of May 2023, are 12% below their level back in 2007 (see chart below).

            Keep in mind that this fall includes the impact of cuts in hours worked per month, cuts in bonuses and overtime, a shift from higher-paid regular workers to lower-paid non-regulars, and the consumption tax hikes of 2014 and 2019.

            The impact of lower real wages on consumer spending is very substantial. Consumers kept up spending for a while, despite declining real wages, by cutting their savings rate. But now the savings rate is so low that this measure has run out of steam. As of early 2023, total spending by all consumers, wage-earners, and retirees alike was no higher than it had been back in 2012, more than a decade ago (see chart below).

Source: https://www.esri.cao.go.jp/jp/sna/data/data_list/sokuhou/files/2023/qe231_2/tables/gaku-jk2312.csv

            The BOJ has a history of bad theories: e.g., its promise back in 2013 that it could reach 2% inflation in just two years based on an unrealistic theory popular in academia called “rational expectations.” BOJ staffers now readily admit the theory did not work. Time will tell whether this is yet another bad theory.