METI’s 2025 “Digital Cliff, Part III
In Absence of Gov’t Action, Labor Mobility is Doing the Heavy Lifting
Source: MHLW “Table 20” at https://www.stat.go.jp/english/data/roudou/lngindex.html (assorted years)
In the absence of government action to deal with the “2025 Digital Cliff,” i.e., the increasingly severe shortage of professionals in Information and Communications Technology (ICT), the heavy lifting is being done by changes in the labor market. This involves the combination of a generational shift in attitudes toward job‑switching, the impact of technology on companies without sufficient in-house digital skills, the resulting increase in mid-career hiring by companies, and the impact on worker compensation of the good old-fashioned forces of supply and demand. Whether these will prove to be enough—and over what time-frame—remains to be seen.
The positive shifts in the labor market could be amplified greatly if the government would step up its role. It’s true that Tokyo created a Digital Agency in 2021. However, aside from some talk of increasing cashless transactions, its mission is mostly concerned with digitizing communications within the government and between the government and citizens. Aside from some improvement in scholarships and the content of university exams, the government is doing very little to fight either the shortage of personnel or the difficulty private companies have in using digital technology well (details on the government role below).
Companies Have To Pay More To Lure Experienced, Skilled Workers
Although most ordinary workers still face wage austerity, a fraction of the workforce with both experience and skills in short supply is increasingly able to extract higher wages as companies compete to hire them.
One factor is a generational shift in attitudes. While poor job conditions have made many workers, perhaps the majority, even more cautious and conservative, things are different among the most talented workers. Many highly skilled workers of all ages, but particularly those in their 20s and 30s, are far more determined than their parents in gaining a career that excites them. At the same time, a growing fraction feels more confident that their skills reduce their need for the security of a lifetime career at a single firm. The chart below shows how many workers, having worked at a single company for ten years, continued to work at the same company for at least another ten. Among 25-29-year-olds hired in the 1970s to early 1980s, 70% stayed on. But, among workers of the same age hired 15 years later, only 52% did so. The same trends can be seen in older age cohorts, albeit to a lesser degree. It’s unclear how much of the difference is simply because older workers tend to be more conservative and how much is because these older workers were born in an earlier era.
Source: Updated data from Ryo Kambayashi And Takao Kato based on https://journals.sagepub.com/doi/10.1177/0019793916653956
In response to this generational shift, as well as the impact of lacking in-house employees with skills in digital technology, companies that previously rejected mid-career hiring now feel compelled to accept it. The share of companies, large and small, conducting mid-career hiring has almost doubled from 37% in 1999 to 65-70% by 2019 (see chart below).
Source: MHLW Table 3 at https://www.e-stat.go.jp/stat-search/files?page=1&layout=datalist&toukei=00450072&tstat=000001018522&cycle=0&tclass1=000001018558&tclass2=000001018568&stat_infid=000032177559&tclass3val=0
Moreover, in order to lure these skilled mid-career staffers, these companies have to offer higher wages than in the past. Back in 2009, only 13% of workers who left one employer for another obtained a pay hike greater than 10%. By 2027, the proportion had doubled to 27% (see chart at the top).
I don’t have Japanese statistical data for the ICT pros among these job-switchers, but, in the US, it is well known that ICT pros who switch jobs every several years have higher total career earnings than those who stay at the same company. I’d suspect the same is true in Japan.
There’s some anecdotal backup for the impression of encouraging pay trends. In 2019, NEC offered a starting salary of ¥10 million ($77,000) to the best R&D recruits, which would often mean giving them a higher salary than other employees hired years earlier. Persol Holdings—a staffing agency founded in the 1970s by Yoshiko Shinohara who would become Japan’s first female self-made billionaire—not only helps companies find mid-career ICT pros; it also offers training programs in ICT. Reportedly, some ICT experts choose to become self-employed consultants because they can gain both more freedom and higher income. Surveys of foreign software developers in Japan report rising wages. Foreign companies and Japanese startups seem to pay substantially more than traditional domestic Japanese firms, but the information is based on a small sample of employees at the companies examined.
It remains to be seen how much these trends will attract more of the young to become ICT professionals, but it’s certainly a move in the right direction. It would be even more impactful if the Ministry of Education (MEXT) did more to have the schools begin to instill digital skills in high school.
Many people in and out of Japan believe that immigration could be a big part of the remedy for the labor shortage in ICT, and elsewhere. Over the years, Tokyo created several special visas, making it easier for highly-skilled people to work in Japan and stay there indefinitely. However, as of 2022, only 3,275 foreigners were designated highly skilled professionals under this visa rule. Altogether, as of 2022, there were about 76,000 foreign workers in the ICT sector, out of 1.8 million foreign workers in total. There may also be some others in ICT occupations at non-ICT companies. That’s still a sliver compared to a growing shortfall that could hit as much as 800,000 by 2030.
While visa reform is helpful, a far bigger obstacle to attracting foreign ICT professionals is the fact that pay in Japan is so much lower than in other rich countries, at a time when Japan has to compete with other countries for foreign ICT pros.
Moreover, a 2019 OECD survey ranked Japan 25th out of 35 countries in terms of attractiveness to highly educated workers. It was rated particularly low in “quality of opportunities” and “family environment.” For example, reported Nikkei, “Japan's education ministry launched a framework in 2014 that allows foreign children to take Japanese classes at school. But only 65% of those who need the extra language instruction have received it, owing to such issues as a teacher shortage.”
Quota for STEM Education
Last September, the Kishida administration’s Council for Creating the Future of Education proposed that Japan raise the number of science majors at colleges from 35% of all students to 50% by 2032. I’m not sure what the government is measuring with this 35% figure, since the OECD says that all STEM graduates, not just those in science, account for just 22% of all university grads.
In any case, like a lot of goals set by the government, it is not to be taken seriously. For example, at a meeting of the same Council, Prime Minister Fumio Kishida called for Japan to raise to 500,000 the number of Japanese students studying overseas by this year. That would seem less than realistic since, in the pre-Covid year of 2019, the number was just 312,000.
As for raising the number of science majors to half, there is already pushback from a wide variety of private colleges who say they lack the financial wherewithal to meet Kishida’s government goal. Besides, the government cannot compel students to focus on STEM. Even if it were possible, it would likely not be advisable. Some increase in the share of STEM students would be helpful to Japan—see chart in the previous post—but few rich countries have half their college students as STEM majors. The notion assumes that only STEM courses contribute to a country’s well-being. When an even more radical version of this notion was proposed by Japan’s Education Minister in 2015, Japan’s own governmental Science Council objected. Forbes reports that, in the US, tech companies are rushing to hire non-STEM majors.
On the other hand, a useful proposal coming out of the Kishida administration is to create a fourth income tier for financial aid that would reduce the higher tuition and fees paid by STEM students to the lower level paid by those going into the social sciences or humanities. If passed, it would cover families with incomes up to ¥6 million ($45,000) per year that meet certain other criteria and help about 200,000 students per year. Two-thirds of Japanese households earn less than ¥6 million per year. There is more the government could do in aiding educational attainment, but that’s a subject for another post.
As discussed in Part II of this series, improving digital education at the high school level could make a big difference. If one lacks the skills in high school, trying to gain them in university is much tougher. Including digital questions on the university entrance exams, a step planned for 2025, may help.
When the government created the Digital Agency, it added some hoopla about DX (for Digital Transformation); the government is very good at creating hollow buzzwords. But, as noted at the outset, the Agency’s mission is quite limited, mostly to digitizing government functions. Even within its limited mission, the Agency is a poster child for the practice of giving various players too much veto power to block needed reforms. One of the Agency's main tasks has been getting all citizens to use the My Number system, whereby each citizen would have a unique 12-digit number for interactions with the government. It was first established in 2015. As of October 2022, only 55% of Japanese had their number. The Agency has said it wanted to abolish the hanko (stamp) system for officials signing documents, the FAX machine, and 1,900 regulations that now require the use of floppy disks. But it has met stiff resistance on all three fronts and has already backed down on FAXes.
The Digital Agency needs an expanded mission to help genuine digital transformation in the private sector and the political backup to enforce its edicts.
Thanks for this great analysis. Some key stuff here - including the issues with higher ed mucking up the IT production function