Shunto: Why 4-5% Headline Wage Hike Really Means 2-3%

Base Pay Vs. Seniority Pay

Source: https://www.mhlw.go.jp/english/database/db-l/monthly-labour.html Note: 2024 is a forecast

The headline numbers for pay hikes being granted by Japan’s biggest and most prestigious firms in this year’s shunto negotiations are strikingly high. Auto companies like Toyota and Nissan have fully accepted union demands and are giving the highest raises in years. At steel companies, the headline number is as much as ¥30-35,000 ($200-235) per month. Japan Airlines and Ajinomoto (a food company) the figure is 6% compared to last year. The Japan Council of Metalworkers' Unions (JCM), an alliance of unions representing 2 million workers, reported that 87.5% of its member unions had their demands either fully met or exceeded. Although most unionized workers won’t get hikes this large, the giant Rengo union federation hopes that their members will get an increase of around 5%.

            While all of this is good news indeed, no one should think that Japan’s labor force as a whole is in line to see income go up 5%. The headline number can create a misimpression.

            For one thing, only 16% of all employees are unionized, and non-unionized workers are likely to get far less, just like last year. Last year, the shunto produced a headline number of 3.7%. But as the months passed, it was clear that the 84% of employees who are not unionized got substantially less.

            More importantly, the headline number is a combination of “base pay” and “seniority raises.” Only the base pay segment results in increased income for the labor force as a whole. A hike in base pay of, say, 1%, means that every worker, regardless of age or tenure at a firm, gets an average hike in wages of 1%. That translates into a 1% rise for the labor force as a whole. By contrast, a seniority hike of 1% means that as each worker gains one more year of seniority--from having worked ten years to eleven or from age 30 to 31—his/her pay goes up 1%. But every year millions of workers with higher pay retire and millions of workers starting with low pay enter the labor force. So, hikes in seniority pay in any given year do very little to raise the pay of all employees combined.

            In 2023, out of a headline number of 3.58%, base pay increased by just 2.12%. Certainly, this is far better than the large number of years when there was virtually no increase in base pay (see chart at the top). However, it remains far below the 3% level that the Bank of Japan says is necessary to produce healthy 2% domestic demand-led inflation (more on this in the next post). It is also far below the rate of inflation. Hence, real wages have fallen from year-earlier levels every month since April 2022 (see chart below).

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

          In the 2024 shunto, analysts polled a couple of months ago expected a headline wage hike of 3.85%. But of this, the hike in base pay was expected to be just 2.15%. while the other 1.7% was the seniority escalator. Depending on the course of inflation, it may not be enough to prevent a continued fall in real wages.

            In Rengo’s demand for a 5.85% pay hike, it was assuming a 2% hike in seniority pay and almost 4% in base pay. We’ll know in the coming weeks how close it came to its goals for the unionized fraction of the labor force. We won’t know until June or July what this means for all the rest of Japan’s employees.