Empower The Young

I call it the great excuse. It happens with deadly certainty. Whenever discussing Japan’s future, sooner or later someone in the discussion will lean back, frown, suck his teeth and say in a grave voice that it’s all bad. The country’s destiny is sealed by negative demographics—it’s inevitable, the decline in the population is forcing the decline of Japan’s economy. Shikata-ga-nai. And usually then everybody nods, more happy to accept the Japanese version of Malthusian pessimism rather than think rationally. Nonsense. Population dynamics is a lot of things, but it is absolutely not a constraint on Japan’s future, or current economic prospects.

For an economist, labor is an essential input for production. To make national income, entrepreneurs need both labor and capital. In Japan the pool of potential labor—people aged between 15 years and 65 years—will be dropping by almost half-a-million people every year, on average for the next ten years. Pretty bad, right? But is Japan really running out of labor? Absolutely not.

First of all, the unemployment rate stands at about 5 percent, which is close to the historic high for Japan. Yes, there is a record pool of available labor currently unemployed. Most interestingly, the unemployment rate for the young population—those aged between 20 and 30—is at an all-time record, close to 10 percent. That’s right, about 1 out of 10 of Japan’s youth is unemployed. In my personal opinion, this is a disgrace for the country, and anybody who argues that Japan’s economy is doomed because of negative population dynamics (i.e. argues that Japan is running out of labor) should be ashamed of him/herself. There is plenty of labor around. The problem is that companies do not want to employ them. They argue that the quality of the young has gone down. That the young are not eager to work anymore. That they are not “hungry.” Really? Or could it be that the young are, de-facto, rebelling against out-dated management practices and corporate culture. Who wants to join the Prussian Army, when you see people succeeding and leading a happy, self-full-filling life working for more modern, enlightened companies?

Let me give you a couple of concrete examples: last year, a Japanese friend of mine asked me to give some advice to his son. Young Takeshi has been studying in the U.S. and will graduate this summer with an engineering degree from one of the best engineering schools in the world. Not surprisingly, Takeshi got job offers: one from Apple, one from the German industrial giant Siemens, and one from Canon. The father wanted me to advise Takeshi on how to choose between them.

Now, please put yourselves in my shoes. What would you tell young Takeshi? I mean, if the young engineer is good and lucky, in 15 years time he could be a contender for the top CEO job at Apple. If he joins Siemens, the European company, if he’s good and lucky, in 15 years he could probably be appointed to run a region, like Asia or Latin America. If he joins Canon, and is good and lucky, what’s it going to be, section chief? In charge of a special project?

To be sure, I mean absolutely no disrespect to the powerful success of Canon and many other Japanese corporations. But the reality is that global competition for talent is extremely severe. In my view, the same applies here in the domestic Japanese market for talent. I question whether corporate leaders in Japan have become too ossified, too complacent, too proud and insistent on past practices to actually attract, incentivize and, yes, empower the young generation. Clearspeak: Could it be that Japan’s young think they are better off unemployed, working part-time and living with their parents because working for a Japanese company is, well, no fun, not fulfilling, and offers little up-side?

Managing human capital—your workforce and the most important factor of production—is always and everywhere the biggest challenge. Striking the right balance between “carrots and sticks” is what every manager and every entrepreneur struggles with. And creating better work-life balance and helping individuals to achieve both personal and corporate goals at the same time is the holy grail. In Japan, the myth of a special relationship between capital and labor is so deeply entrenched, that somehow lifetime employment and corporate culture as such have given rise to a “capitalism with a kinder and gentler touch.” That’s fine as a myth, and by no means unique to Japan. After all, U.S. corporations will go out of their way to try and make it on the list of “500 best companies to work for.” Professionally, as an economist, that Japanese myth got shattered early as hard numbers and facts suggest that even in its heyday, barely one-in-four Japanese workers was on a life-time contract.

The real blow came in the early 1990s, when corporate Japan was fighting hard to cut excess fat build-up during the bubble years. One of the first things that did get cut was the internal scholarship programs. In the 1980s it was a growing practice for Japanese companies to invest in their future managers by sending them to the U.S. or other international universities for one- or two-year graduate programs. The top four or five U.S. business schools, for example, regularly had 10-15 young managers on scholarship paid for by their Japanese employers. These programs were one of the very first “costs” cut and today virtually no major Japanese company offers these kinds of programs to their future talent. It is therefore ironic that those same managers that authorized the cut in these human capital investment programs are the same ones who now argue that Japan’s youth has lost its hunger and lost its international outlook.

To be sure, most U.S. companies do not offer scholarships to go to business schools or other graduate schools. You are on your own, and in charge of your own education and career. However, U.S. companies are definitely open for business and in the market to hire mid-level, post-graduate talent. In contrast, Japanese companies are still basically are closed for mid-level entry. So by cutting out the global scholarships, it was corporate Japan that forced the closing of the minds of their future mid-and top-level managers.

Discussing Japan’s demographic destiny is inevitably a complex issue. However, simply using the population decline as an excuse for pessimism is, well, a big excuse to justify your own mistakes. There are plenty of young Japanese around, and there is plenty of labor power and energy waiting to be harnessed. The challenge is for corporate Japan to unleash this power. In my view, Japan’s demographics spells huge opportunity, not doom and gloom.