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Evolution From Traditional To Modern System Management Essay

Western scholars began to talk about the peculiarities of the Japanese management model in 1970. After World War II the Japanese manufacturers took a leading position in the global market. Japan achieved industrial supremacy in several industries, primarily in the motors manufacturing and appliances. Japan also exceeded Western countries in terms of economic development, that is why in the West (and especially in those countries where there was a decline in production) appeared particularly interest in the Japanese model of economic development. Several research studies highlighted a number of factors contributing to economic growth and a high level of productivity in postwar Japan. Among these factors, the Japanese management, as a set of unique production methods and features of human resource management, was under consideration for decades.

Considering the peculiarities of the Japanese model of human resource management, it should be noticed, that for the last fifteen years the Japanese model of management is under transition. The undergoing series of changes are caused by the economic situation in the country. The stock market crash in the year of 1990, the collapse in property price-sand, and subsequent financial crisis in the late 1990s led to increase in unemployment and long-term stagnation of the Japanese economy. Economic growth in Japan declined from the level of 3-4% in 1980 to 1% in 1990 (Rebick, 2005, p. 3).  As result of the changing economic situation the Japanese model of HRM also transforms, gaining some features of the Western model.

The last decades of the XX century characterized by the following strategies in the system of Japanese human resource management: increase in wages of employees, reduction of working time, improvement of housing, ensuring secured and quiet retirement age, etc. In this context, there existed the slogan "humanization of working life" in the Japanese trade unions. At the same time, the global competition affected on working conditions, leading to an intensification of work in order to save costs. In reality, working hours were not reduced. As a result of work intensification the tiredness and distress among the employees accumulated. The seniority - based system was replaced by ability-oriented and gradually reduced the practice of life-time employment. Material conditions improved due to increase in wages, while the working conditions got worse. In a prolonged economic recession favorable material conditions of life have been undermined. Activities of the trade union movement has shifted from promoting schemes to raise wages (the most relevant topic in the period of economic growth), the preservation of jobs and the combat against layoffs. On the one hand, as a result of restructuring of enterprises, there was a growth in the number of bankruptcies and unemployment, on the other hand - there was a decline of public welfare programs.

This study focuses on specificity of Japanese human resource management and employment relations. The key elements of employment relations are life-time employment, seniority-based wage and promotion system, and enterprise-based trade unions. Proceeding from the time frames, the given study examines the evolution and transformation of Japanese employment relations during one century starting from the 1910s of XX century till the 2010s of XXI century. This period includes the most important development stages for Japan: Pre-war period (1910- 1914), Inter war period (1914-1945) which includes the economical crises: the financial crisis in 1926, the Great Depression (1929-1931), the period of high economic growth (1950-1970), the two Oil Shocks in 1973 and in 1979, the Stock market crash in 1989, financial crisis in the late 1990s and long-term stagnation of the Japanese economy.

Many researches and observers analyzed the Japanese HRM practices and employment relations using different methods and proceeding from several perspectives. For instance: from a cultural perspective Abegglen (1958), Adhikari (2005), Budhwar and Sparrow (1999) examined formation of employment relations; proceeding from national factors perspective Whitley (1992), Jackson and Shuler (1995), Yamanochi and Okazaki (1997), Sano (1993), Hanami (2004), Kono and Klegg(2001) analyzed the national factors to understand the employment relations; from a comparative method of analysis Buckley and Mirza (1985), Ouchi (1981), Pascale and Athos (1981), Suliva and Nonaka (1986) compared the Japanese and American management systems; proceeding from a human resources perspective Hatvany and Pucik (1981) defined their own model of Japanese management; proceeding from didactic method Pascal and Athos (1981) introduced their "Seven S" model.

Based on study, it is obvious that under globalization, socio-cultural and economical factors the employment practices in Japan are undergoing changes which are resulted in significant rethink of life-time employment, seniority-based wage and promotion system and trade unions movement. The theoretical framework of the study is based on the assumption that the Japanese HR practices transform from traditional to modern system of management which combines both Western and Japanese employment relations practices. The study concludes that there exists the shifting of HR practices from traditional model and especially at the turn of XXI century, however still many Japanese companies maintain their HR practices based on the national and cultural norms. There exists the high commitment to the principle of fit between Japanese culture and HR practices among many well-known companies in Japan.

The given work consists of three parts. The first part is a theoretical part and explores the main features and principles of the Japanese model of management. This part analyzes traditional employment relations in Japan proceeding from the seniority-based wage system, life-time employment and trade unions movement. The second part is an empirical and focused on the transformation and rethink processes of employment relations after 1990s. There is described under which factors and how the changes in employment relations took place and what are the recent changes. The last part includes the case studies on two famous Japanese companies - Toyota and Nissan - and analyzes the implementation and transformation of Japanese HR practices during the last decades on the firm level.

This study follows the case-oriented comparative approach applied in studying of employment relations and human resource practices in Japan which facilitates to investigate the peculiarities of changes described mainly from life-time employment, the seniority-based wage and promotion systems, and trade unions perspective.

Chapter I. Traditional Japanese model of management and evolution of employment relations till the beginning of 1990s

The main features and distinguish principles of Japanese management model

Japanese system of management is based on the traditional forms of production management which in their turn based on religious, moral, ethical and ethnic settings. However, Japanese style of management can be regarded as an aggregation of imported ideas and national, cultural traditions. Many authors stress on the role of national culture in formation the employment relations (Abegglen, 1958; Adhikari, 2005; Budhwar & Sparrow 1999; Ouchi, 1981). Thanks to high competitiveness of the Japanese economy and corporate management it gained a competitive advantage and Japanese model of management became an example to learn, borrow and follow for other countries. If in early 1950s and 1960s the American management was dominant thereafter in the 1970s to the early 1990s Japanese management became the dominant and spread around the world (Pudelko & Harzing, 2007; Pudelko & Harzing, 2009). Management in Japan, like in any other country, reflects its history, characteristics, culture and social psychology. It is directly linked to the socio - economical structure of the country. That is why it is necessary to analyze the features of economical development and influence of social factors on formation of business in Japan.

There were difficult times for the Japanese economy which was completely destroyed during World War II. Much of the Japan’s modern economic success was gained after war and called the post- war Economic Miracle. Thanks to high-growth economy of Japan there was formed unique style of capitalism in which managers and employees but not the shareholders became the stakeholders of a firms (Mizutani, 2003). It took Japanese government about 30 years to transform and reorganize its economy of post war era by transforming old institutions and development of national level policy concerning the national economy and employment relations practices. Japan built its market economy similar to the US and UK economies. The economical development of Japan can be divided into two historical periods: the per-war Meiji Era and the post-war Era.

During the Meiji era in the 1880s the Meiji government created a favorable business environment for private businesses to thrive and sold some governmental – owned enterprises to financial oligarchy. On this way appeared the six influential enterprises called Zaibatsu: Mitsui, Mitsubishi, Sumitomo, Yasuda, Okura and Asano groups (Morikawa, 1992). Subsequently all these enterprises became larger and more powerful and government bureaucrats steered them into areas of development with the aim of the reformation of Japan (Thorson, 2011). They bound together different enterprises in banking and insurance, trading companies, mining concerns, steel manufactures, textiles and machinery manufactures. However after WWII, there was signed the Potsdam Declaration in 1945 that played a significant role in the liquidation of Zaibatsu as a necessary step for democratization of Japan economy and subsequent formation of the modern company groups - Keiretsu (Ibid.). By the end of 1946 there were dismissed four major zaibatsu company groups. Furthermore, in 1949 there was established the Ministry of International Trade and Industry (MITI) which also had a great impact on Japanese Economic Miracle. In 1950s political power in Japan was consist of twenty one ministries including MITI (Keys, Denton & Miller,1994). Chalmers Johnson (1982) the author of “MITI and Japanese Miracle” described MITI as an organization which had a great impact on the economy of a nation and formalize the cooperation between the Japanese government and private industry. New constitutional and economic policies implemented by the US during the American occupation of 1945-1952, contributed to the eventual recovery of the Japanese economy. However, the main purpose of the American occupation authorities in Japan was to create a system of financial and economical activities which would not be associated with the activities of the old government and Zaibatsu groups. The new system expected to gain an American ideas and traditions that certainly would put Japan in dependence on the United States. However, it did not happen, because the country had strong national traditions and moral values, and American method of management was based on an entirely different system of social orientation. Japanese management practices have maintained their national identity, however, under the influence of time and external factors have changed. After 1951, many Japanese companies and corporations have been restored. 

After the post-war period the Zaibatsu managed to evolve into the Keiretsu with the six major Keiretsu being Mitsubishi, Sumitomo, Fuji, Mitsui, Dai-Ichi Kangyo (DKB) and Sanwa Groups (Thorson, 2011). A notable characteristic of Keiretsu is the cooperation of manufacturers, suppliers and distributors in closely knit groups and maintaining the long term business relationships and stability between them. The Keiretsu system characterizes the employee relationships in Japan firms and companies which are organized around a big bank and have a large amount of equity in these banks (Dedoussis, 2001). Keiretsu – as a company network relationship system - has both advantages and disadvantages. The main disadvantage is the slowly reaction on external events because the players are partially protected from the external market. However there are many strong sides of this system as highly incorporated vertical relationships, networking that confines competition, considerable foreign direct investment and important governmental influence. Also, keiretsu can provide significant scale economies. Keiretsu relationships have helped members to share risks while allowing Japan's large-scale enterprises to achieve considerable insulation from market forces (Dedoussis, 2001).  

According to Thorson (2011), there are two types of Keiretsu systems related to the relationships in the company group. The Big Six (Mitsubishi, Sumitomo, Fuji, Mitsui, Dai-ichi Kangyo and Sanwa Groups) company groups have a horizontal type of relationships since the groups have business interests in different fields. Mostly, each of these company groups represents the complex which has its own central city bank, general trading company and insurance company. The second type is the vertical company group which is held together in an umbrella–like form with a large–scale enterprise at its apex (Thorson, 2011). In contrast to the Big Six, the scope of business of these vertical company groups is more closely connected to the original industry of the leading enterprise. Examples of vertical type of company group are the following: Matsushita, ITOCHU, Hitachi, Toshiba, NTT, Tokyo Electric Power and Toyota.

Furthering the internalization of labor markets - the premium wages and long-term employment guarantees largely restricted to white collar workers were extended to blue collar workers with the legalization of unions and collective bargaining after 1945 - also raised the social capability of adapting foreign technology. Internalizing labor created a highly flexible labor force in post-1950 Japan. As a result, Japanese workers embraced many of the key ideas of “just-in-time” inventory control and Quality Control circles in assembly industries, learning how to do rapid machine setups as part and parcel of an effort to produce components "just-in-time" and without defect. The concepts of just-in-time and quality control were originally developed in the United States, just-in-time methods being pioneered by supermarkets and quality control by efficiency experts like W. Edwards Deming. Yet it was in Japan that these concepts were relentlessly pursued to revolutionize assembly line industries during the 1950s and 1960s. Miracle Growth was the completion of a protracted historical process involving enhancing human capital, massive accumulation of physical capital including infrastructure and private manufacturing capacity, the importation and adaptation of foreign technology, and the creation of scale economies, which took decades to realize. 

For 20 years after war the U.S. has been considered as a leader in the global economy. Suddenly, the picture of the world economy and leadership in productivity has changed dramatically. The Japanese economy is characterized by the rapid economic growth from the 1960s to the 1980s. The productivity growth in Japan became much higher than average index. The average growth rate was 10 % in the 1960s and 5% in the 1970s (Japan: Patterns of Development, 1994). This trend has continued to act in the 1980s and the Japan's growth rate made around 5% which was higher than the 3.8 % growth rate of the United States (Ibid.). Additionally, the Japanese products flooded the American markets and became competitive in international market. Japanese success in economy growth and competitiveness has become a matter of great interest to many managers and researchers. This has led them to study Japanese practices, e.g. just-in-time, zero defect program, vendor-buyer networks, Kaizen and etc.

Many authors studied the main factors which have a significant impact on international competitiveness of firms. It is generally believed that management style and organizing principles became the key factors of competitiveness of Japanese companies after 1960s (Cosier & Dalton, 1986; Harber & Samson, 1989; Peters & Waterman, 1982). For instance, Kogut (1991) considers capabilities and organizing principles of the nation as the main factors of a country’s leader position in international competition. He claims that technologies can be easily imitated however organizing principles which assist to implement know-how are difficult to assess (Kogut, 1991). Yonemura and Tsukamoto (1992) stress on two main factors of economical success in Japan: quality and managerial approach. American consumers bought Japanese cars and electronics, not because they were cheaper, but because they had a better quality. One of the essential factors of high-quality Japanese products is being cleanliness and tidy at work. The leaders of Japanese companies are trying to establish a procedure which can guarantee the quality of products and is able to increase productivity thanks to cleanliness and order. The situation analysis revealed unusual facts. Many of the Japanese innovations were adapted ideas, taken from old American books on management (just-in-time or quality control). Since robotics was available to any U.S firm that wanted to implant it, however Japanese industry used it in a better way (Yonemura & Tsukamoto, 1992). Secondly, Japanese industry had an important advantage over many sectors of American industry: the Japanese approach to the management issues was much broader. Unlike their American counterparts, Japanese managers did not look for rapid solutions of output and profits fall problems. They understood that one does not provide an increase in production performance and that quality is no less important.

The main reason for the leading position of Japan in a production performance is a good management. A man with his weaknesses and opportunities is placed in the center of management concept. In the 1930's K. Matsushita - the CEO of "Matsushita Denki" recognizes the need for deep and comprehensive study of a person as a key element in the economic mechanism (Ouchi, 1981). However, this element is very fragile and requires a perfectly well-functioning management control. Thanks to his ideas there has been developed strictly hierarchical triad of priorities in Japanese management system – people, finance and technology.

Japanese management style became in the center of attention of many researches, who tried to reveal the main features of it (Hatvany & Pucik, 1981; Koya & McMillan, 1981). They had different approaches and used different methods of research. However, based on these study results it is possible to reveal the main characteristics of Japanese style of management which distinguish it from other models of management. Japanese management is based on collectivism, guaranty of employment, corporation values, information and quality control. It uses all the moral and psychological leverages to impact on the individual. Firstly, a sense of duty to the team is almost equal to the feel of shame in the Japanese mentality. Secondly, the tax system focused on an averaging of income and financial status of the citizens and there is a minimal stratification of wealth among the population. This makes possible to use the sense of collectivism most effectively. Japanese management system also tries to create for all employees a base of understanding the corporate values of the firm, such as the priority of quality service, collaboration between workers and the administration, cooperation and collaboration between different departments. Management constantly strives to inculcate and maintain the corporate values ​​at all levels.

Publicity and the value of corporation is another characteristic of Japanese management. In Japanese firms all levels of management and workers get information on policies and activities of the firm from the common base. It develops an atmosphere of participation and shared responsibility, which improves communication and increases productivity.

Japanese management is based on information and pays a special attention on data collection process and systematic use of it in order to improve production efficiency and product quality. Managers monthly check items of income, output, quality, and gross receipts to see whether the numbers reach a given performance and to see the coming difficulties in the early stages of their occurrence. 

Another major distinctive feature of Japanese method of management from other methods used in Europe and USA is being the subject of management. Human resources are the main subject of management in Japan. From the HRM perspective there exist a number of concepts that are missing in the American model of management. The most important are lifetime employment system and the process of collective decision-making. Moriguchi and Ono (2004) notice: “Japanese lifetime employment is a product of dynamic interactions among management, labor, and government in response to changing environments” (p.3). Lifetime employment as a unique phenomenon exists only in Japanese model of management and represents by itself a guarantee of employment. Such guarantees led to the stability of the labor forces and reduce the labor turnover. Stability is an incentive for employees and workers. It strengthens the sense of corporate community and harmonizes the relationships between workers and managers.

Proceeding from comparative analysis there are many scholars who compared the Japanese and American management systems (Buckley & Mirza, 1985; Ouchi, 1981; Pascale & Athos, 1981) and revealed the principal characteristics of them.

The theoretical study of Ouchi (1981) “Theory Z: How can American business meet the Japanese challenge” especially should be underlined. In his book he identifies seven distinguish principals of Japanese firms: lifetime employment, collective decision making, slow evaluation and promotion of employees, collective responsibility, non-specialized career paths, implicit control mechanism, and holistic concern (building a complete relationship between employer and employee, including concerning with employee's non-work, personal and family, matters). He argues that these principals exists only in Japanese firms and not true for American organizations. However, his research methodology has been criticized because of the small sample size and limited interviews and observations.

Pascal and Athos used their own approach which is as noted by Schein (1981) more didactic. They developed the “seven S” model including the following components: super ordinate goals, strategy, structure, systems (administrative), staff (the concern for having the right kind of people), skills (training and developing the people), and style (the manner in which management handles subordinates, peers, and superiors) (Pascal &Athos,1981). They argue that Japanese companies are more effective because of their integration of these seven components and their concern for staff, skills, style and call these factors "soft S's" which have to do with human element (Ibid.). Pascal and Athos (1981) stress the importance of managing people as key resources and the importance of super ordinate goals, sense of spirit, or company philosophy. They draw conclusions from a limited number of case studies. 

From a human resources perspective, Hatvany and Pucik (1981) offer a model of Japanese management in which they define three interrelated strategies: (a) to develop an internal labor market securing a labor force of desired quality and to induce the employees to remain in the firm; (b) to articulate company philosophy based on concern for employee needs and cooperation and teamwork; and (c) to engage in intensive socialization (pp.469-480). The authors assert that these general strategies are translated into specific management techniques including job rotation and slow promotion; evaluation of attributes and behavior; emphasis on work groups; open communication; consultative decision making; and concern for employee. Although they do not contrast American and Japanese managerial characteristics explicitly, they organizational theories developed in the West in their analysis of Japanese attributes (Hatvany & Pucik, 1981). The authors also argue that the Japanese techniques can be adapted by firms in other countries (Ibid.).

Sullivan and Nonaka (1986) approach to comparative analysis of Japanese and American firms proceeding from an organizational learning perspective. They widely consider the process of handling information and claim that Japanese managers get more information and learn more about their organizations (Sullivan & Nonaka, 1986). They notice that: "This greater commitment to an organizational learning perspective may be an important source of differences in the strategy-formulating behavior of Japanese and American executives" (Sullivan & Nonaka,1986, p. 128).

To sum up, Japanese management style includes both traditional and modern concepts. While forming during the XX century Japanese management absorbs ideas and principles existing in other management systems and transforms them into one unique model based on traditional principles. According to studies of many scholars, Japanese management system has its own features and characteristics which distinguish it from models used in other countries. The main goal of Japanese management is to improve the efficiency of enterprises mainly due to the increase in productivity. Meanwhile, the major purpose of European and particularly American management system is to maximize profits, i.e. to apply the minimum efforts in order to optimum the benefits. In general, the Japanese management focuses on improvement of human relations: coordination, teamwork, high moral and ethical qualities of employees, employment stability and the harmonization of relations between workers and corporate managers. Human resources are an important element of Japanese model of management. The following part of study will be focused on the human resource management (HRM) system and its influence on development of employment relationships in Japan till the 1990s. The study will research the main aspects of Japanese HRM such as lifetime employment, seniority based wage system and trade unions.

Japanese model of HRM and three aspects of employment relationships

In contemporary literature on human resource exists a variety of explanations of the term human resource management (HRM). For instance, according to Bratton and Gold (2003) HRM as a strategic approach is an ability to properly exploit people’s capabilities with the aim to achieve competitive advantage. Beardwell, Holden and Claydon (2004) consider HRM as a system which impacts on change of employment relationships. Kishita (2006) argues that HRM is a business system with a purpose to control employees in the firms in that way that they are able to contribute to the firms’ final goals. She distinguishes four subsystems within the HRM system: an employment, working condition, reward and personnel evaluation system where the last one is the basic concept for other three (Kishita,2006).

In the firm-level, HRM practices began forming in Japan during 1930s when complementary labor laws were enacted by the government (Moriguchi, 2003). The formation of macro-level institutions has a major influence on appearance of HRM practices in Japan. As a result of the development of labor laws, state welfare policies, and social norms, today’s HRM practices are deeply penetrated into complementary institutions and characterized by its resilience and stability.

At the beginning the Japanese managers carried out their tasks in the modern conditions using the traditional methods of control. However, in the last decades of the XX century there have been significant changes in the world practice of human resource management. Globalization and competition in economy and business within global market influence the pattern of employment relations and human resources management. The main reason of the changes was to gain the competitive advantage by the firms in the domestic and international markets (Adhikari, 2005). Japan as well as other European countries, has been influenced by this pressure and began to redesign its traditional management system towards the new one. Later, Japanese corporations and firms applied the American methods of control and management. They attempted not only creatively to apply the pre-war experience to the new conditions, but also to learn, to accept new ideas and find the new Japanese way of development. Finally, it was resulted in appearance of the Japanese style of management which is focused on human resources and based on three HRM strategies: an internal labor market, a company philosophy that concerns for employee needs and cooperation and teamwork within a company environment (Beechler & Yang, 1994). Thanks to the new HRM style and strategies Japanese firms became the successful in a global market characterize with the economic growth during the 1980s (Pudelko, 2004).

One of the distinguishing features of traditional Japanese management is that the Japanese corporations manage their employees so that the latter worked as efficiently as possible. To achieve this, Japanese companies use American tools of personnel management, including effective payroll system, analysis the organization of labor and employment, certification of employees and others. But there is a big difference between American and Japanese management. Japanese corporations increasingly use loyalty of their employees to companies. Identification of employees with the corporation creates strong morale and leads to high efficiency. Japanese management system tries to strengthen identification in that way which made possible to sacrifice the personal interests to the interests of the company. The Japanese workers very closely identify themselves with the company hired them and treat themselves as representatives of the company. One of the manifestations of identification the worker with the company is that each worker is convinced that he is important and necessary person for the company where he works. Another manifestation is that the Japanese worker in response to the question about his occupation always tells the name of the company where he works. Many employees rarely take days off and do not fully use their paid leave, because they are convinced that their duty is to work, when company needs it. They do it with the aim to demonstrate their commitment to the company.

Human management is especially important in Japanese companies and Japanese top-level managers believe that people is the greatest asset (Moriguchi & Ono, 2004). The Japanese workers have certain qualities that are indispensable in the management of industry. Within the company, employee does not exist as an individual, but only as a member of a large group. Person is identified with the group and his aspirations are the aspirations of the group. The worker is aware that he is a member of the group and does not looking for a personal authority. He is always interested in success of the group. All mentioned strengthen the coordination within the production and lead to a minimization of personal tensions and conflicts. The Japanese firm focuses on the ability of groups working independently to solve local problems. This ability is developed through production and dissemination of knowledge workers directly in the course of work. Most companies prefer to hire employee who have just end school or college and was member of sport clubs team with an incentive of their further training directly in the production process (Kishita, 2006). The Japanese firm is carried out systematically rotated between experienced workers neighboring shops. The main objective of this process is more widespread knowledge among them to increase their capacity to address local problems. However, the training method of knowledge sharing can be quite expensive in terms of wasted time and reducing the effectiveness of the original. As Wan (1999) notes, large manufacture and industrial companies recruit employees only from the best schools. One of the distinctive features of the Japanese worker was his versatility. He could perform variety of functions since constantly trained during the job. Most Japanese companies practice the redistribution of workforce depending on different circumstances. Since the company must operate as a cohesive group the purpose is to improve the group’s work and strengthen the group’s solidarity. That is why such features of Japanese worker as the mutual trust, cooperation, harmony and full support in solving the challenges facing the group are more valuable. Additionally, the employee were provided by different kinds of benefits such as housing, tours, business trips, sporting events, parties and etc. The managers of all levels were provided by entertainment which was charged as a company entertainment expenses in tax accounting systems.

Therefore, management always argues from the position of a group. The group is responsible for the success of the cause as well as for failures. Therefore, individual workers are rarely blamed for failure, especially if they are creative failures or associated with a risky business. In Japanese firms, a group makes a decision. Subordinate employees formulate their proposals and forward them to interested parties. After the discussion the group set common goals and each employee shall determine its own and begin to implement them. If it is noticed that the employee is not able to control the situation, the middle level manager will personally step in and provide leadership. This attitude inspires confidence that personal failures and mistakes, in general, does not make sense and the senior always helps to get out of difficult situation. Thus, the emphasis is made not to avoid failures, but to achieve a positive outcome. 

The success of Japanese HRM attracts a significant degree of attention in many countries and there are a lot of discussions among the authors about the major reasons of this success. Some part of the researchers usually cite unique culture, deep-roots and institutional characteristics as most important factors influencing on Japanese HRM (Ballon, 2005; Inohara, 1990; Pudelko, 2006). However, the study of Kishita (2006) provides the best explanation for success of Japanese firms on the global market during the period between 1970 and 1990. Kishita (2006) explains Japanese competitive success by the fact that the firms used 'people oriented' HRM systems and notices that: “This framework placed an emphasis on employees’ abilities. Employers hired people for a relatively prolonged period and they provided employees with incentives to work earnestly.”(p.3) On the same way, Hatvany and Pucik (1981) argue, that Japanese HRM strategies were based on socialization, a high quality work force which leads to the use of the following techniques: emphasis on work groups; consultative decision making; job rotation and slow promotion; open communication; evaluation of attributes and behavior; concern for employee. Salmer (2001) believes that collectiveness of the Japanese culture is an important factor which has been carried over to the companies and characterized as a large entity through which each worker feels pride of being part of this significant entity. Japanese society is homogeneous and it is permeated with the spirit of collectivism. The Japanese always think on behalf of groups. A person is aware of himself primarily as a member of the group and own individuality treats as a part of the whole.

The next section of the study is focused on three elements of employment relationships. There will be discussed the formation of the Japanese lifetime employment, the features of seniority based promotion system and evolution of the trade unions and their role in shaping the traditional Japanese human resource management. This part observes the formation and evolution of all three elements during which Japan had gone through the most important stages: Pre-war period (1910- 1914), Inter war period (1914-1945) which includes the economical crises: the financial crisis in 1926, the Great Depression (1929-1931), the period of high economic growth (1950-1970) and the two Oil Shocks in 1973 and in 1979.

The Japanese life time employment

In order to understand the nature of Japanese HRM it is necessary to consider the key elements of employment relationships which have been established for many decades. According to many researchers there are three major aspects of the Japanese employment relationships: life-time employment, seniority based wage system and enterprise-based unions (Abegglen & Stuck, 1985; Ouchi, 1981). Adhikari (2005) notes that:

“The three sacred employment relations practices are also the philosophy of Japanese enterprises, based on the ideas of people-oriented management and a long-term vision, which contributed to favorable relations between labor and management and also favor a long-term approach toward planning and human resource development”(p.13).

The formation of lifetime employment in large Japanese firms was a long historical process. According to some scholars the origins of lifetime employment trace to the beginning of the XX century and was created after World War I (Gordon 1985; Moriguchi 2000). The lifetime employment system was cemented in Japan’s postwar economic boom, bound workers and paternalistic employers together. It produces a mutual loyalty and labor harmony which is rarely seen in the West. There exists different ways to interpret the lifetime employment. According to Kazuo (2004), lifetime employment is a system which reduces outflow of those employees, who got knowledge and technique during training and experience in the firm, by offering them special opportunities for promotion and paying premium remunerations. Moriguchi and Ono (2004) define lifetime employment “as a set of interdependent human resource management practices surrounding an implicit and long-term employment contract” (p.1). Later, Ono (2007) in the work “Lifetime employment in Japan: Concepts and measurements” argues that it is better to understand the lifetime employment “…as a long-term commitment between workers and employers rather than a permanent employment contract (p.1)”. Though there are different interpretations of the concept, however all of them depict the main idea behind the lifetime employment.

Lifetime employment - is a form of guaranteed employment, used in large companies and governmental institutions in Japan. First, the term "lifetime employment" was used by James Abegglen - the American scientist - in his book "The Japanese Factory" (1958).  This system emerged after the Second World War, and proved its viability and effectiveness. The person receiving the education, goes to work in a Japanese company and works there until retirement.  Within the same company the employee may change a few places, change the scope of work and get a promotion. The advantage of lifetime employment that each employee directly connects itself with the company where he works and realizes that his personal prosperity depends upon the prosperity of his company.

According to Ono (2007), all concepts and measurements existed in literature on lifetime employment can be divided into two methods of application: the labor market segmentation or so called ex-ante method and the ex-post method. The ex-ante method supposes that the lifetime employment is offered not to all employees. Only core workers are able to remain in the firm till their retirement age. The firm uses this practice in order to protect core workers from dismissals and fluctuations in labor demand. However, only large firms are able to offer lifetime employment. The ex-post method is close to the widespread concept of lifetime employment and describes it as a behavioral practice where the worker remains in the firm and employer treats him as an infant or own child (Ono, 2007).

Lifetime employment was appeared and formed as a result of long-run interactions between micro and macro level institutions (government) (Coleman, 1990). Moriguchi (2000) emphasize the role of macro-level institutions, in particular the development of state welfare policies, enterprise unions, case laws, government subsidies and social norms, on formation and institutionalization of Japanese lifetime employment (p.25) . Lifetime employment is not legally entitled. Its statement is a tribute to tradition. It is an agreement between employer and employee, where employer undertakes the duty not to lay off the worker and the employee in turn will not change his job and continues to work at this firm until his retirement. Manufacturer morally obliged to care about its employee until they riche their retirement age. The staff recruited on the basis of personal qualities, background and character. Loyalty is valued more than competence. Each worker is treated as a family member. Similarly, if there are financial difficulties, all workers worthy suffer the income loss. All above mentioned reflects the concept of lifetime employment which existed in Japan till the early 1980s.

However, the concept of lifetime employment was not the same and it had changed throughout its existence. During World War I, there was a rapid growth of heavy industries and lack of skilled labor. As noted by Kyochaki: “To train and retain skilled workers (jukuren-ko), who were well-known for their foot looseness and lack of corporate loyalty, major employers began introducing a variety of HRM practices” (as cited in Morighuchi & Ono, 2004, p.7). The large firms opened special corporate schools, where the workers trained and later recruited them directly from these schools. The workers usually could change their jobs and leave the employers after a training period for better wage offers. In order to reduce the labor turnover, employers introduced such incentives as service bonuses, periodic pay raises, and retirement allowances. (Morighuchi & Ono, 2004, p.7). Additionally, the recruitment to the work did not begin directly after graduation from schools and colleges. Koshiro (1984 ) argues that only after World War II the employment practices changed. He notices that before the prewar period most workers obliged to perform military service and only after it they started to look for a job and established their career (Koshiro,1984 ).

After the 1945, the military service was abolished and the large companies began to recruit the workers directly from schools and universities. The recruitment of employees in large companies usually started in April from high schools and universities and continued with the training system inside the company as a way to conclude long-term employment contracts (Wan, 1999). The selection procedure started with the school report, written examination and interview. Depending on the size of company the candidate could be examined on physical condition. The second part of selection process included collection of school reports, completion of personal history form, police verification and checking the family background. Wan (1999) reports, that selection process was mainly focused on personality traits, such as learning potential and ability to communicate, collaborate and associate with others, instead of skills and proficiency of a candidate. Promotion takes place among the employees of the firm. An employee who has a total length of service at the company more than 5 years, is not accepted for a job in another company. In the system of lifetime employment an employee may not be dismissed, and works in the company until the official retirement. The worker can be dismissed if he had committed a serious criminal offence. Dismissal of an employee is a severe punishment, because it is almost impossible for worker to find a different job with the same wage and job security. The company pays a lump sum to a retire worker which is equal to his wages for five or six years. After retirement the worker does not receive any pension or social security.

After the 1960s most companies faced the lack of labor force and began the recruitment of so called “halfway” temporary workers (Koshiro, 1984). Most of these employees were from rural areas. “Halfway” workers could remain at the company if they had an ability to demonstrate the high performance and effectiveness. However, there was some disproportion in assessment of this type of employees. For instance, they got less salary than regular workers. It was explained by the less years of service within the firm.

Kazutoshi Koshiro, the professor in the faculty of economics at the National University of Yokohama, distinguishes three models of lifetime employment: the stationary model, the growth model and the stagnation model (1984, pp.34-35). The first model represents the lifetime employment as a system of internal markets and consists of administrative rules. It takes into account the length of service, the quantity of employees, wage rate, total wages and separation rates in the process of labor pricing and allocation of labor force within a firm. The recruitment of new workers directly from the schools maintained at the bottom of hierarchy. The new worker may continue its employment only if he is able to successfully compete with the other workers of the same generation and tenure. Thus, this model contradicts to the usual definition of lifetime employment.

The second model is related to the organizational growth of the firm, which makes possible for all employees to become the regular workers and work at the company until their retirement (Koshiro,1984). Organizational growth of a firm is directly connected with the expansion of a market share of the company. If the firm has wide market share it helps to guarantee employment security for workers and improve their welfare and work conditions. This model existed during the period of economical growth from 1950-1980.

The last model is the stagnation model (Koshiro,1984). This model of lifetime employment appeared in the period of economical crises (the financial crisis in 1926, the oil Crises in 1973 and 1979). The business leaders reduced the employment by the following measures: cutting overtime, stopping the recruitment of new workers, dismissals of temporary workers, payments of retirement and transferring the workers in other branches within the company (Ibid.).

Thus, lifetime employment became institutionalized as a result of dynamic interactions between labor, management and government. The whole system of lifetime employment is based on job security and ensures employee in his future promotion. In turn, each employee gets satisfaction of its own effectiveness at work, knowing that someday his actions will be appreciated by the company. The logic behind the lifetime employment is that before cutting the regular workers, Japanese companies get rid of buffers. They will get rid of temporary workers, reduce bonuses and overtime, squeeze their suppliers and etc. The system creates confidence in the future days, the employee is almost guaranteed from dismissal. However, lifetime employment has serious limitations: the system in Japan, applies only to workers in large companies. In case of deterioration of the financial situation the company is conducting layoffs, because the agreement on lifetime employment guarantees are not recorded in official documents and has the nature of the social contract. As a rule, only corporate workers are guaranteed lifetime employment. Corporate workers are employees of the corporation which have competence specific for the company, and demonstrates a desire to improve it.

Seniority based wage and promotion system

Commitment to the firm is highly encouraged in Japan. The Japanese firm is trying to encourage capable, high skilled workers by discouraging them a desire to change their place of work in mid-career. It results in an incentive system, which has three important elements: the system of wages, which takes into account seniority and merit of the employee; promotion of individual employees based on individual merit; lump sum payments at retirement. The application of incentive system just exaggerated idealization of a relatively long period of work in Japanese firms.

The seniority based wage system has gone hand in hand with lifetime employment and takes it origins from the beginning of XX century. This system was adopted and widely used in public sector than in the private sector. Kazuo (2004) describes the seniority base wage system as a method deferring payment of wages, which made employees to remain and work in the firm for a long period of time “…by setting wages below marginal productivity for those who have been employed for a relatively short period, while offering wages greater than marginal productivity for those who have been employed for a longer period”(para.1).

Kishita (2006) characterized the Japanese HRM system in the period from 1960 to 1980 as “an ability oriented system” which was based on seniority (p.3). The worker, who transfers to another company loses seniority and starts from vary beginning. The more employee worked in the firm - the higher his rank and hence his wage. Sugeno (2004) point out that “if an employee under the seniority wage system is to quit his job, it will be rational for him to do so at an early stage of tenure” (para. 14). According to the existing traditional theory the employees with a long period of service at the company and a good reputation in terms of their skills get better opportunities for promotion. In other words, less diligent workers have much worse prospects. It means that rewards mainly related to the length of the service instead of individual abilities and skills of the worker. From the other side, there exists another traditional theory which insists that “older workers receive higher wages because of their cost of living is higher” (Arai, 1988, p.21). In both cases the performance and productivity of employee does not the factors of consideration in wage determination. Ono (1987) points out that an age of the worker is the most important factor for consideration while the wage determination process. Within the second model there was made the wage contracts which identified the level of wage at different ages for the worker. It is believed that that the second model is not effective from the view of modern HRM system.

The traditional theories of wage-based employment do not consider the effect of competition on wage determination. Therefore, the main negative feature of Japanese incentive system was the lack of competition within the firm. It is explained by the fact that each worker was sure in his further promotion regardless his working efficiency. Therefore, there were worked out other mechanisms for promotion of competitiveness among workers in order to climb the corporate ladder. Kishita (2006) notes:

“Japanese employers appointed the employees to managerial positions based on the performance of their work instead of their seniority. In the successful three decades, most managers in Japanese firms were promoted internally after ten years of service. As smart employers did not tell who would be promoted (for this period), almost every employee thought that he (or very rarely she) would have a chance to be selected to higher positions, and thus (he) made great efforts” (p. ).

Obviously, that the number of managerial positions within the company was limited and not everybody was able to become a manager and stay in the company. Japanese companies wanted to avoid a loss of enthusiasm and created affiliated companies where they transferred the non-managerial staff members as managers. Kishita (2006) explains that lifetime employment was a system focused on security of employees within a group of affiliated companies. Thus, the workers retained in the firm and continued to work in related companies in managerial positions.

Seniority based wage system has many characteristics in Japan. Arai (1982) defines it as a “form of implicit labor contracts” (p.53). This system is used mainly in large enterprises and applicable to full-time regular workers and male workers (Sano, 1976). The regular workers paid monthly wage and additional bonuses twice a year in June and December (Kishita, 2006). The salary is based on the general classification and years of service of employees and intended to cover living expenses. The monthly salary of a worker included a basic salary and plus several types of allowances (overtime premiums, housing benefits and etc.). The basic salary was based on the ability of employee to perform a job and was called “the ability based grade system” (Kishita, 2006, p. ). When it comes to the bonus system, it applies not to all workers. Each bonus is equal to one or three month’s salary. Additionally, the term bonus suggests a special reward for good work. The semi-annual bonus has become an integral part of the wage system. It is also a profit sharing for companies. The size of bonus depends on the size of the company’s profitability, and is subject to collective bargaining by the company’s union. If company facing bankruptcy, it continues to pay reduced semi-annual bonuses. Since bonus is a part of wage package, the company withholds it from the monthly salary of employee. Japanese workers receive a bonus payment, which is predictable and substantial, and use it for major purchases and for savings.

As it was mentioned, there are two important elements of seniority- based wage system: age and length of service of worker. “Thus a worker who got employed by a firm in his mid-career receives wages lower than those for workers of the same age but with longer lengths of service in the firm” (Arai, 1982, p.53). It is mean that payments depending on the characteristics of the employee can be determined on the basis of his seniority and merit. Assessment of the merits of the employee as a whole plays more important role in the decision on his promotion at work. Therefore, some workers could reach the highest rank in the middle of a career, and then moved on and became a manager, while the least competent workers could reach the highest rank in the usual category of only a few years before retirement. As a result of these differences there were eventually developed a significant imbalance in the basic rates of payment for employees with equal seniority. The payments of such categories of workers as artists and managers were usually not associated with specific functions performed by them. The high rank means the high status of the worker and effected on the higher annual growth rate of his salary. For the new workers the payment was set on the base of lowest rank and promotion was slow and continued from five to ten years. There was not much difference in wage and bonuses. Wan (1999) points out, that promotion started with the higher speed when worker became a kacho. Then, the decision about promotion was made in the basis of individual performance, capability, potentiality and personality of an employee. The collective agreement between the company and the union workers stipulated the minimum and maximum rate of advance of the ladder of ranks, as well as the annual increase in base rates for employees of each rank.

Additional element in Japanese incentive system is a mandatory retirement employment system with lamp sum payment. All private and public firms are obliged to retire regular workers at ages from 55 to 62. As regular employees these retires receives pensions. The pension is divided into two types and retire can receive it, either as a large lump sum payment, or as a regular monthly pension. After retirement some retires continue to work for a few years on a contract or part time basis. They may work for the same employer or for an affiliated firm. In post-retirement position there is no lifetime employment and seniority-based wage system.

Thus, the Japanese companies do not pay their workers for the particular jobs they perform. They maintain very broad employment categories or ranks, where employee begins with the standard basic wage and receive an increase in payment for each year of service. The seniority-based wage system keeps employee from changing jobs, since after a few years of employment they get the wage level that they could not match if they moved to another company. This system underpays young employee, however rewards them very good in later years, even if their productivity declines. An early retirement age also supports the seniority wage system, normally forcing employees to retire from their regular positions at early ages.

Trade unions

Organization of trade unions is being one of the principles of Japanese management. Before the pre-war period there were not organized trade unions and trade union law was not materialized. In the 1910s business leaders organized and introduced the worker representation – “factory councils” and claimed that they were more effective than trade unions and conducted to “labor-capital cooperation” (Moriguchi & Ono, 2004). On the fact, these councils consisted only of blue-collar employees and did not reflect the rights and status of white-collar employees. Moreover, the management refused to discuss such issues as safety, health, wage and benefits of employees. After World War I in 1921, financial crisis in 1926, and the Great Depression of 1929-1931 the Japanese economy got downturns. This period was characterized by the wage reduction, cancellation of benefits and layoffs of employee. As a respond to the critical situation, there were organized public demonstrations by workers. These protests made government to pressure on firms’ leaders to avoid dismissals. Gordon (1985) notes that there was emerged the voluntary retirement which became very effective measure in maintaining the good relations between management and employees. On the legislative level the government enacted unemployment insurance bill in 1932 which became the law in 1936. As cited in Moriguchi and Ono (2004):

“The law mandated every employer (with 30 or more workers) to establish a retirement allowance fund for an employee and pay an allowance in case of separation. Affirming prevailing HRM practices, the law permitted employers to vary an amount of the allowance depending on an employee’s length of service and the reason for separation” (p.10).

There were organized about 900 trade unions which included 400,000 workers by the 1930s, however, all major firms still had no unions (Moriguchi & Ono, 2004). After 1945 the situation began to change. There was organized labor movement under the slogan of “democratization of management” and workers formed employee unions – “jugyoin kumiai” (Ibid.). These unions argued for the rights of workers, improvement of their status and welfare and demanded the equal treatment of all employees, employment guarantee based on contracts and participation in management. Thus, the main distinctive feature of these unions from previous factory councils was that they were consisted of both white-collar and blue-collar employees. From 1945 till 1949 many unions gained contracts with very favorable conditions for employees. Gordon (1985) notes that these contracts included the increase in wages, a variety of welfare benefits for workers and their security. In such conditions, the mistrust between labor and management developed and kept increase further which led to appearance of labor disputes in major Japanese companies. In most cases in strikes between labor and management won the last party. The disputes were ended with the division of core employees from the unions and formation of the “second unions”, which “became the foundation for enterprise unionism characterized by labor-management cooperation in pursuit of corporate goals that took roots in most large Japanese firms in the following decade” (Moriguchi & Ono, 2004, p. 12).

To the team was able to represent their interests in matters of determining the overall level of payment and formation of administrative policies related to their welfare, and was able to effectively negotiate with the administration about this, there have to be a collective agreement at company level. That is why the enterprise unions of employees play an important role in the Japanese firms. They represent the collective interests of employees and integrate it into the process of addressing issues of intra-distribution and production management policy. An enterprise union is a company union and not an industry-wide union. According to estimations there exist other types of trade unions in Japan, such as industry or craft unions, however Hara and Kawaguchi (2008) report: "more than 90 % of unions are enterprise-based unions" (p.7). It includes all regular non-management employees – both blue collar and white collar – regardless of the work they do. It is usually led by employees who come from the ranks of white collar workers, however not yet become the part of management. Enterprise unions exclude temporary workers. They cannot join to the union and so do not enjoy the same benefits regular member unions do.

The world practice shows that in the U.S., Britain, Italy and other countries managers of industrial firms felt the increasing difficulties in managing the worker staff. It was becoming increasingly difficult to introduce new methods and techniques. Unions were always in opposition to management. In many firms the management withheld important and confidential information from the unions. There appeared the atmosphere of conflict and suspicion which leads to decrease in productivity. The Japanese managers were aware of it and tried to design its management system on the base of mutual understanding and cooperation between management and unions in order to overcome these difficulties. Japanese management considers the union as a legitimate mediator between management and workers in the questions concerning the wages. The unions in Japan are not divided with respect to occupation and represented by the union of workers of a firm. The unions in their turn share such the values ​​of management as productivity, profitability and growth. They were fully aware that workers can improve their welfare only by increasing the productivity and therefore they began to cooperate with the management. Trade unions in Japan were constantly looking for ways and methods to improve the welfare of workers, without damaging to the company. They understood that the creation of favorable conditions for workers in the long run depended on the prosperity of the company. Unions critically examined the purposes and policy of management in order to identify any violations and constantly striving to raise awareness of the workers. Thus, they could develop a constructive relationship with management and cooperated with it.

The major problem was the absence of the law which guaranteed employment of workers. According to the Japanese Civil Code and The Labor Standard law of 1947, the employers had write to dismiss workers any time with the notification before two weeks and with equivalent payment of thirty days’ wage (Moriguchi & Ono, 2004). The role of trade unions became very important in protection of employment of their workers. Moriguchi and Ono (2004) report that: “In exchange for their cooperation with management in rationalization and productivity improvements, enterprise unions demanded employment security of their members, i.e., all regular employees, as their first priority” (p.13). Unions thus played the main role in creation of lifetime employment practice in large Japanese firms. There were created the statutory laws which protected the workers’ rights on employment. The judicial decisions of Japanese courts began to rule in favor of workers by establishing of minimum liabilities to employers in the cases of dismissals (Sugeno, 1992). Thus, after the 1960s the situation in the firm-level began to change in favor of employee, providing the legal base for lifetime employment.

During high growth period between 1960s and 1970s life time employment became more durable, stable and strengthened. It made possible for employers to made investments in human capital, provide systems of education and trainings of employees and developed human resources management. It resulted in stabilization of management-labor relations. In that period there was an increase and standardization of wages and minimization of wage dispersions. Appeared the “new middle class” and the status of employee in the large firms became very desirable from the position of Japanese (Vogel,1963).

The employment relationships suffered in the 1970s, when the two Oil crises occurred in the 1973 and 1979. The business leaders began to cut the salaries and bonuses of workers. According to Koshiro (1983) there were large-scale dismissals and more than one million employees became unemployed. According to many authors the major reason to suffer after these crises laid on cooperation between labors and managers. The unions deeply cooperated with management in the questions of dismissal, reduction of wages and creation of measures to undertake the effects of crises and reach the stability (Shimada, 1992). The Spring Offensive is one of examples of wage reduction undertook by labor unions in 1980 (Takanashi, 2002). The Spring Wage Offensive is a campaign for higher wages launched by each industrial trade union and has two main objectives: "(1) to compensate for the enterprise-based unions' lack of bargaining power as individual entities and (2) to distribute wage increases proportionately across companies and industries through simultaneous wage negotiations" (Hara & Kawaguchi, 2008 p.8). Another reason was implementation of different projects maintained by the Government in order to sustain the economical stability in macro level. For instance, there were organized new affiliates where workers could transfer in order to escape the mass dismissals. Consequently, the collaboration between management and labor, the measures and projects undertaken by the Government assisted to mitigate the negative effects of crises and strengthened the Japanese employment system for the future decades.

After 1980s, once defined as an independent, any organization of employees or their representatives had the right to negotiate with the administration. It is theoretically possible that the employees of one company were represented in several competing unions or a union branch. Agreements at the enterprise level one industry often were coordinated by the industry federation of trade unions of enterprises. Despite the fact that Japanese laws allowed groups of employees of one company to be a member in various organizations, trade union leaders preferred to protect the interests of all employees of one company so that they could be an effective representative of the interests in negotiations with the administration. The emergence of competitive trade unions in some way weakened it in the auction with management. However, since the majority support did not guarantee exclusive rights of representation, the union leadership had to be able to find consensus in order to secure the support of the various categories of ordinary members. Otherwise, the consistent disregard for the interests of minorities might lead to a competitive organization that reflects their interests. Consequently, the union leadership of employees should made great efforts to balance the interests of different groups, which required great political skill in the trade union leaders. Thus, the Japanese enterprise union system provides strong job security, good wages and benefits to regular employees by allowing companies to hire the contract (permanent) workers, who do not have the same job security and benefits.

To conclude, the three pillars of Japanese employment system have been lifetime employment, the seniority based wage system and enterprise unions. Only about one - fourth of the labor force enjoys all these advantages of employment. They are mainly the most privileged part of the labor force. These employment practices are expensive for companies to maintain. However, they are undertaken by large companies to reduce employers’ flexibility, and small companies try to imitate them in order to keep their employee. Therefore, there is the greatest competition for jobs in large corporations that carry these benefits. They are no offered to every worker. The Japanese employment system distinguishes between regular, who are entitled to these privileges and part-time or contract workers, who do not receive them. Both regular and contract workers may work in the same firm and do the same job, however their employment conditions will be very different.

The following part of paper focuses particularly on transformation of Japanese employment relations and the model of HRM on the whole after 1990s, under the impact of economical factors, such as the burst of the bubble economy, and prolonged recession. The process of globalization is also another main reason of transformation of Japanese HRM system. Many Japanese companies which enjoyed their competitive advantage lost it in the global economic competition. Transition to a service economy has had a great impact on Japan's employment system. Consequently, Japanese firms started to reengineering their HR practices.

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