Does Japan Have a Labour Shortage?

January 23, 2025

The notion that Japan has a labour shortage is widely accepted. The country's ageing and shrinking population leaves fewer working-age people for firms to hire. Businesses often cite difficulties finding workers as a reason for raising pay, and labour shortages are seen as a driver of inflation. However, Mizuho executive economist Momma Kazuo, in a commentary published on 21 January 2025, challenges this view. He argues that labour market conditions are more nuanced than commonly perceived and that declining real wages contradict the narrative of a general labour shortage. This post summarises key points from the report.

A PDF of the original Japanese-language report can be found here.

Nominal wages are increasing

The 2024 shunto spring wage negotiations produced a 5.1% nominal pay gain, the highest in 33 years. Labour unions are aiming for a 5%+ increase in 2025.
Inflation and labour shortages are widely cited as drivers of wage increases. While inflation is a clear driver of wage gains, the impact of labour shortages is less certain.
Businesses cite pay increases as necessary to retain workers. But if labour shortages were driving inflation, nominal pay gains would outpace inflation and real wages would rise.
Real wages briefly increased in summer 2024 but remain 2.4% lower than in 2019.
To recover this loss by 2026, real wages need to rise 1.2% annually, which requires nominal pay gains of 3.2% assuming 2% inflation. This aligns with shunto outcomes of 5%.
The modest union wage demands suggest limited negotiating power. True labour shortages would lead to stronger wage demands.

2017 again?

In 2017, wage stagnation was partly attributed to increased employment of women and seniors, who often take lower-wage jobs, reducing average wage levels.
Workforce growth from these groups has since slowed, leading some to argue that current wage increases reflect genuine labour shortages.
But the continued stagnation of real wages casts doubt on this argument. It also suggests that wage stagnation in 2017 has yet to be fully explained.

Not really a labour shortage?

Some researchers argue that labour shortages are overstated, including Professor Saito Makoto of Nagoya University and Professor Shioji Etsuro of Chuo University.
Indicators like the job-to-applicant ratio, the unemployment rate, and the Bank of Japan's labour supply-demand gap estimate show that the labour market is not as tight as before the pandemic.
Labour shortages may be sector-specific, with industries like IT, construction, and essential services facing shortages, while others, such as office roles, experience surplus supply.

Financial constraints impeding wage growth

Businesses may lack the financial resources to support significant wage increases.
Japan's real GDP growth has been so weak as to suggest that Japan is heading towards four lost decades.
Weak real GDP growth and worsening terms of trade have eroded Japan's real Gross Domestic Income (GDI), with ¥5.8 trillion (approximately 1% of GDP) in income flowing out of the economy since 2019.
This weak macroeconomic environment limits the ability to achieve sustained real wage growth.

Domestic growth expectations are key

Many businesses increasingly rely on price increases to fund wage hikes, but this does not improve real wages as higher costs offset nominal gains.
Policies to sustainably increase real wages are difficult to identify, but obstacles that need to be resolved include institutional constraints, time and cost barriers to reskilling, a lack of investment in workers, and weak domestic growth expectations.