Document Type

Working Paper

Publication Date

1997

Center/Program

Center for Law and Economic Studies

Center/Program

Center for Contract and Economic Organization

Abstract

In Japan, large firms' relationships with their employees differ from those prevailing in large American firms. Large Japanese firms guarantee many employees lifetime employment, and the firms' boards consist of insider employees. Neither relationship is common in the United States. Japanese lifetime employment is said to encourage firms and employees to invest in human capital. We examine the reported benefits of the firm's promise of lifetime employment, but conclude that it is no more than peripheral to human capital investments. Rather, the 'dark' side of Japanese labor practice--constricting the external labor market--likely yielded the human capital benefits, not the 'bright' side of secure employment. What then explains the firm's promises of lifetime employment in Japan, a practice that developed following World War II, when labor was in surplus, and hence economically weak? We hypothesize two political explanations, one 'macro' and one 'micro.' The 'macro' hypothesis is that a coalition of conservative and managerial interests sought lifetime employment to reduce the chances of socialist electoral victories. The 'micro' hypothesis is that managers tried to defeat hostile unions and win back factories from worker occupation, firm-by-firm, by offering lifetime employment to a core of workers. Neither the 'macro' nor the 'micro' goals were intended to improve human capital training, but rather to reduce worker influence, either in elections or in the factory. We assess the evidence for these hypotheses. We look at Japanese labor practices and related corporate governance institutions as 'path dependent': A political decision 'fixes' one institution and then the system evolves in light of that fixed institution by developing efficient complementary institutions.

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