Japanese labor markets and subcontracting

Abstract

This paper makes two points. The first is an empirical one, that the employees of a Japanese firm are very homogeneous; firms are observed to pull their employees from only one segment of the labor market. The second is a theoretical one, that the consideration of factor market imperfections, such as the homogeneity discussed herein, is important for developing a more complete theory of the firm. Organization functions as a substitute for markets, and its form reflects their structure and faults. In the manufacture of most products, a variety of labor inputs are required, e.g., skilled and unskilled. But homogeneity means that a firm is constrained from employing differing types of workers at different wages. Hence, for static efficiency, a firm will subcontract processes which require workers who are, in the labor market, paid less (or more) than its own employees. Following this introduction, Section II presents an overview of theories of the firm, highlighting the contribution of this research to that theory. A brief description of subcontracting in Japan is also included. Section III is the first of two on labor markets; it contrasts the range of (market) wages found in Japan with the relative homogeneity of the workforce in Japanese firms. Because of their aggregate nature, standard statistical sources are incapable of providing detail at the firm level; case studies are utilized as an essential, complementary data source. Section IV delves into the sources of this homogeneity, primarily through a review of the literature on labor relations in large Japanese firms. Section V raises several issues which are beyond the scope of this paper, including generalizations to the US labor market. Section VI briefly summarizes the paper