The Japanese Model of Productivity and Distribution Management

Abstract

Market System, Planned System and Social System
The mixed economy of Japan is somewhat different from the European one. Social and informal systems play an important role, for examples, in providing ‘welfare’ services and managing firms. It may be called a mixed economy of three systems, namely, (1) the economic system (market system), (2) the political system (planned system) and (3) the social system (informal system) .
Life-time Income Maximizatien Hypothesis: Optimum Share of Wages
The share of wages and the ratio of dividends (the pay-out ratio of profit) in large companies in Japan have been low. These practices are not rational in the short term for either employees or share holders. However, they are likely to choose to maximize the present value of wages (including fringe benefits) and profits (including capital gains) not in the short-run but in the long-run. Equations (1) - (3) below present a simplified model to show that the modest share of wages is accepted as a result of the rational optimization behaviour of employees. In a large company the so-called ‘larger pie theory’ is more acceptable in Japan than in European countries. This is one of the reasons to explain why the share of wages in large Japanese companies, where lifetime employment is the practice, has been relatively low.
Theoretical Model
Assuming a two-period life-cycle model, the present value of employees' total compensation, including bonuses and fringe benefits, is:
W^*=n₁v₁Ω₁+{Ω₁v₁n₁+n₂ΔvΩ₂/(1+γ) (1)
Assuming further that the saving = investment depends solely on profits, which in turn depend on the share of wages, the increase of value added (ΔV) depends on:
ΔV=Δvn₂=s_pσ(1-Ω)v₁n₁ (2)
As we assume a simplified two-period model, the present value of lifetime compensation can be obtained by combining (1) and (2) .
W^*=Ω₁v₁n₁+ {Ω₁v₁n₂+Ω₂s_pv₁σn₁× (1-Ω₁) n₂} / (1+γ) (3)
Differentiating (3) with respect to Ω₁ assuming Ω₁=Ω₂, the optimum share of wages in the sense that maximizes the present value of employees' lifetime income is deduced as equation (4) .
Ω₁^*=1/2[1+1/σs_pn₂{(1+γ)+n₂/n₁}] (4)
We may conclude that the optimum share of wages depends mainly on the following variables. Functions are indicated as increasing (+) or decreasing (-) .
(1) n₂/ (n₁+n₂) ……the length of expected service period (-)
(2) γ: the time discount rate (+)
(3) s_p: the propensity to save profit (-)
(4) d: the pay-out ratio of profit (+)
(5) s_w: the saving ratio of employees (+)
(6) σ : the productivity of investment (-) and the rate of productivity increase (-)
W^*: the present value of lifetime income,
r : the time discount rate,
n₁: the length of the young period,
n₂: the length of middle and senior age period,
Ω: the share of wages including fringe benefits,
V: the value added per employee,
s_p=1-d: the savings ratio of profit,
d: the pay-out ratio of profit,
σ: the productivity of investment,
Ω^*: the optimum share of wages,
W=wn, V=vn
Subscript 1 denotes young age period and subscript 2 denotes middle and senior age period.