Japan Faces Severe Labor Shortage

According to a survey by Japan’s Ministry of Internal Affairs and Communications, the number of people over 15 who are "unemployed and not actively seeking work but still hope to find a job" dropped to 2.33 million in 2023—2.97 million fewer than 20 years ago.

Along with 1.78 million unemployed individuals actively looking for work, Japan has a total of 4.11 million potential workers, accounting for 3.7% of the population over 15. However, this rate is only half of the 8% recorded in 2003.

Japan’s labor shortage is most evident in hourly wages. According to the Japan Institute for Labour Policy and Training, in Q4 2023, hourly wages for part-time workers increased by 3.8% compared to the same period the previous year—the largest increase since 2015, excluding the COVID-19 pandemic period, and significantly higher than the 1% increase for full-time workers.

According to Japan’s National Institute of Population and Social Security Research, the country’s working-age population (ages 15-64) in 2023 had declined by 15% compared to its peak in 1995. Meanwhile, the "M-shaped curve"—which reflects the employment decline among women in their 30s due to marriage and childbirth—has almost flattened in Japan.

“The ability to offset labor shortages through the return of women and elderly individuals (beyond working age) has nearly reached its peak,” said Munehisa Tamura of the Daiwa Institute of Research.

Nobel laureate economist Arthur Lewis introduced the concept of a "turning point," where surplus rural labor is fully absorbed into the industrial sector, leading to wage pressures. Economists believe Japan reached this "turning point" in the 1960s. Now, the country is facing a similar situation, but instead of rural workers, the remaining labor surplus consists of women and elderly workers.

As a result, businesses must change their strategies. In past decades of weak growth, low near-zero interest rates and increased workforce participation by women and the elderly helped keep operating costs low, allowing even unprofitable businesses to survive. However, with the Bank of Japan (BOJ) ending its negative interest rate policy last month, pressure on these businesses is mounting. If part-time wages continue to rise, many underperforming companies may be forced to shut down.

Analysts suggest that increased labor productivity, job mobility, and foreign labor participation could help businesses address these challenges.

Mitsubishi UFJ Research and Consulting estimates that by 2035, Japan will face a labor shortage of nearly 8 million workers compared to the number needed to achieve a potential GDP growth rate of 0.5% per year. The firm estimates that if labor productivity increases by just one percentage point annually, it could offset 70% of the labor shortfall. This would require labor productivity to rise by about 20% compared to 2021. The issue could be mitigated through artificial intelligence (AI) and other tools to improve business efficiency, freeing up workers for research, development, and other high-value tasks.

In reality, many businesses and organizations have already started moving in this direction. In early April, the city of Osaka began a pilot program allowing around 20,000 workers to use generative AI for tasks such as translation and meeting note preparation.

“We want them to focus on more human-centered, value-added work,” an Osaka city official stated.