By 2026, the Japanese labor market will face a new reality. For the first time, the number of non-permanent workers is projected to exceed 40 percent of the total workforce. This change marks a new chapter in the history of Japanese employment. Over the past seven decades, the system of lifelong employment has served as the foundation underpinning not only economic stability but also the social stability of Japanese society. This system guaranteed that permanent employees, particularly male university graduates in large corporations, could work at the same company until retirement age. However, that guarantee is now increasingly eroding. This phenomenon is not merely a statistical shift. Behind the figures lie deeper issues. Japan’s younger generation faces career uncertainty unlike anything experienced by previous generations. Women continue to be marginalized into low-paid jobs with minimal protection. Meanwhile, the working-age population is shrinking at an alarming rate. This phenomenon raises the question: why is a system that has endured for decades beginning to change, and what are the implications for Japanese society?
Empirical data reveals a stark contradiction in the current Japanese labor market. On the one hand, the unemployment rate remains low, at just 2.6 percent in 2022 (OECD, 2022). This figure is far better than that of many other developed countries. On the other hand, however, the quality of jobs continues to decline. Non-permanent workers receive only around 60 percent of the hourly wage of regular workers (Jones et al., 2019). They also do not receive the same benefits, such as bonuses and severance pay, and have minimal job security. Young people are the group most affected. In 2003, the job separation rate, the proportion of workers leaving their jobs, for those aged 19 and under reached 42.2 percent. This figure rose sharply from 27.4 percent in 1991 (Ono, 2006). This trend has continued to the present day. Meanwhile, women account for two-thirds of all non-permanent workers, and the gender pay gap stands at 25 percent, the third-highest figure among OECD countries (Jones et al., 2019).
Amid these changes, Japan is also facing an increasingly severe demographic crisis. The working-age population (aged 15–64) has fallen by around 12.5 million people from its peak in 1995. International bodies project a further decline of nearly 15 million people by 2040 (Makoto, 2024). The combination of a shrinking working-age population and a swelling elderly population is placing immense pressure on the pension system and the social safety net.
This article argues that the transformation of the Japanese labor market is a consequence of external pressures from globalization and a demographic crisis that have forced institutional change. However, this change has not been uniform. Male core workers in competitive sectors such as the automotive industry still enjoy relative stability. Meanwhile, young people and women are increasingly being marginalized into precarious employment. In other words, a system that once guaranteed stability for the majority of workers is now only able to protect a small minority, at the expense of the rest. The urgency of this topic lies in its implications for Japan’s future. Labor market policy choices in 2026 will determine whether Japan can maintain social cohesion amidst demographic pressures or instead become increasingly trapped in structural inequalities that undermine the foundations of long-term growth. Moreover, Japan’s experience offers lessons for other advanced nations facing a similar dilemma: how to balance the demands of economic flexibility with the need for social protection.
Japan’s lifelong employment system developed after the Second World War in response to the need for a stable workforce amidst rapid industrialization and a shortage of skilled labor (Ono, 2007). There are three pillars underpinning this system: the simultaneous recruitment of new graduates, seniority-based pay, and mandatory retirement at the age of 60 (Jones et al., 2019). These three pillars complement one another. Companies are willing to invest in training because workers are expected to remain with the company until retirement. Workers are motivated to develop their skills because seniority guarantees pay raises. As a result, companies secure a skilled and loyal workforce, while workers gain the assurance of long-term livelihood security. The data supports this picture. Around 20 percent of Japanese workers remain with the same company for 30 years, with higher figures for specific groups: 55.2 percent for male university graduates in large firms and 65 percent for male workers in the public sector (Ono, 2006). Studies of the automotive industry confirm that this complementarity persists in sectors where Japan holds a competitive advantage. Automotive firms still rely on recruiting new graduates, and the majority of workers remain in their jobs until retirement age (Yamauchi, 2021). However, this system is beginning to show cracks as external pressures intensify.
The economic crisis of the 1990s marked a turning point. Field research at three major manufacturing firms revealed a consistent pattern. All three firms reduced their workforce by 25–50 percent without resorting to redundancies. Instead, they employed three strategies: a drastic reduction in the recruitment of new graduates, the transfer of workers to affiliated companies, and voluntary early retirement schemes. For example, Firm A recruited over 3,000 new graduates in 1990 but recruited only 62 to 482 people per year between 1994 and 1997. Firm C had an average of 8,500 workers on fixed-term transfer status each year, or more than 10 percent of its total workforce. Firm A offered a redundancy package in 1995 that attracted more than 4,000 workers (Kato, 2001). This strategy successfully avoided redundancies but had long-term consequences. The cessation of recruitment of new graduates disrupted the regeneration of the skilled workforce. The transfer of workers to affiliated companies created career uncertainty. The 1997–1998 banking crisis exacerbated the situation. Many small firms that had absorbed transferred workers also collapsed. Since 1993, small firms have no longer functioned as a ‘buffer’ for the labour market (Fujiki et al., 2001). Research on firm heterogeneity also indicates that only firms with high productivity are able to survive in the international market (Ayumu, n.d.).
Change has not unfolded in the same way across all sectors. There are three distinct patterns. Firstly, in competitive sectors such as the automotive industry, companies have retained traditional practices. Even foreign-owned companies such as D Co. and F Co. have adopted local practices. Second, in weak sectors such as finance and pharmaceuticals, the expansion of foreign firms is forcing the adoption of global practices, including job-based recruitment, specialized career paths, and individualistic compensation. Third, in protected sectors such as life insurance, change is proceeding much more slowly (Yamauchi, 2021). Amid these changes, Japan faces a demographic crisis. The labor force is projected to shrink by 24 percent by 2050 (Jones et al., 2019). The birth rate stood at just 1.15 children per woman in 2022, far below the 2.1 required to maintain the population (Makoto, 2024). The combination of the decline in lifelong employment and an aging population is putting pressure on the pension system. In 2016, pension insurance coverage was extended to part-time workers in large companies, but it remains far from adequate (Jones et al., 2019).
The concept of ‘discouraged workers,’ those who wish to work but have stopped looking, is important to understand. In 1999, when discouraged workers were included in the count, the unemployment rate reached 9–10.7 percent, far above the official figure of 5 percent. The proportion of young and elderly discouraged workers is rising, indicating that women’s traditional role as a ‘buffer’ in the labor market is beginning to fade (Fujiki et al., 2001). The poverty rate among the elderly stands at 20 percent, well above the OECD average (Jones et al., 2019). Around 40 percent of female part-time workers limit their working hours to stay below the tax threshold (Fujiki et al., 2001).
The burden of adjustment has been unevenly distributed. The retention rate for male core workers aged 30–44 with more than five years’ service has remained stable at around 80 percent. However, younger and middle-aged workers with short periods of service have experienced a significant decline. Women aged 35–39 with short tenure experienced the largest decline, falling from nearly 60 percent to 40 percent (Kato, 2001). The job separation rate for those aged 19 and under surged from 27.4 percent in 1991 to 42.2 percent in 2003 (Ono, 2006). Institutional factors exacerbate gender inequality. The spousal tax deduction system provides an incentive for wives to limit their earnings (Jones et al., 2019). The gender pay gap stands at 25 percent, the third-highest figure in the OECD (OECD, 2022). Women hold only 13 percent of managerial positions, the second-lowest figure in the OECD (Jones et al., 2019). Sixty-one percent of female workers are in non-permanent employment, compared to 21.9 percent of men (OECD, 2022). Young women face only two extreme choices: leaving permanent employment for family life and then returning as part-time workers, or maintaining their careers at the expense of marriage or children (Fujiki et al., 2001).
The year 2026 will be a turning point. Divergences between sectors will widen. The automotive sector will retain the core principle of lifelong employment, whilst the financial and pharmaceutical sectors will increasingly align with global practices (Yamauchi, 2021). Intergenerational inequality will worsen. The generation trapped in precarious employment will reach their 40s without adequate skills or pension savings. Female participation will rise, but without fundamental change, this increase will occur in precarious sectors (Jones et al., 2019). Pressure on the pension system will reach a critical point, forcing radical reform (Fujiki et al., 2001; Jones et al., 2019).
The transformation of the Japanese labor market is a consequence of external pressures from globalization and a demographic crisis that is eroding the institutional complementarity of the lifetime employment system. Three key findings can be drawn. First, the lifetime employment system does not stand alone. It is part of a network of complementary institutions, ranging from the recruitment of new graduates, internal training, seniority-based pay, and mandatory retirement. When external pressures force change, this entire network is disrupted. Second, the response to these pressures is not uniform. In sectors where Japan holds a competitive advantage, such as the automotive industry, companies have been able to maintain traditional practices and even export them abroad. In weaker sectors, such as finance, companies have been forced to adopt global practices. This demonstrates that globalization does not always lead to convergence towards a single model of capitalism. Thirdly, the social consequences of this transformation are not neutral. The protection of core male workers in large firms is achieved at the expense of younger generations and women, who are marginalized into precarious employment. Widening intergenerational and gender inequalities are the logical outcome of the way Japanese institutions have adapted to pressure.
Based on this analysis, six policy recommendations can be put forward for the Japanese government. First, abolish the spousal tax deduction system that encourages women to limit their working hours, and extend the coverage of pension and health insurance to all workers regardless of their contractual status. This would reduce the incentive to remain in the precarious employment sector. Second, develop training programs specifically designed for middle-aged workers who have lost their jobs and young workers trapped in precarious employment. Programs must be flexible, with short modules that can be accumulated into full qualifications, so that workers can undertake training whilst working. Thirdly, enforce the principle of equal pay for equal work, which was introduced in the 2018 labor reform package. The government must ensure that dispute resolution mechanisms are easily accessible to precarious workers and that there are sufficiently severe penalties for companies that violate the law. Fourthly, abolish companies’ right to set a mandatory retirement age, and gradually raise the retirement age above 65. However, this increase must be accompanied by guarantees that older workers have the opportunity to continue working under decent conditions, rather than being forced out with drastically reduced wages. Fifth, expand the coverage of unemployment insurance to include part-time and contract workers. Furthermore, create a system of pension rights portability between companies so that workers who change jobs do not lose their accumulated pension entitlements. Sixth, facilitate dialogue between trade unions, employers’ associations, and academics to formulate a ‘new deal’ on the balance between flexibility and security. Germany’s experience with the concept of flexicurity could serve as a reference, although it would need to be adapted to Japan’s institutional context.
The transformation of Japan’s labor market demonstrates that no system is permanent. The lifelong employment system, which succeeded during the era of high growth, faces existential challenges in the era of globalization and an aging population. Japan’s success in navigating this transition will be determined by its ability to balance the conflicting demands between the flexibility required by the global economy and the social protection that forms the foundation of political legitimacy. The key question is not whether the old system will survive because it has undergone irreversible transformation, but rather to what extent the emerging new system can deliver justice for all groups, not just a handful of core workers.
