Business and Household Behavior under Deflationary Economy

Section 2

Businesses operating under low-growth economy and a long-term deflation experience more pressure in terms of labour cost reductions and sense of employment surpluses. Although the substitution of ordinary workers with part-time workers is limited, there is a trend to reduce the numbers of regular employees and increase the use of part-time workers. More establishments are pursuing strict employment adjustments such as requesting voluntary retirement as well as dismissal, resulting in the increase of the involuntary unemployment, mainly from the middle and older age groups. Severe wage adjustments including lowering the wages for ordinary workers have been implemented.
Employment adjustment by individual companies is sometimes inevitable for managerial reasons. Workforce reduction, however, involves negative aspects for business activity such as depressed willingness to work, outflow of excellent human resources and reduced opportunities for human resources development. Employment adjustment and deflation may also hold back consumption.

Business Behavior under Deflation
Recently, the number of regular employees are decreasing and non-regular employees continuing to increase. The major reasons of these trends include: (1) reducing labour costs in order to reducing sale prices; (2) strengthened uncertainty reflecting declining expectations of firms for growth rate (Figure 17), and (3) a feeling of higher personnel cost due to increasing share of elderly and highly educated employees under low nominal growth rate, as well as the prolonged low economic growth and severe business situations of firms.
Labour share has remained high since the 1990s. Among the factors of the labour share, the per capita nominal labour cost made negative contribution but the product price factor remained a positive contributor. These trends indicates that firms are pursuing cost reductions, including lowering of labour costs, but the labour share remains high due to lowered product prices and the drop in amount of sales under a deflation (Figure 18).

Recent Employment Adjustment
The employment adjustment measures, during the current period of recession have been mainly overtime restrictions, personnel re-assignment and transfer to related companies. The number of establishments that have implemented severe employment adjustment, such as requesting voluntary retirement and dismissal, is at a low level but increasing, resulting in increased numbers of the non-voluntary unemployed, mainly among middle aged and the elderly. Substitution of ordinary workers with part-time workers is limited, and the remarkable decrease in ordinary workers is considered to be the result of establishments reducing all workers including part-timers.
The share of establishments that have reduced their labour costs, including wages, is also high, suggesting that wage restriction is used as a way of reducing labour costs. Total cash earnings and real wages declined between 1998 and 2002 (Figure 19). Full-time workers especially faced a severe situation in 2002 due to reduced pay increases and a remarkable reduction in special allowances such as bonuses.

Effects of Employment Adjustment
The effects of workforce reduction include not only positive aspects such as reduced costs and improved business management efficiency, but also negative aspects such as lowered employee morale, an outflow of excellent human resources and reduced opportunities for human resources development. Workforce reduction leading to lowered morale of employees is highly likely to adversely affect productivity (Table 20).
Furthermore, workforce reduction may lead the decline of people in employment, which would constrain consumer spending due to reduced employee income and consumer uncertainty about the future. Reduced disposable income contributes to reduced consumption, and employment uncertainty and reduced income will adversely affect consumer attitude, thus affecting behavior of the household. Reduced householder income may have encouraged spouses to work, increasing the part-time employment rate among them.
While the deflation may lead to expanded consumption arising from increased real purchasing power, it may also constrain consumption due to a reduced income, uncertainty of future income and an expectation for further price declines. More households who feel a decline in prices tend to spend less, indicating that deflation has depressed consumption (Figure 21).

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