Revisiting The Problems of Overcapacity and Overemployment: What Was the Essential Problem?

No.74
April 2000
Research Fellow Hidetaka Yoneyama

1. Since 1999, arguments concerning overcapacity and overemployment have accumulated steadily, and the assertion that Japan's economy cannot recover without the elimination of these two issues has become dominant. Concerning the elimination of overcapacity, under the Industrial Revitalization Law there is a provision in the tax system for preferential treatment in the case of scrapping equipment. However, in the present argument, the cause of this overcapacity (i.e. whether it is structural or a result of economic revival), problems with capital stock statistics, and other issues have not been sufficiently scrutinized, and consequently there is a chance that the argument has been misread.
2. First, though there are some statistical problems, it is generally agreed that Japan's capital coefficient (gross capital coefficient) is high compared to that of the U.S. and other countries. However, the problem with gross base is that the price of capital stock has not been appraised correctly. If the net capital coefficient-which more accurately judges capital stock price-is examined, the gap between Japan and the U.S. disappears almost entirely. Indeed, the present perception of bloated overcapacity in the economy as a whole is not necessarily correct. Furthermore, even for those sectors of industry in which there is overcapacity, cases in which this overcapacity is in fact a temporary side effect of economic recovery are not uncommon.
3. Even within those industries that suffer from structural overcapacity, examples in which the preferential treatment for scrapping equipment (as stipulated in the tax system) is utilized are practically nonexistent, and it is clear that the Industrial Revitalization Law has strayed from the goals of its inception. Preferential treatment in the tax system was never designed for anything other than accelerating the elimination of excessive supply and demand potential within the framework of one specific company. In the present industrial sectors that are grappling with excessive supply and demand capacity, the elimination of such excesses in only one company is no longer sufficient. Rather, it is important that multiple companies-indeed, the entire business world-follow the path of integrating and aggregating production and eliminating excessive supply and demand capacity.
4. At the same time, problems with overemployment are clearly expressed by the consistently high level of the labor distribution rate. However, in order to lower this rate, it is necessary to spur the reevaluation of the value of labor. In addition to excessive personnel, one major factor of overemployment lies in paying wages that are higher than labor productivity. As a result of the introduction of the annual salary system, some forms of wage adjustment according to job description (including lowering wages) are advancing, but where these adjustments will lead is dependent upon the market value-based wage system. Furthermore, if the liquidity of employment continues to progress, the reevaluation of labor costs may also occur as the result of transfers (e.g. changing jobs and transfers to other companies resulting from corporate purchasing). By promoting the reevaluation of the cost of labor both inside and outside of companies, it would be possible to eliminate overemployment for the economy as a whole.

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