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  4. Why Can’t Companies Increase Labor Costs?

2017 Vol.1
Why Can’t Companies Increase Labor Costs?

2017/02/15

Despite recent improvements in companies’ profits and increased demand for labor, wages are slow to rise. This is partly because companies have not shifted away from their adherence to labor cost control, which was established during the long period of economic stagnation that started in the 1990s. For small enterprises facing serious labor shortages, raising wages is an urgent issue. However, there is a limit to labor cost increases because of the low profitability of their core business and insufficient increases in revenue (i.e., the source of wage payments). Also, even with profits finally bouncing back, small enterprises tend to increase their cash reserves in preparation for a potential sudden decline in business, given their past struggles to finance their operations. Large companies, on the other hand, are seeing significant increases in profit but are not certain about growth in the face of tremendous uncertainty about the future. They therefore increase their retained profits and cannot actively increase workers’ pay. In addition, as large companies increase their emphasis on shareholders, they increasingly allocate more of their profits to dividend payments. Even for large companies, increases in value added are essential to allow for increases in labor cost. To increase value added, companies must autonomously grow through effective investments. Since the 2000s, corporate investments have been restrained. Because of the lack of investments in equipment and human capital, which are necessary for growth, companies are now caught in a trap of their own making. Now that the labor market is going through a structural transformation, it is crucial to reexamine the importance of avoiding overemphasis on shareholders and allocating an appropriate portion of profits to employees. The domestic economy is difficult to keep expanding. Therefore, companies should treat labor compensation as an investment for growth, not as a mere cost factor.

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