In the age of AI, how should the way we work change?

Excerpt from *The Demise of White-Collar Workers*

Prologue: The Labor Shortage Crisis Strikes Again

The Reality of Labor Shortage That Emerged Nearly 10 Years Ago

Around 10 years ago (June 2014), in my book *Why Japan's Economic Recovery Depends on Local Economies — G and L Economic Development Strategy*, I already warned of the increasingly severe local labor shortage problem in Japan. In fact, the "labor shortage" in local industries began to become prominent around 2010, which is not only reflected in statistical data, but also a common feeling of frontline practitioners across all industries in prefectures, cities and the Tokyo metropolitan area.

At that time, although the second Abe Cabinet recognized the severity of this problem, listed "Local Revitalization" as a core policy agenda and invested huge subsidies, it still failed to achieve the expected results. The root cause of this systematic problem is that neither enterprises as economic entities nor universities tasked with talent cultivation have completed structural transformation.

The Approaching Labor Shortage Society and the White-Collar Surplus Crisis

In March 2023, the Recruit Works Institute released a report titled *Future Forecast 2040: A Labor Shortage Society Is Coming*, whose astonishing data shows that by 2040, Japan will face a labor gap of 11 million people.

From 2020 to 2040, the working-age population will decrease by 14.28 million. This severe labor shortage and the continuously slightly increasing labor demand will expand the supply-demand gap to about 11 million people.

Furuya Seito, a researcher at the institute, warned in his book *The Shock of the "11 Million Labor Shortage"*: "Japanese society may no longer be able to maintain the labor supply necessary for basic people's livelihood." Although the statistical chart of the Recruit Works Institute shows that as of 2022, Japan's national labor market still appears to be in equilibrium on the surface, this is due to the Tokyo metropolitan area continuously absorbing young people to maintain the balance of the national labor market.

Just as I warned in 2013, Japan's local economic circles have begun to experience insufficient labor supply.

Now the problem is more severe than it was 10 years ago. As mentioned in Chapter 2 of this book, multiple negative effects caused by labor shortage are emerging. If the Japanese government continues to do nothing, Japan will fall into an extremely severe dilemma in the next 5 to 10 years, long before 2040. It is worth noting that during the 10 years of deepening labor shortage crisis, new contradictions have quietly emerged.

According to the calculation of Mitsubishi Research Institute, by 2035, the number of jobs in Japan's labor supply market will decrease by about 4.8 million. The main reasons are the automation and efficiency improvement brought by digital transformation, as well as the application of generative AI (Artificial Intelligence) to replace simple and repetitive manual operations. The impact of job reduction will spread to people engaged in sales and service work in the local economy. However, from another perspective, the above impact will help solve the problem of insufficient labor supply pointed out earlier.

The ones that will really suffer severe impact are the white-collar class in the globalized economy. They will most likely lose their jobs and fall into the dilemma of nowhere to find employment.

The same calculation by Mitsubishi Research Institute shows that by 2035, there will be a surplus of 1.8 million white-collar workers (clerical staff) in Japan. In fact, this trend has already begun and is accelerating. In the future, the jobs of most white-collar workers (business people working in urban office buildings facing computers) in the global economic circle may no longer be necessary.

Therefore, if enterprises participating in global competition continue to retain redundant staff, they will face a heavy burden of labor costs. Alternatively, delaying the advancement of digital transformation in order to retain redundant staff will also lead to a decline in the global competitiveness of enterprises and a bottleneck in profitability.

In this way, Japan will retreat steadily in the fierce competition of the globalized economy, and its national strength will continue to decline.

In the future, Japanese companies will probably no longer be able to keep redundant staff as they did in the past. In fact, even when the economy is not in recession, some leading enterprises are continuing to lay off middle-aged and elderly employees over 40 years old.

Despite the increasingly severe labor shortage, the wage growth curve in the local economy remains flat and almost stagnant, and people will probably find it difficult to withstand the pressure of sharp price increases.

If this trend continues, Japan's social economy is likely to fall into an "inflationary recession" caused by high prices leading to stagnant consumption, that is, stagflation. For residents in local economic circles that account for 70% to 80% of Japan's total economic output, they will face an irreversible situation of continuous decline in living standards.

The Only Way Out Is to Significantly Increase Value-Added Labor Productivity

Traditionally, labor productivity and wage levels in the global economic circle are much higher than those in the local economic circle. Rough estimates of the average gap between the two show that the former is about twice that of the latter — which is also directly reflected in the salary difference between regular white-collar employees and frontline non-regular workers. According to the analysis of Professor Hoshi Takeo of the University of Tokyo, the biggest reason for the stagnation of wage growth in Japan during the "Lost Three Decades" is the structural transformation of the labor market, that is, the shift from full-time regular employees to part-time non-regular employees who only need to be paid half the hourly wage.

If we take the productivity gap as a given fact and formulate relevant policies accordingly, in order to increase national income, the government will tend to promote the further expansion of the scale of the global economic circle and the increase in the number of regular white-collar employees, the so-called "middle class revival theory".

In fact, the Japanese government has been implementing various policies for this purpose for many years, but as I pointed out in my book *Why Japan's Economic Recovery Depends on Local Economies — G and L Economic Development Strategy*, the transfer of labor to local areas is structurally inevitable, and the "middle class revival theory" has not achieved remarkable results. In fact, the pressure of employment shifting to local areas has continued to increase since then. In addition, as will be discussed in detail later, the traditional white-collar model, the main force of the global economic circle, is in decline.

In this case, if we continue to blindly adhere to the original economic structure and way of thinking, and cling to the illusory middle-class development model, the wage level of workers in reality will continue to stagnate, social operation will be barely maintained, the trend of population reduction will be difficult to curb, and the overall national strength will continue to decline. As an island country with scarce resources, Japan's crisis of sustainable development of people's livelihood will gradually intensify. The stagflation situation that is now emerging is the external manifestation of such structural problems.

So how should Japan respond?

On the whole, Japan is faced with the dilemma of insufficient labor supply. However, if we break it down, it presents a bipolar pattern: surplus labor in the global economic circle and insufficient labor in the local economic circle. To resolve this structurally unbalanced polarization and achieve economic growth and rising real wages under the premise of insufficient labor supply, the only way out is to improve value-added labor productivity, especially to continuously improve the productivity of local economic circles where the proportion of employment continues to expand. According to the 2022 international comparison data denominated in US dollars, Japan's labor productivity per unit of time is 52.3 US dollars per hour, ranking 30th among the 38 member states of the Organization for Economic Co-operation and Development (OECD), which is only about one third of Ireland, the top country. Although this nominal value is affected by the exchange rate, the average exchange rate in 2022 was about 130 yen to 1 US dollar, which is neither high nor low. Therefore, the fact that Japan's labor productivity per unit of time is at a low level cannot be denied. We must aim at the top level and make every effort to improve labor productivity per unit of time.

Value-added labor productivity can be calculated by the following formula:

Value-added labor productivity = Total value added / Total labor hours

It can be seen from the formula that to improve value-added labor productivity, either increase the total value added as the numerator (increase sales or reduce external purchase costs), or reduce the total labor hours as the denominator.

The "Lost Three Decades": The Price Japan Paid for Prioritizing Employment

Japan's per capita GDP (Gross Domestic Product) once ranked among the top in the world. Why has its labor productivity declined to this point?

The shortcut to improve value-added labor productivity is to actively promote digital transformation.

Digital transformation can replace the traditional management processes of enterprises, which can not only reduce total labor hours, but also reduce some external costs.

However, the process of digital transformation of Japanese enterprises is very slow.

While there are certainly reasons such as insufficient management capabilities, enterprises generally have excess personnel. If digital transformation is vigorously promoted, the problem of excess personnel may become more serious. Whether managers are aware of this or not, this fact makes enterprises hesitate to move forward on digital transformation. In this sense, managers still lack the courage and determination to overcome this problem. After all, there are enterprises like Hitachi that have successfully solved this problem.

Another reason is the deep-seated structural problem that has long existed in Japanese society. Since the bursting of the bubble economy in the early 1990s, during the stagnation period of the "Lost Three Decades", labor surplus has been widespread in Japanese society. Especially in the first 20 years of the 21st century, Japan obviously had a labor surplus problem.

The root cause behind this is that Japan was in the "double population peak" period at that time. The approximately 8.06 million "Baby Boomer Generation" born between 1947 and 1949 were moving from middle age to retirement age during these 20 years. In addition, the "Baby Boomer Junior Generation" born between 1971 and 1974 reached working age in the late 1980s. Therefore, during this period, these two peak population generations were concentrated in the working-age population.

Japanese society had to absorb this "double population peak", but after the bubble economy burst, the economic growth rate dropped sharply, and the problem of labor surplus became more and more prominent. At the same time, Japanese enterprises participating in global competition failed to keep up with the rapid transformation of the world's industrial structure, and struggled under the double blow of globalization and digitalization, so they had to maintain operation through layoffs.

Led by multinational corporations, Japanese companies have laid off workers one after another, and at the same time drastically reduced the scale of recruitment to ease the pressure of excess personnel. Local industries have become a buffer to absorb unemployed people, and a large amount of labor has flowed to non-regular positions in local industries or entered small and medium-sized enterprises in local areas.

At that time, most of the troubled global enterprises tried to survive in global competition through their familiar cost reduction strategies. If enterprises laid off workers on a large scale and moved production bases to overseas regions with lower labor costs, the unemployment problem would become more serious. Therefore, in order to protect existing regular employees, enterprises could only adjust gradually while controlling the number of new recruits and wage levels. In other words, enterprises chose a low value-added labor productivity strategy of barely maintaining business through low-price strategies and continuing to operate in a state of excess personnel. Most Japanese enterprises participating in global competition adopted the strategy of suspending wage increases and prioritizing the maintenance of a stable employment scale.

Labor and management reached a consensus to prioritize protecting employment rather than raising wages. This is the real reason why the wages of domestic workers in Japan have stagnated for a long time during the "Lost Three Decades".

The Era of "Stagnant Stability" Brought by Deflationary Stability

At the same time, the situation of local industries, which served as employment buffers, is also different. Non-regular employment and small and medium-sized enterprises are facing the same dilemma: improving value-added labor productivity will weaken their ability to absorb employment. Therefore, small and medium-sized enterprises in local industries have accepted low labor productivity for the overall harmony of society. The government has also extended the life of inefficient enterprises in various ways and provided support for them.

People accept low-wage jobs and choose to barely keep their jobs by lowering the prices of products and services, rather than pursuing profits. If the prices of products and services are lowered, the total value added will decrease unless external purchase costs are actively cut. Enterprises accept the decline in total value added without carrying out digital transformation. They should have reduced total labor hours, but if they do not lay off employees, they can only cut wages. However, enterprises adopt direct wage cuts, or achieve wage cuts through means such as non-regular employment, extending working hours, and suppressing wages per unit of time. As a result, all kinds of unscrupulous business models are rampant.

In this way, the value-added labor productivity of both the global economic circle and the local economic circle has declined, so the stagnation of wages (value-added labor productivity × labor income share) has led to weak consumption, which in turn has caused the prices of products and services to fall, thus falling into a vicious circle. This is a typical deflationary cycle. During the "Lost Three Decades", Japanese society continued the stability under the operation and social model based on lifetime employment and seniority-based wage system in the Showa era by tolerating this vicious circle, or more accurately, by maintaining the status quo of low growth.

However, this also brought corresponding returns: although wages decreased, prices also fell, so the society as a whole did not fall into extreme poverty. Of course, the relative poverty problem is gradually intensifying, but even in a social environment where wage growth has been stagnant for a long time and the economy continues to be sluggish, basic social security and stability can still be maintained. The society has not fallen into a dilapidated situation of moral collapse, expanding slums and rampant street violence. In fact, violent crimes in Japan have decreased, and foreign tourists often exclaim "how safe Japan is, you can walk easily on the street". This is exactly the result that Japanese society chose "stagnation for stability" and exchanged 30 years of economic stagnation for. In the case that income and tax revenue cannot grow, and the fertility rate declines and the population ages intensifies, the government's desire to maintain the economic stability of ordinary families will inevitably lead to fiscal deterioration. The current extremely severe fiscal situation is also the price of choosing "stagnant stability".

If Japanese society had chosen to promote economic growth in order to avoid the economic stagnation of the "Lost Three Decades", it would have to promote the metabolism of industries, enterprises, business formats and talents in a more drastic and active way. This will certainly generate various frictions, and many people will find it difficult to adapt to drastic changes and transformations. Even if these changes are only temporary, they may become unemployed, be forced to re-plan their careers, or sink to the bottom because they cannot adapt to the development of the times. Therefore, Japanese society chose to sacrifice economic growth in order to avoid these problems.

From April 2001 to September 2006, during the administration of Junichiro Koizumi, Japan's economy had an opportunity to shift from the stagnation mode to the growth mode. As the practical person in charge of the Industrial Revitalization Corporation of Japan, I myself also promoted this process. But Japanese society seemed to instinctively realize that it could not bear this transformation, and criticisms of "excessive reform" emerged one after another. Therefore, the economy returned to the stagnation mode. Japan implements a democratic system, and the choices made by the people can only be borne by all the people in the end.

In addition, successive shocks such as the 2008 financial crisis, the 2011 Great East Japan Earthquake, and the COVID-19 epidemic that began in 2020 have continued, and the "stability first" model has continued in Japan. The Japanese people must realize that the social environment is difficult to promote the improvement of dynamic value-added labor productivity, which is the deep-seated reason behind Japan's "Lost Three Decades".

The Possibility of Shifting from "Deflationary Stability" to "Inflationary Equilibrium"

Now, Japanese society must get rid of the "deflationary stability" model that it has chosen for a long time before.

One of the reasons is the effect of "Abenomics". The long-term loose monetary policy has weakened the yen, and the inflationary pressure brought by the depreciation of the yen has continued to increase. In addition, the unstable world situation has pushed up energy costs, and the pressure of imported inflation from outside is also intensifying. If there had not been the impact of the COVID-19 epidemic, Japan would most likely have entered the inflation stage around 2020.

Another reason is the "labor shortage" problem mentioned at the beginning of this book. Insufficient labor will push up wages through market pressure, completely eliminating the basic conditions for wage deflation. Rising wages will break the aforementioned vicious cycle of deflation, making deflationary stability lose its equilibrium state.

As mentioned earlier, this labor shortage has developed sharply in the first half of the 2010s. At the same time, when the book *Why Japan's Economic Recovery Depends on Local Economies — G and L Economic Development Strategy* was published, the growth of non-regular