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Japanese labor markets provide a stark illustration of how varied labor practices can be in other industrialized nations, as well as some dangers in attempting to enhance employment stability.
Since the 1950s,Japan's labor markets have been characterized by several distinctive features. Perhaps the most notable among them is "lifetime employment," the practice at large firms of hiring workers directly out of school and retaining them until a mandatory retirement age (originally age 55, now around 60 for most companies). The lifetime guarantee is implicit, with no written contracts, but real nevertheless and estimated to cover about a third of all workers. Rather than hiring midcareer managers or blue-collar workers from the outside, firms promote exclusively from within.
A related feature of Japan's labor markets is steep seniority-based pay. As part of the incentive for employees to remain with the firm under a lifetime employment guarantee, wages follow a steep seniority profile. In addition, corporate pensions are not portable.
To absorb those workers not fortunate enough to enter large corporations practicing lifetime employment, Japan's government protected several sectors of the economy (including agriculture, retailing, and construction) from large firms and international competition. These protected sectors, with their characteristically small labor-intensive firms and flexible wages, readily absorbed workers.
A final distinctive characteristic of Japan's labor market is weak company unions. Efforts to create American-style craft unions in Japan shortly after World...