How to Encourage Human Resource Mobility

The Kishida administration’s “three-pronged set of labor market reforms” has kicked off. The package comprises policies to support reskilling to improve capabilities, to introduce a job-centric* salary structure flexible to the situation of each employer, and to facilitate labor mobility toward growth businesses. The goal is to free up Japan’s rigid labor market and stimulate the movement of human resources within and between organizations toward growth industries, thus encouraging wage increases and ultimately economic growth.

We propose the FLAP Cycle^†—comprising Find, Learn, Act, and Perform—as a framework to enliven the labor market. The government’s latest reform guidelines contain specific actions for Learn, Act, and Perform that complement one another.

However, the guidelines fail to sufficiently address the Find phase, FLAP’s starting point. Specifically, Find measures must take into account how generative AI will likely expedite changes in industry structure and human resource requirements. Companies must also update how they communicate to job seekers as they set their sights on different types of candidates.

When industries transform, so do their human resource requirements. We updated our long-term labor supply and demand forecasts based on digital technology scenarios through 2035. We take into account business transformation using digital technologies (digital transformation, DX), transition to decarbonization (green transformation, GX), revitalization of the semiconductor industry, which is crucial to economic security, and the impact of generative AI on employment.

That said, all scenarios contain an element of uncertainty, and forecasts should always be viewed as one example of assumptions for the future.

We calculated totals for labor supply and demand through 2035 by main factors (Figure 1). There are three points to note here.

First, industrial structure transformation will generate new labor demand of equivalent quantity as the employment that is lost. As shown in Figure 1, the digital transformation, the green transformation, and revitalization of the semiconductor industry will add demand for 4.7 million, 2.7 million, and 0.2 million workers each. However, the gap between labor supply and demand will be approximately 1.9 million, because labor supply will be reduced by population decline.

Second, the skills mismatch will pose a greater problem than the labor shortage. A large number of professional technical jobs will be created, mainly in IT. Meanwhile, most reduction will occur in clerical service and sales jobs. We calculated that the skills-to-jobs mismatch will give rise to a shortage of 4.8 million workers, far greater than the labor shortage of 1.9 million workers.

This means that if we are to harness digital technologies and achieve carbon neutrality, we must somehow fill a labor shortage of 6.7 million workers in a few decades. A mismatch of this size can only be rectified by large-scale reskilling and encouraging labor mobility within and between companies.

Third, the mismatch also arises in units of tasks and skills rather than people or jobs. Based on the above calculations, digital transformation, including greater use of generative AI, will reduce labor demand by around 9.7 million workers, roughly 15% of our forecast for employed persons in 2035.

The key point here is that advancing digital technologies will not simply replace the 9.7 million jobs lost; they will replace a portion of the tasks that a given job comprises. Naturally, a certain task may be included in many different jobs. We must also be aware that generative AI, like ChatGPT, may take over from humans some non-routine tasks* previously thought beyond the realm of machines.

Japan will face an increasingly constrained labor supply and should regard task replacement by generative AI and other technologies as a big opportunity to improve productivity, not a threat. We must determine in all occupations which human tasks can be taken over by machines, identify which human skills enable us to utilize AI to its fullest power, and refine those skills.

One example is the skill of asking ChatGPT appropriate questions, making proper decisions based on the information thus obtained, and bringing team members on board to put decisions into action. Companies and governments must clearly delineate skills like these and encourage the workforce to master them.

These three points hint at imminent transformation to the structure of our industries depending on how we deal with economic security and transformations both digital and green. This will set into motion human resource movement beyond individual companies and redefine the skills in demand across a broad range of occupations. It is essential that the government is aware of these shifts while advancing its three-pronged set of labor market reforms.

Government guidelines repeatedly stress the need to disclose information to the labor and capital markets. For example, they demand the use of open badge measures, or the digital authentication and display of credentials, a common standard across the world.

Guidelines also state that disclosure regarding salary and employment schemes is essential for the adoption of a job-centric model—one where salary is determined by output instead of work hours. It calls for the sharing of job-posting information and required skills too to encourage labor mobility. Japan’s labor market lacks both mobility and such sufficient information for it. However, the guidelines fail to clarify who—be it corporations, workers, or educational institutions—should disclose what information and in what way.

In the context of changing industry structure and in-demand skills, information circulated in the labor market must be expressed in a common language that transcends a particular company, business, or industry. It is essential for work experience and job descriptions to be stated using the same standards. It is also desirable that the shared information be part of a structure whereby the minimum unit of human resource requirements is based on skills.

It is also important that government guidelines are based on the adoption of job-centric HR systems. Clarifying job definitions and adopting compensation based on job content are essential for Japanese companies to move away from the traditional seniority-based HR system and achieve equal pay for equal work.

Even in Europe and North America, which have a long history of job-centric employment structures, organizations with uniform job definitions are facing challenges in overcoming this unpredictable age of volatility, uncertainty, complexity, and ambiguity (VUCA). Some forward-thinking companies are beginning to experiment with using skills as the basis for hiring, training, assignments, and career development*.

Japanese companies adopting such job-based HR systems must assess the diverse skills of human resources and be able to define jobs and roles in terms of skill sets.

We propose two courses of action for the disclosure that will underpin Japan’s shift to job-centric employment (Figure 2).

First, companies must communicate, through dialogue with workers, their values, purpose, and the strategies to achieve them. This is essential for workers to draw a connection between their given job and the larger direction of their company.

Second, having visualized workers’ diverse skills, they must define jobs by the skills that are needed to perform them and explore HR measures focused on those skills.

Japanese companies, mainly large ones, began disclosing information about their own human resources to capital markets in the fiscal year ended March 2023. The goal is to take human capital management, or increasing corporate value by investing in people, into the mainstream. Going forward, however, they must also disclose information to the labor market.

Disclosure to the labor market will provide a way for companies to deliver information and engage in dialogue for the purpose of acquiring and training human resources as well as leading to a transformation in labor practices. Companies must discuss their values and strategies in a common language to gain the understanding and support of workers inside and outside the company. This will enable companies to attract human resources who are essential to their business strategies.