Why Do Japanese Wages Not Rise? Decoding the 'Non-Regular Employment Trap' Through the Prisoner's Dilemma

The 'Prisoner's Dilemma' of Non-Regular Employment

The increase in non-regular employment is not merely the result of institutional reforms or labor market liberalization, but a phenomenon born from the intersection of deeper economic structures and the unique management culture of Japanese companies. Institutionally, the revision of the Worker Dispatch Act and the enactment of the Labor Contract Act in the late 1990s gave companies the flexibility to selectively use regular and non-regular employees. However, institutional changes alone do not directly lead to improvements in the productivity or capability development of non-regular workers. Here, game-theoretic elements and insights from labor economics provide important perspectives.
Considering the relationship between companies and non-regular workers as a prisoner's dilemma game reveals an interesting composition. To reduce short-term costs, companies do not provide non-regular employees with capability development or discretion, expecting them to serve only in auxiliary roles. On the other hand, non-regular employees, under limited compensation and unstable employment conditions, have no incentive to contribute in the long term.
In this situation, a strategy where both parties cooperate to pursue high productivity is unlikely to be established as a Nash equilibrium. Even if non-regular workers increase their efforts, companies only bear short-term costs, and since future rewards or improvements in treatment are not guaranteed, non-regular employees refrain from putting in effort. Companies also refrain from investing in training or expanding discretion, and as a result, an inefficient equilibrium for both parties is formed.

'Tit-for-Tat' for Pareto Improvement

Theoretically, this inefficient Nash equilibrium could be Pareto-improved through repeated game strategies such as 'Tit-for-Tat.' A cooperative equilibrium could be established where companies provide capability development and discretion in the initial stages, and non-regular employees respond by increasing their efforts, thereby raising the payoffs for both sides. However, this Tit-for-Tat strategy has not functioned in Japanese companies. The biggest reason is the short-term nature and fluidity of non-regular employment. Because contract periods are short and worker turnover is frequent, future returns are uncertain even if companies invest, and non-regular employees cannot sustain their efforts in a situation where they 'do not know what will happen in the next contract.' Furthermore, under Japanese management culture, non-regular employees were placed outside the organization both institutionally and culturally, and their participation in decision-making and job discretion was restricted, so the cooperative incentive chain through Tit-for-Tat hardly ever materialized.

The Consequences of a Dual Labor Market

From the perspective of labor economics, the decline in productivity of non-regular employment is closely related to the mechanisms of the internal labor market. Japanese companies have built internal labor markets centered on long-term employment, seniority-based wages, and in-house training, where regular employees are granted capability development and discretion based on long-term commitment, gradually increasing their productivity throughout their careers. On the other hand, non-regular employees, due to short contract periods and restrictions on promotions and training, cannot expect returns on investment, and there is almost no incentive for them to improve their skills or productivity.
As a result, companies expand non-regular employment to keep labor costs down, but the quality of the labor input becomes lower. In a dual structure of the labor market, since low-productivity sectors are being expanded, a paradox arises where the efficiency of the entire economy is impaired. This could be called a kind of fallacy of composition.
Furthermore, factors unique to Japanese management culture have also promoted this phenomenon. In Japanese companies where long-term employment and collectivism are rooted, non-regular workers are often placed outside the organizational culture, and restrictions on participation in decision-making and job discretion dampen motivation for creative contributions. Even if the system becomes more flexible, the implicit order that 'regular employees are the protagonists' is maintained, and education, evaluation, and compensation systems for non-regular employees have remained limited. For this reason, mutual trust and the effects of repetition, which are prerequisites for the Tit-for-Tat strategy, were not established, and the inefficient equilibrium remained fixed.

Ultimately, Returning to Labor Systems is the Path to Pareto Improvement

So, how can we institutionalize the Tit-for-Tat strategy that Pareto-improves the inefficient Nash equilibrium as a labor system? One method is to introduce a mechanism that guarantees a certain level of long-term contracts and investment in capability development for non-regular employees as well. For example, reflecting work proficiency and capability improvement in contract renewals and salary increases would clarify the return on initial investment.
Also, by institutionally guaranteeing partial participation in job discretion and decision-making, the motivation for non-regular employees to put in effort is internalized. The fruits of both parties' efforts and cooperation would be retained between the parties involved, ensuring Pareto improvement.
This would ensure that if a company neglects initial investment, non-regular employees can also secure a structure of 'Tit-for-Tat' in the form of sabotage or exit.

Overall, the problems of the expansion of non-regular employment and low productivity can be explained by the complex interaction of institutional acceptance, game-theoretic mutual distrust, the incentive structure of the internal labor market, and Japanese management culture.
To improve this, it is essential to incorporate the principles of the Tit-for-Tat strategy into institutional design and internalize the incentives for cooperation for both companies and workers. As you can see from this examination, ultimately, returning short-term contract labor to substantial long-term contract labor is the conclusion of economic and game-theoretic analysis.