Strategies for Securing and Retaining Talent Amidst Labor Shortages💖 Decoding the Essence of the Efficiency Wage Hypothesis in Structural Labor Market Changes💴: 2026 White Paper on Small and Medium Enterprises No. 18

A lecture series carefully
decoding the 2026 White Paper on Small and Medium Enterprises📙
The theme this time is
“Securing and Retaining Talent”in small and medium enterprises😉

Last time, we explained the reality that
small and medium enterprises are trying to increase
Total Factor Productivity (TFP) by utilizing
asset-light cloud services (SaaS)!
However, no matter how much digitalization progresses,
there is no sustainable growth for a company
without securing and retaining the "people" who operate it.

Looking at the data, the changes in what job seekers
expect from small and medium enterprises and the
concrete approaches to increase retention rates are clearly shown.
This time, too, let's learn more deeply together
while strongly linking it to other exam subjects🔥

The Rise of "Interest in Job Content" as a Reason for Joining Small and Medium Enterprises

First, let's check together the
“Reasons for joining small and medium enterprises” (Figure 1),
which shows why job seekers
are choosing small and medium enterprises💛
Long-term trends are shown by the size of the previous company
(from large enterprises, or from small and medium enterprises).

✅① Significant increase in interest in job content
Looking at the reasons for those who changed jobs from large enterprises to small and medium enterprises,
the response "Interest in job content," which was 20.8% in 2014,
increased significantly to 34.5% in 2023,
accounting for the highest share.
It is worth noting that it is also at a similarly high level
for job changes from small and medium enterprises to small and medium enterprises (27.9%)!

✅② Changes in individual career consciousness
Beyond just conditions like the former "good working conditions"
or "high income,"
it is clear that there is a relative increase in job seekers
who choose small and medium enterprises by prioritizing
the quality of their career and sense of fulfillment,
such as "Is it a job where I can use my abilities and personality?"or "Can I have an interest in the work itself?"📈

The Reality of Improving Retention Rates Brought About by Personnel Evaluation Systems and Wage Levels

Next, let's turn our attention to "Initiatives and Results for Improving Retention Rates"
(Figures 2 and 3 below) on how to retain the talent
that has joined the company📝

✅① Turnover risk divided by the presence or absence of a personnel evaluation system
Looking at the talent retention status by the presence or absence of a personnel evaluation system in Figure 2,
the percentage of companies that answered that the retention rate is "70% or more"
does not seem to have a large difference at first glance between companies that have a system (49.6%)
and companies that do not (48.8%).

However, what should be noted is the percentage of companies
that have the risk of organizational collapse, where the retention rate is "less than 30%"📊

It reaches 17.1% in companies that do not have an evaluation system,
which is higher than in companies that do (11.3%).
It can be seen that the existence of an appropriate evaluation system
acts as a breakwater to prevent extreme turnover📝

✅② Top 2 initiatives to increase retention rates
Looking at the content (Figure 3) that small and medium enterprises
with actually high talent retention rates are working on,
1st place is "Improvement of wage levels" (63.1%)
and 2nd place is "Promotion of taking leave" (61.1%).
The real reality that improvement of treatment that supports life,
not just fulfillment, is indispensable for employee retention
is shown🚴

Future room for growth seen in the utilization status of side-job and concurrent-job talent

In an era where it is difficult to hire talent full-time
by the company alone, a new option is
“Utilization of side-job and concurrent-job talent”(Figure 4)🌟

✅① Current status where utilization is still less than 10%
Looking at the current utilization status,
small and medium enterprises that answered "Currently utilizing"
remain at only7.0%!
Even if you add companies that answered "Have not utilized, but have an intention to utilize in the future" (14.5%),
many companies have still not taken the step to utilize external talent.

✅② The wall where more than 70% have no intention to utilize
Companies that answered "Have not utilized, and have no intention to utilize in the future"
account for an overwhelming majority at 74.5%.
It is highly likely that concerns about information security and a lack of know-how
in external talent management are becoming a bottleneck,
and it appears that there is significant room for growth
and a need for support in the utilization of external resources
by small and medium enterprises here🔍

Connection to Economics and Economic Policy (Labor Economics)

The data in the White Paper showing that "improving wage levels (63.1%) is"
the most effective way to retain talent
can be explained by the concept based on
the "Efficiency Wage Hypothesis,"a key theory in macroeconomics and labor economics👍

Let's logically organize this mechanism in our minds so that we can appropriately handle it in exam essays and multiple-choice questions🧠

1. The Essence of the Efficiency Wage Hypothesis

In classical labor market theory,
wages are considered to be determined mechanically
solely by the balance of labor supply and demand📝
However, according to the Efficiency Wage Hypothesis,
the point is that "by setting wages higher than the market equilibrium price,
worker productivity and retention rates improve spontaneously,
and as a result, the total costs for the company are reduced"🌟

As a mathematical representation,
if we express the worker's effort level (morale) $${e}$$ as a
function model of the wage $${w}$$, the relationship is as follows.

$${\large{\text{Effort function: } e = e(w) }\\    \\  \\\quad \left( \text{where, } \frac{\Delta e}{\Delta w} > 0 \right)}$$

In other words, raising the wage $${w}$$ is
not just an increase in costs,
but functions as a motivational investment
to enhance employee effort and retention rates🔥

2. Why does raising wages improve retention rates?

The reasons why high wages directly lead to
retention rates (lower turnover rates) as suggested by the Efficiency Wage Hypothesis
are said to be mainly the following three points!

✅Prevention of Shirking (Shirker Model)
Employees earning wages higher than the market average
are aware of the opportunity cost that "if I were to quit or be fired
and lose my current position, the wage of the next job I find
would be lower than it is now."
Therefore, an incentive is created to work diligently and
remain in the organization!

✅Labor Screening Effect
By offering a high wage level, you can attract
a high-quality pool of candidates who are more talented and
"interested in the content of the work"
from the labor market!
This aligns with the trend in Figure 1!

✅Reduction of Turnover Costs and Maintenance of Productivity
As shown in Figure 3, if retention rates increase
due to "improving wage levels,"
you can suppress the occurrence of recruitment costs for new job postings and
training costs (sunk cost) for training new employees from scratch💴
As a result of the above, it becomes possible to
maintain high total factor productivity for the company👍

Even in a tough business environment, SMEs
taking on the challenge of improving working conditions is
a rational choice to win the "high wage → high retention → high productivity"
virtuous cycle indicated by this Efficiency Wage Hypothesis,
which can be interpreted theoretically🔍

The summary of this lecture is as follows✨

• "Interest in the content of the work" is emerging as a reason for changing jobs to SMEs,
  and changes in the career orientation of job seekers can be observed.
  

• To increase retention rates, "improving wage levels" and
  "promoting vacation leave" are effective, and the development of personnel evaluation systems
  suppresses the worst turnover risks (retention rates of less than 30%).

• As per the economic "Efficiency Wage Hypothesis,"
  appropriate improvement of working conditions is not just an increase in costs,
  but an investment in the future to stimulate employee incentives, prevent turnover,
  and increase organizational productivity.

To be chosen by job seekers and have them work for a long time,
a dual strategy is required: presenting the fulfillment of the work (motivational factors)
while honestly establishing the foundation such as evaluations and wages (hygiene factors)✨

Thank you for watching until the end👍
If you found this article helpful, I would be encouraged if you could support me with a like or share💚

Reference links and recommended texts📚

✅Small and Medium Enterprise Agency
What is a Small and Medium Enterprise Management Consultant

White Paper on Small and Medium Enterprises - Small and Medium Enterprise Agency - Ministry of Economy, Trade and Industry

2026 Edition "White Paper on Small and Medium Enterprises" Full Text

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