Unpad Overtme for Whte-collar Workers Yoko Takahash Doctoral Student, Gakushun Unversty 1 Introducton It s sad that there are many workers who work wthout beng pad the legal allowance for overtme work n Japan. Ths s known as "unpad overtme". In the 1980s, Japan was sad to have longer workng hours than other countres. In partcular, t was thought that the phenomenon of unpad overtme was unque to Japan and that ths was one of the reasons behnd long workng hours n Japan. It wasn't untl a few years ago that unpad overtme hours started to be measured and t s thought that the actual stuaton was not fully understood n the 1980s. Even n other countres, studes measurng the amount of unpad overtme are more or less nonexstent. As far as I know, unpad overtme hours n Germany and the Unted Kngdom were measured n 1993. On the whole, the number of hours of unpad overtme for male workers was 2.36 hours n Germany and 7.8 hours n the Unted Kngdom. The average number of hours of unpad overtme worked by those who worked overtme, even f only occasonally, was 25.7 hours a month n Germany and 38.2 hours a month n the Unted Kngdom. Accordng to a study carred out by the Japanese Trade Unon Confederaton - Research Insttute for Advancement of Lvng Standards (RENGO-RIALS) n June 2002, the average number of hours of unpad overtme worked per month for men and women combned was 8.7 hours. The monthly average amongst those who had worked unpad overtme for at least one hour was 29.6 hours 1. As the studes n Germany and the Unted Kngdom were carred out over a perod of ten years and the workers subject to the studes were dfferent, a comparson between the levels of unpad overtme s not possble. Nevertheless, t s safe to say that unpad overtme exsts n all three countres, thus makng t mpossble to say that ths s a phenomenon exclusve to Japan. As mentoned above, only a few attempts have so far been made to examne unpad overtme not only n Japan, but also n other countres as well. The purpose of ths paper s to nvestgate the actual stuaton of unpad 1 Research on Dversfcaton of Workng Style and Workng Hours conducted by RENGO-RIALS (Research Insttute for Advancement of Lvng Standard) 41
overtme. 2 Background of ncreasng unpad overtme n Japan The number of hours of unpad overtme n Japan has ncreased n recent years. Fgure 1 shows shfts n the estmated number of workng hours n Japan. At the start of the 1990s, polces to reduce the number of workng hours (ncludng revsons to the Labor Standards Law desgned to lead the way towards shorter workng hours) proved effectve, and the total number of workng hours decreased substantally n comparson to fgures n the 1980s. However, snce the latter half of the 1990s, unpad overtme has contnued to ncrease, drvng the total number of workng hours ever upwards. In lne wth ncreases n unpad overtme n Japan, the authortes stepped up measures to rectfy the stuaton durng the perod from the late 1990s nto the new century. In Aprl 2001, the Mnstry of Health, Labor and Welfare ssued recommendatons for the rectfcaton of the stuaton regardng unpad overtme, and the resultng extra wages pad out by companes ordered to make correctve payments va the Labor Standards Inspecton Offce totaled 8.14 bllon yen (70.7 mllon dollars) over the course of the next year and a half up to September 2002. Fgure1: Estmated total number of workng hours and unpad overtme hours per month (non-agrcultural/combned male and female totals) Total workng hous per month (hours) 225 220 215 210 205 200 35 33 31 29 27 25 23 21 19 17 15 Unpad overtme hous per month(hours) 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: Labour Force Survey and Survey on Wage Structure 42
Unpad overtme for whte-collar workers Correctve measures such as these were mplemented based on the dea of companes not payng workers suffcently n lne wth the amount of overtme hours declared. Accordng to a survey that asked workers ther reasons for dong unpad overtme, a large number of workers responded to the effect that "Even f I request to be pad, I won't get anythng due to budgetary restrctons" ndcatng that companes force employees to work unpad overtme. At tmes when there s excessve supply n the labor market, companes try to sft through the large number of job seekers and employ people who can work harder for lower pay. At tmes lke these, workers are prone to put up wth workng overtme for no wages n order to gan employment or ensure that they retan ther job. However, not all unpad overtme, whch ncreased n the latter half of the 1990s, needs to be rectfed. In fact, there are cases where companes are actually payng wages for so-called unpad overtme. In the followng sectons, ths paper verfes that amongst whte-collar workers at large enterprses n the same category n terms of age, sex, qualfcatons and occupaton, the overall yearly salares of workers who work unpad overtme are hgher than those of workers who do not. The reason for ths s thought to be that, although companes do not formally pay wages drectly based on the number of overtme hours worked, n practce, hours put n are reflected n payments such as bonuses. The reason behnd why companes stopped payng wages drectly based on hours of overtme worked s related to personnel management systems that were popular amongst large enterprses n the latter half of the 1990s. One of these s the performance-based system of personnel management whereby employees are pad n accordance wth ther results. Ths system s a reflecton of the downturn n company performance n the 1990s and started to gan popularty as part of a movement to reassess the payment of wages n accordance wth labor nput. Another system, whch s n the process of beng ntroduced, s the Dscretonary Labor System whereby as the quantty of advanced, specalzed work assgned to employees has ncreased, all aspects of work - from methods of executon to tme allocaton - s left to the workers themselves. Wth specalzed, advanced work, t s dffcult to predct the number of workng hours that wll be requred to reach completon. In cases where t s not possble to estmate the necessary number of workng hours, under systems whereby workers receve a salary n return for the hours they 43
have worked, they try to boost ther wages by workng longer hours. Therefore, for more advanced, specalzed work, rather than payng wages accordng to hours worked t makes more sense to pay wages based on the evaluaton of fnal output. Both systems place greater emphass on the performance of workers to whom they are appled and weaken the relatonshp between workng hours and wages. It s thought that the percentage of compensated unpad overtme such as ths ncreased n the 1990s. If the reason for the ncrease n unpad overtme s sad to be owng to an ncrease n the tradtonal type of uncompensated unpad overtme, t s expected that unpad overtme would have ncreased at smalland medum-scale companes. Small and medum scale busnesses suffered a sgnfcant deteroraton n performance n the 1990s and t s possble that companes dd not pay workers for the number of overtme hours they declared because of cutbacks n funds to cover wages. Fgure 2 shows shfts n the number of unpad overtme hours put n by male workers accordng to dfferences n the scale of companes. The bgger the scale of the company the greater the number of unpad overtme hours worked per month. The average number of hours for the 1990s was 32.5 hours for large-scale companes wth 1000 or more employees, 29.3 hours for medum-scale companes wth between 100 and 999 employees, and 26.3 hours for small companes wth less than 100 employees. The number of unpad overtme hours at large companes also ncreased sgnfcantly durng the perod from the end of 1990 to the start of the year 2000. The number of unpad overtme hours at large companes n 2002 was 42.7 hours, an ncrease of 10.3 hours n comparson to the average for the 1990s and roughly double the total for small- to medum-scale companes. Thus, t s large companes that exhbt more rapd ncreases n the number of unpad overtme hours. The ncrease n unpad overtme at large enterprses can only be explaned as nothng more than unpad work. Factorng n the ncreased popularty of new personnel systems that gve rse to compensated unpad overtme amongst large-scale companes, there s a strong possblty that workers actually receve wages n return for so-called unpad overtme. 44
Unpad overtme for whte-collar workers (hours) 45 40 35 30 25 20 1985 1986 Fgure 2: Number of unpad overtme hours per month accordng to scale of frm (non-agrcultural/male workers) 1000+ 100-999 10-99 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 40.3 35.3 31.3 Source: Labour Force Survey and Basc Survey of Wage Structure 3 Compensated unpad overtme 3-1 Prevous works Only a few economc leadng studes about determnants of unpad overtme do not regard unpad overtme as smply nonpayment of labor. Rather, these studes thnk that unpad overtme s pad for, and workers do t from ther own motvaton and of ther own accord. Pennenberg s (2002) study ndcates that over a 10-year perod, workers wth unpad overtme experence on average a 2 percent ncrease n real labor earnngs usng panel data n West Germany 2. He fnds supportve evdence for the nvestment character of unpad overtme. Mtan (1997) ponted out that the probablty of dong unpad overtme s hgh when the evaluaton element s performance as opposed to the number of hours worked. In other words, unpad overtme s undertaken n the belef that ther efforts wll be recompensed by future promoton accompaned by hgher wages, although there s no mmedate compensaton. In ths way, the reason why frms compensate for unpad overtme later s 2 He uses longtudnal mcro data from the German Soco Economc panel Study (GSOEP) for the years 1988 to 2000. 45
to provde an effort ncentve. Ohash (1989) looked at how frms pay bonuses to compensate employees for the ntensty of work experenced snce the last payment. If we read labor ntensty to mean unpad overtme, future payment for unpad overtme can be consdered as a means to encourage work effort. Although Mtan (1997) hghlghted the relatonshp between the evaluaton system and unpad overtme, he doesn t verfy that unpad overtme s actually recompensed. If the wages of workers who engage n unpad overtme s lower than that of workers who do not, the frm smply ntroduces a new salary system and ams to reduce costs through wage controls. Therefore, ths paper confrms as follows that the wage of workers dong unpad overtme s hgher. 3-2 Implct contract Based on ths hypothess, we wll demonstrate that the more workers do unpad overtme, the hgher the reward they wll receve. Workers wll make a choce between two types of job. One s a job that requres unpad overtme because the content of the work s varable, although the rewards are hgh. The other s a job that does not requre unpad overtme because the content of the work s fxed, although the rewards are low. Ths s an mplct contract concernng unpad overtme and rewards that are agreed on between labor and management. Ths contract s updated whenever frms offer a new job to workers. For example, n the case of an ntervew wth the boss for the purpose of goal settng for the current term under the management-by-objectves system, ths s a half-yearly or yearly event to decde the work method for a certan perod. The reason why frms offer such a contract s that some jobs are dffcult and complex. In the case of specalzed and advanced jobs, t s hard for frms to predct the labor nput requred to complete them. When a frm cannot accurately assess the labor nput requrement, a worker pad on an hourly bass wll prolong workng hours more than requred n order to rase ther reward. In ths way, a performance-based wage s more approprate for compensaton for specalzed and advanced jobs than an hourly wage. In addton, a frm must set hgher rewards to ensure premum payment for workng uncertan hours. Furthermore, under the performance-based salary, t becomes rrelevant for workers to report ther own workng hours to the frm, as workng hours are not the crtera used for evaluaton. Therefore, ths leads to the phenomenon 46
Unpad overtme for whte-collar workers where workers underreport ther workng hours. However, a worker recognzes these extra workng hours as unpad overtme because an extra pay s not drectly receved for overtme hours. Then what choce do workers have when t comes to selectng a job n whch the rewards are hgh but unpad overtme s requred? We shall begn by consderng a frm whch employs n workers. It s assumed that the job performance of ndvdual workers s equal, but they have dfferent levels of lesure preference. For now, let us assume that the lesure preference of worker ( = 1, n) s θ ( 0 θ 1), thus we wrte θ > θ > L > θ. The 1 2 n worker whose lesure preference s hgh s able to obtan a hgh level of utlty from ther lesure tme, when endowment hours was dstrbuted as workng hours and spare tme. On the other hand, the worker whose lesure preference s low gans consderable utlty from compensaton of labor,.e. lesure preference s a varable to express whether the worker s a famly-orented person who prefers to spend a lot of tme wth ther famly, or a work-orented person who places greater mportance on ther job. As a famly-orented worker feels dstressed when workng hours become longer, t becomes necessary to pay greater rewards for margnal labor. When worker selects the degree of dffculty of work T ( T ) 0, then they wll receve salary W. Also, we assume that workers have a prce attached to ther labor, and ths prce depends on the degree of dffculty of work as chosen by themselves and ther lesure preference θ. The unpad overtme S of worker depends on the degree of dffculty of the work T, so t s wrtten as S ( T ). Furthermore, we surmse that ths unpad overtme functon S ( T ) has the followng characterstcs: ' '' assumpton 1 () S ( ) > 0, () S ( ) > 0, () S ( 0) = 0 T () Longer workng hours are necessary n order to adequately complete more dffcult work. () As the work becomes more dffcult and complex, the margnal unpad overtme hours contnue to ncrease. () A job wth the lowest degree of dffculty T = 0 does not requre unpad overtme. In other words, t means that the job s able to be adequately completed durng basc workng hours. The worker has the followng utlty functon: T 47
U = u ( W C( S( T ), θ )) C( S( T ), θ ) represents a workers cost functon for dong unpad overtme, and has the followng propertes:. Assumpton 2 () C > 0, () C > 0, () C > 0, (v) C > 0 S SS ()The more the workers do unpad overtme, the larger the labor cost wll become. ()The more the workers do unpad overtme, the larger the margnal labor cost wll become. Also, workers labor cost depends on ther lesure preference. ()The hgher the level of lesure preference that workers have, the larger the labor cost wll become, (v)thus, as unpad overtme ncreases, the margnal cost also ncreases. In addton, a frm receves profts π ( T ), and π > 0, π < 0. A worker does not need to receve rewards that exceed the proft that s obtaned by completng hs job. The utlty maxmzaton problem s expressed as follow. θ Sθ maxu T = u( W C( S( T ), θ )) s. t. π ( T ) W 0 The frst-order condton for maxmum utlty reveals that the worker whose lesure preference s low wll choose more dffcult work, and the wage of workers who do unpad overtme s hgh. dt < 0 dθ dw > 0 ds 4 Emprcal Method Based on a prevous hypothess, ths secton demonstrates that whte-collar workers n a large enterprse wth a low lesure preference do unpad overtme, and as a result ther rewards ncrease. The data s taken from Survey of Whte-collar Employees. Ths survey was conducted by RENGO-RIALS n 1993 for whte-collar employees n fve sgnfcantly large frms. These fve frms are automotve, electroncs, chemcal 48
Unpad overtme for whte-collar workers and electrc power companes, and a department store. The employees surveyed ncluded both those who had been promoted and those who had not - ncludng the secton head, department head and drectors but excludng top executves. The number of questonnares dstrbuted was 2,100, and the response rate was an mpressve 86.5 %. Thus, the total number of completed questonnares was 1,816. Summary statstcs are reported n Table 2. Frst, we use a probt model n order to nvestgate the decson makng of unpad overtme. Unpad overtme u s determned by the followng formula: * u = a + bθ + u u = 1 f u * > 0, 0 otherwse In the survey, respondents were asked, "When you are busy, do you do so-called unpad overtme or job spll?" The dependent varable s the dummy Table.1: Varables defnton lst Explaned varables Unpad overtme dummy =1 f the respondent answered postvely to the queston "When you are busy,do you do so-called unpad overtme or job spll?" = 0 otherwse Wage Salary (Bonus ncluded) Explanatory varables Lesure Preference =1 f the respondent answered postvely to the queston "Do you use all your pad days off?" = 0 otherwse Job Change dummy = 1 f the respondent has an experence of changng ther job. = 0 otherwse = 1 f the respondent s n a poston equal to or hgher than Post dummy the chef executve. = 0 otherwse Male dummy = 1 f the respondent s male = 0 otherwse Educaton hgh school, junor college,unversty graduate Age Age Age 2 /100 Workng Hours Generated from Basc Survey of Wage Census 1993 Frm dummy Occupaton Automotve frm A, Electroncs frmb, Chemcal frm C, Department storee FrmD=1 Clerk, Sales, Dstrbuton, R&D, Producton, Others Producton=1 49
varable, whch equals 1 f workers engage n unpad overtme and 0 f otherwse. Among 1,816 workers (ncludng 44 workers who dd not answer the queston), 1281 workers do unpad overtme, 490 workers do not. The lesure preference varable s used as the ndependent varable. Ogura (2000) verfes that a worker who has a hgh lesure preference takes annual pad leave more often, even f t s controlled for factors such as sex, age, occupaton, ndustry. Therefore, we use a worker s stuaton of takng pad leave as a proxy varable of the worker s lesure preference. To be concrete, f the respondent answered postvely to the queston n the survey Do you use all your pad days off? they are assumed to have a hgh lesure preference, otherwse they are assumed to have a low lesure preference. Table2: Summary statstcs Varable No. of Observatons Mean Standard Devaton Unpad overtme 1583 0.73 0.45 Salary 1583 6.40 0.36 Lesure Preference 1583 0.23 0.42 Job change 1583 0.74 0.44 Post 1583 0.14 0.35 Sex 1582 0.04 0.19 Educaton Hgh school 1583 0.91 0.28 Junor college 1583 0.20 0.40 Unversty 1583 0.06 0.24 Age Age 1583 33.70 6.21 Age 2 1583 11.74 4.34 Workng hours Standard hours 1583 156.52 5.45 Overtme hours 1581 14.02 5.60 Overtme hours2 1581 228.02 144.85 Frm Frm A 1583 0.15 0.36 Frm B 1583 0.24 0.43 Frm C 1583 0.22 0.41 Frm D 1583 0.26 0.44 Frm E 1583 0.13 0.33 Occupaton Clerk 1583 0.18 0.38 Sales 1583 0.26 0.44 Dstrbuton 1583 0.07 0.25 R&D 1583 0.06 0.23 Producton 1583 0.37 0.48 Others 1583 0.08 0.27 50
Unpad overtme for whte-collar workers Next, we shall proceed to an analyss of the relatonshp between unpad overtme and workers salares. On the bass of the theory presented so far, the followng remuneraton functon s estmated usng ordnary least squares and the generalzed method of moments. The logarthm of workers yearly salary s used as the dependent varable. The ndependent varable s the unpad overtme dummy u, whch s used n the unpad overtme formula as a dependent varable. ln W = α + βu + γover + ε 5 Emprcal Result Frst, we estmated the relatonshp between unpad overtme and lesure preference (See Table3). A coeffcent of the lesure preference varable s negatve as expected, and statstcally sgnfcant. Ths suggests that workers wth a hgh lesure preference do not do unpad overtme. Next, Table 4 shows the estmaton result of the effects on a worker s annual salary. The frst and second column shows the results usng OLS. The coeffcent of unpad overtme s not statstcally sgnfcant and ths suggests that unpad overtme does not affect the salary when other factors are controlled. Estmaton results usng GMM are shown n the thrd column, the coeffcent of unpad overtme s statstcally sgnfcant. Accordng to the result, workers who do unpad overtme have salares 9.4 % hgher than other 0.090 workers ( e = 1. 094 ). In addton, the valdty of the estmaton model of GMM s supported by J-statstcs. Bascally, ths ndcates that workers wth a low lesure preference do unpad overtme and as a result the salary of such workers s hgh. Ths result s consstent wth the mplct contract hypothess that was presented n a prevous secton. 6 Concluson Ths paper s calculatons verfed that whte-collar workers at large enterprses wth low lesure preferences do unpad overtme and the overall yearly salares of workers who work unpad overtme are hgher than those of workers who do not. Ths result s consstent wth the mplct contract hypothess, that s, workers decde whether they do unpad overtme accordng 51
Table3: Unpad overtme and Lesure preference Dependent varable= Unpad overtme dummy (1) (2) Coeffcent Margnal effects Coeffcent Margnal effects Pad leave dummy -0.523-0.184-0.523-0.184 (6.36) (-6.30) Post -0.025-0.008-0.054-0.018 (-0.24) (-0.41) Sex 0.210 0.072 0.241 0.084 (1.74) (1.67) Workng hours Overtme hours -0.002-0.001 (-0.27) Occupatons Clerk -0.180-0.061-0.183-0.062 (-1.86) (-1.86) Sales 0.332 0.103 0.324 0.101 (3.55) (3.38) Dstrbuton -0.104-0.035-0.105-0.035 (-0.73) (-0.73) R&D 0.096 0.030 0.099 0.032 (0.61) (0.63) Others -0.148-0.050-0.149-0.051 (-1.12) (-1.13) Constant 0.521 0.533 (3.91) (3.43) Pseudo R2 0.039 0.039 No. of observatons 1583 1581 Lob lkelhood -890.96-890.46 Note:Data s Survey of Whte-collar Employees Numbers n parentheses are t-statstcs. to ther lesure preference and company pays hgher wages to workers who do unpad overtme. A part of ths unpad overtme s nterpreted as a result of the ex-ante contract among the labor and management, rather than explotaton by a company. Of course, there wll be an objecton to ths regardng the explanaton of unpad overtme that ncreased rapdly n the latter half of 90's only for the reason mentoned above. The data used n ths paper was collected n 1993, so the crcumstances may be not same. Snce the end of 2002, Rengo or the Mnstry of Health, Labor and Welfare have contnued wth surveys about unpad overtme, and an analyss usng ths data s expected n the near future. Fnally, we would lke to reterate the fact that we do not fully agree wth 52
Unpad overtme for whte-collar workers exstng systems of unpad overtme. In fact, n cases where a pror agreement between labor and management wth regard to approprate payment n return for hours worked, ncludng unpad overtme, s clearly lackng, some knd of admnstratve nvolvement s essental. To enable agreements between labor and management regardng workng hours and payment to be formed easly, matters such as establshng legal procedures for nformaton dsclosure at the tme when employment contracts are sgned are lkely to become mportant polcy ssues n the future. References Bell, D. N. F., Gaj, A., Hart, R. A., Hübler, O. and W. Schwerdt. Unpad Work n the Workplace. A Comparson of Germany and the UK, Anglo-German Foundaton for the Study of Industral Socety, London, 2001. Mtan Naok. Work ncentve for whte-collar workers: wage and promoton Who Runs Japanese Busness? Chapter 6. Edward Elgar Publshng lmted, 1998. Ogura, Kazuya. Analyss of Pad Annual Leave, The studes of the Japan Insttute of Labour, The Japan Insttute of Labour, No.20. pp.19-56, 2000. Ohash, Isao. On the Determnants of Bonuses and Basc Wages n Large Japanese Frms, Journal of the Japanese and Internatonal Economy, Vol.3, No.4, pp.451-479, 1989. Pannenberg, M. Long-Term Effects of Unpad Overtme: Evdence for West Germany, IZA Dscusson Paper No.614, 2002. 53
Table4: Estmaton of Unpad overtme and Wage Dependent varable=salary OLS (1) OLS (2) GMM coeffcents coeffcents coeffcents Unpad overtme 0.001 0.001 0.090 (0.13) (0.07) (2.26) Job change -0.087-0.088-0.093 (-4.46) (-4.50) (-4.56) Post 0.087 0.088 0.090 (5.57) (5.66) (6.51) Sex 0.196 0.199 0.190 (9.08) (9.24) (7.41) Workng hours Standard hours 0.009 0.009 0.009 (2.84) (2.80) (2.38) Overtme 0.007 0.007 0.009 (1.70) (1.59) (2.02) Overtme 2-0.001-0.001-0.001 (-3.76) (-3.66) (-3.97) Age Age 0.140 0.141 0.132 (20.94) (21.16) (18.58) Age 2-0.139-0.140-0.001 (-13.73) (-13.91) (-12.89) Educaton Hgh school -0.094-0.095-0.089 (-6.24) (-6.35) (-4.96) Junor college -0.013-0.012-0.013 (-0.75) (-0.69) (-0.70) Frm FrmA -0.090-0.092-0.097 (-4.95) (-5.15) (-5.63) FrmB -0.184-0.181-0.191 (-8.51) (-8.46) (-8.14) FrmC -0.207-0.208-0.207 (-6.36) (-6.42) (-5.89) FrmE -0.264-0.264-0.274 (-4.73) (-4.77) (-4.41) Occupaton Clerk 0.006 (0.53) Sales -0.004 (-0.36) Dstrbuton -0.022 (-1.37) R&D 0.021 (1.24) Others -0.011 (-0.76) Constant 1.830 1.835 2.006 (3.69) (3.71) (3.68) No. of observatons 1580 1580 1580 Pseudo R2 0.835 0.835 J Statstcs 9.253 p-value 0.160 Note:Data s Survey of Whte-collar Employees Instrumental Varables are pad leave dummy, occupaton dummy and constant. Numbers n parentheses are t-statstcs. 54