The Origins of Internal Labor Markets in Japan

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SANFORD
JACOBY3
The
Origins
of
Internal
Labor
Markets
in
Japan
OVER THE
PAST
THREE
DECADES, scholars investigating Japan’s
industrial relations system have developed two sorts of explanations for the
origins of that country’s internal labor markets. In the first
of
these-the
particularist theories
-
Japan’s unique cultural traditions are hypothesized
as the source
of
the internalization of any given firm’s workforce.’ Such
practices as permanent employment, seniority-based wage and promotion
schemes (“nenk$’), and what has been called welfare corporatism
are
seen
as evidence that Japan is an exception to the logic of the Western industriali-
zation process, The emphasis
is
placed on the similarity between work
relations in feudal merchant houses and those in modern firms. More recent-
ly, however, this approach has been supplanted by one that relies on the
concept of specific human capital. Japanese employers can
be
seen as
shaping personnel policies on the basis of constraints imposed by an enter-
prise-specific technology, rather than in accordance with time-honored
patterns of social organization or in response to external labor market
conditions.
This paper critically examines both
of
these hypotheses in terms of their
internal logic and their applicability to the Japanese experience. Then,
a
brief outline
of
a third theoretical framework for explaining the appearance
of
certain internal labor market phenomena in Japan during the initial
period of sustained industrialization is presented. Like specific human
capital theory, the explanation sketched here stresses the importance
of
skilled labor retention. However, the argument is made without recourse to
the notion of specific human capital. Instead, it is suggested that
nank6-
based employment systems were introduced as a result of two interrelated
OResearch Assistant, Institute
of
Industrial Relations, University
of
California, Berkeley.
‘Representative examples
of
the
particularist approach
to
Japanese industrial relations practice are
James
C.
Ahegglen,
The Japanese Factory:
Aspects
of
Its Social Organization
(Glencoe,
Ill.:
Free Press,
1958) and
Solomon
B.
Levine,
Industrial Relations
in
Postwar
Japan
(Urbana,
Ill.:
University
of
Illinois
Press, 1958).
INDUSTRIAL
RELATIONS,
Vol.
18,
No.
2
(Spring 1979). 1979 by the Regents of the University
of
California.
0019-8676/79/0525/184/$1.00
184

Internal Labor Markets in Japan
/
185
phenomena
-
the decline of
a
traditional form of skilled labor organization
and the appearance of capital-intensive, oligopolistic firms. The
nenk6-
based employment system is seen as a device to elicit worker loyalty and
raise effort levels, as well as to retain skill, under these new forms
of
labor
and firm organization. This hypothesis is tentative and must await confirma-
tion in further research. Nevertheless, the present analysis has the imme-
diate effect of underscoring the importance of considering
a
variety of
historical factors to explain the Japanese experience.
Particularist Theories
Early post-World War
I1
studies of Japanese industrial relations,
such
as
Abegglen’s and Levine’s, characterized Japan as a unique society,
They emphasized the historical continuity of Japanese institutions, including
those of the labor market, and borrowed from an anthropological genre that
placed heavy emphasis on national character.2 Japanese culture, pre-indus-
trial in origin, was seen as the central formative influence on modern society.
Cultural constructs such as the Tokugawan
is,
the extended family
relationship found in the feudal merchant houses, were brought forth to
explain the current relationship between employer and worker, as if simi-
larity were sufficient explanation?
Abegglen sees
nenkb
and permanent employment
as
the modern equiva-
lents of the traditions of the feudal merchant house. Management practices
are collapsed under the rubric of “paternalism” and are portrayed as an
undifferentiated span from the feudal to the modern, paternalistic firm.
Says Abegglen, “Factory organization and its leaders are directly and closely
tied to a non-urban pre-war traditional Japanese experience and outlook..
.
[tracing] their origins directly to feudal merchant families. The tradition
and outlook of these families remain an active and real force in the manage-
ment practices of the ~ompanies.”~
Levine is somewhat more conscious of the discontinuity and change that
2The classic anthropological work is Ruth Benedict,
The Chrysanthemum and the Sword: Patterns
of
Japanese Culture
(Boston, Mass.: Houghton Mifflin, 1946). Abegglen approvingly notes that, “In point
of fact,
as
Ruth Benedict rightly guessed, the whole social structure of Japan is dictated by a concept
of
hierarchy deriving from the kinship
of
the clan.” Abegglen,
op.
cit.,
p.
132.
3This emphasis on Japanese character and culture may have been rooted in a need to see the Japanese
war experience as a phenomenon limited to Japan. By locating the causes of war in national character
deformation, one could overlook the propensities to expansion of the Allies. And if Japanese character
was unique, then
so
too was the authoritarian state. Others have argued that the fascination with tradi-
tion and the supposed smoothing effects it had during industrialization glosses over the link between
tradition and coercion. This may explain Abegglen’s popularity in some circles in Japan-he provides a
justification for the continuation of current practices. See Robert Cole,
Japanese Blue Collar: The Chang-
ing Tradition
(Berkeley, CA.: University
of
California Press, 1971), pp.
7-8,
and Kunio Odaka,
Toward
Industrial Democracy: Management and Workers in Modern Japan
(Cambridge, Mass.: Harvard Uni-
versity Press, 1975).
4Abegglen,
op.
cit.,
p. 100.

186
/
SANFORD
JACOBY
occurred in the first period of Japanese industrialization and mentions the
increasing distrust between employers and their employees. Yet, for Levine
too, these changes are modifications
of
a timeless paternalism that was a
“combination
of
feudal traditions and intense nationalistic motivation.
.
.
.”
He speaks of
a
“relatively smooth transition to industrialization” in which
“basic pre-existing patterns somehow remained..
.
.”5
But continuity of
tradition is in itself problematic.
As
Barrington Moore reminds us, traditions
“do not persist of their own momentum
....
They have to be drilled into
each generation anew and kept alive.”* What is missing in the works of the
particularists is a sense
of
how different traditions are reproduced, and what
ensures their legitimacy.
Interestingly, critics of this approach did not focus on the lack
of
discussion
of the sources of institutional change and of social conflict, which might have
given the lie to the idea
of
an undifferentiated paternalism. Instead, their
criticism was directed at the notion that permanent employment had always
been practiced in Japan. They pointed to evidence that seemed to indicate
high labor turnover and mobility during the first two decades
of
this century,
with a drop in the twenties? Unfortunately, the data on turnover for the
period preceding
1920
are extremely thin, and most writers have relied on
descriptive materiaL8 Still, critics of particularist theories managed to
generate a new consensus that turnover rates were relatively high until
the end of World War I, high enough to cast doubt on the existence of any
(successful) paternalistic schemes to retain labor?
5Levine,
op. cit.,
pp. 32, 34.
BBarrington Moore,
Social Origins
of
Dictatorship and Democracy: Lord and Peasant in
the
Making
of
the Modern World
(Boston, Mass.: Beacon Press, 1966), p. 291. Byron Marshall’s study of managerial
ideology in the prewar period in Japan brings out the point that Japanese employers consciously chose
a
paternalistic, traditional ideology in the face
of
proposed labor reforms,
a
paternalism that they dis-
pensed with when it came into conflict with other interests, such as the payment
of
injury compensation.
Byron Marshall,
Capitalism and Nationalism in Prewar Japan: The Ideology
of
the
Business Elite
(Stan-
ford, CA.: Stanford University Press, 1967).
’As
in the United States, this has led to controversy over the extent to which the fall in turnover
may be attributed to the “new personnel policies” being implemented at the time, or
to
rising unem-
ployment in the deflationary twenties.
For
two different views, see
H.
T. Patrick, “The Economic Muddle
of the Twenties,” in
J.
W. Morley, ed.,
Dilemmas
of
Growth in Prewar Japan
(Princeton, N.J.: Princeton
University Press, 1971), pp. 211-266, and Hiroshi Hazama, “Historical Changes in the Lifestyle of
Industrial Workers,” in
H.
T.
Patrick, ed.,
Industrialization and
Its
Social
Consequences
(Berkeley,
CA.: University
of
California Press, 1976), pp. 3-65.
“arada, writing in 1928, lamented the fact that
‘‘no
extensive study
of
turnover” had been made as
of that time. Shuichi Harada,
Labor Conditions in Japan
(New York: Columbia University Press, 1928),
p. 129.
$Taira presents national data on accessions and separations starting with 1920, although the figures
do
not cover all firms, nor separate quits from discharges. Pre-1920 data are limited to one prefecture
for 1916-1917. See Koji Taira,
Economic Development and the Labor Market in Japan
(New York:
Columbia University Press, 1970), pp. 154-156. For examples of this criticism, see Robert Evans, Jr.,
The
Labor Economies
of
Japan and the United States
(New York: Praeger, 1971); Mikio Sumiya, “The
Emergence
of
Modern Japan,” in
Kazuo
Okochi, Bernard Karsh, and Solomon Levine, eds.,
Workers
and Employers in Japan
(Princeton, N.J.: Princeton University Press, 1973), pp. 1548; and Taira,
op.
cit.,
Chapter
6.

Internal Labor Markets in Japan
/
187
If high turnover rates indicated the absence of Japanese-style internal
labor markets, then the periodization of their emergence is pushed forward
into the present century. New theories of the origins of Japanese employ-
ment practices developed that portrayed the
nenko
system and paternalism
as
a
calculated response by employers to the exigencies of the labor market.
This was certainly an advance over particularist explanations. Said one
sociologist, “It appears that some of the industrial features thought to be
traditionally Japanese..
.
are in fact fairly recent innovations, supported
by traditional values to be sure, but consciously designed for good profit-
maximizing
reason^."'^
Specific
Human
Capital
Theory
The current economic alternative to Abegglen’s particularist
explanation is the specific human capital theory of labor retention, which
focuses on the constraints imposed by an enterprise-specific technology.”
The general argument that the firm-specific technologies of modern industry
necessitated the training of workers by the firm and their consequent
retention through permanent employment is applied
to
the specific case of
Japan to explain the origins of
nenk6
and permanent employment. Micro-
economic optimizing
by
employers is supposed to have
led
to internal labor
markets in the
U.S.
and to have resulted in something very similar in Japan.
It is an argument not all that far removed from technological determinist
theories in which similar technologies create similar imperatives within
the firm.
The specific human capital theory that Doeringer and Piore’s book
elaborates is based on Becker’s argument that, during training, skills are
acquired by the worker that are either generally useful in
a
variety of firms
(e.g., craft skills or cognitive abilities like literacy) or highly specific to the
technology and organization of a particular firm or plant.12 The existence of
~
‘“Ronald Dore, “Sociology in Japan,”
British Journal
of
Sociology,
XI11
(June, 1962), 120. This new
consensus has relegated Abegglen to the “scrap heap”
of
discarded theories. While one study done in
1964 found that Abegglen was one of the most commonly cited authors in the organization theory litera-
ture
of
the preceding decade, a 1977 review article claims that “...one seldom sees Abegglen cited
in the social science literature anymore,” James
G.
March, ed.,
Handbook
of
Organizations
(Chicago,
111.: Rand McNally, 1964), p. xii; and Robert
E.
Cole, “A Review
of
Marsh and Mannari’s
Modernization
and
the Japanese
Factory,”
Contemporary Sociology,
VI
(September, 1977), 582-584.
lLThe classic statement
of
this theory is in Peter Doeringer and Michael Piore,
Internal
Labor
Markets
and Manpower Analysis
(Lexington, Mass.: Heath, 1971). For application
to
the Japanese case, see
Mikio Sumiya, “Japanese Industrial Relations Revisited: A Discussion
of
the
Nenkci
System,”
Japanese
Economic Studies,
V
(Spring, 1977), 3-65.
12Employers will not bear the costs
of
training in general skills. See
Gary
Becker,
Human Capital:
A
Theoretical
and
Empirical Analysis with Special Reference to Education
(2nd ed.; New York: National
Bureau
of
Economic Research, 1975).

188
/
SANFORD
JACOBY
skills useful to only one employer is a fuzzy concept; Doeringer and Piore
try to clarify it
by
such notions as having experience with the idiosyncracies
of the machinery in a particular plant, or the experience acquired by a team
of workers who become more productive as they work together over time.
Additionally, they observe that the only way a worker acquires enterprise-
specific skills is through the actual performance of work in a plant for some
period of time, as in Arrow’s learning-by-doing. This training temporarily
reduces a worker’s productivity, making it costly for the employer, who now
has an interest in the retention of these specifically skilled workers
so
that
he may recoup his training costs.
According to this theory, employers hold on to their workers by sharing
with them the benefits of their increased productivity and through devices
that will bind workers to the firm. For example, job ladders in the
U.S.,
and
seniority wage increases in Japan, facilitate the informal training process
and promise the worker a career if he stays with the firm. While no guar-
antee of permanent employment is necessarily given, the employer’s interest
in a stable labor force to ensure returns on the training investment is
presumed to lead to reduced involuntary separations in the
U.S.
and some
promise of permanent employment in Japan. Over time, the internal labor
market reduces recruitment, screening and training costs, and this, together
with the irreversibility produced by rigid rules and vested interests, ensures
its continuation. The internal labor market is economically rational from the
start and may
be
said to acquire a rationale of its own
as
it
persist^.'^
With respect to Japan, specific human capital theory implies a link be-
tween firm size and the formation of internal labor markets. Japan’s rapid
industrialization required substantial infusions of new technology; most of
the
firms with enough capital to finance the creation of new industries were
quite large. The supposedly vast differences among firms in the skill require-
ments of the new technology led to bottlenecks in the supply of skilled
labor. Technology became enterprise-specific and this required the assump-
tion of training by the employer. This training is presumed to have led to
I1Added on to their skill-based theory
of
internal labor markets is a noneconomic concept they call
“custom” that plays a small role in their book. Their discussion of custom and its role in the origins of
the internal labor market is not integrated with the rest
of
their argument. Their point seems to be that
custom exerts a force on the economic factors called into play by the specific human capital theory, and
constrains the development of these internal structures in the direction of continuity with past practices.
Later, custom continues to have this haphazard, rigidifying role. Exactly how custom comes to bear in
the process of internal labor market formation is never made clear. The best that can be said about their
argument is that they have at least recognized noneconomic factors, though they remain unspecified,
stuffed into the proverbial black
box.
Piore did make an attempt to develop these ideas somewhat further.
Michael Piore, “Fragments
of
a ‘Sociological’ Theory
of
Wages,”
American
Economic
Reoiew,
LXIII
(May,
1973),
377-384.

Internal Labor Markets in Japan
/
189
various schemes to retain labor that eventually developed into Japanese
personnel policies like
n~nk6.’~
Now, if it could be shown that at some point in the past, the skills required
of Japanese workers became relatively more enterprise-specific, presumably
as a result of the change in technology, then a sufficient condition for the
appearance of internal labor markets would be established. However, it is
not at all certain that machinery or technology was becoming more enter-
prise-specific at the time of the formation of internal labor markets in Japan
(or even in the
U.S.,
for that matter). It is true that in both countries mass
production industry developed in the early part of this century, which may
have led to enterprise-specific technologies, as firms found it necessary to
begin research departments and install their own (or licensed import)
machinery. At the very same time these developments were occurring, how-
ever, capital goods industries were emerging in Japan and in the
U.S.
Firms
could purchase identical machinery from national or international vendors
instead of having to craft their own as in the nineteenth century. There is
reason to believe that this earlier lack of standardization across plants which
characterized the nineteenth century led to enterprise-specific technologies
as significant as those Doeringer and Piore have in mind.15 Similarly, the
teamwork argument is as convincing for the earlier period as it is for the
twentieth century. That is, workers who work together over
a
period of
time probably
do
become more efficient, but this is independent
of
the
technology in use.16
One other problem with the theory is the paradoxical focus on training
and skill as co-generators of the internal labor market. The period in which
firm-specific skills and training were supposedly becoming crucial to em-
ployers was also a period when these same employers were introducing a
141t
is
usually pointed out that the largest firms established training schools to meet their specific-
skill requirements. This occurred at Sumitomo in
1904,
and at Hitachi and Yahata in
1910.
Those who
have advanced the specific human capital argument in one form or another include: Robert Ballon and
Makoto Sukurabayashi, “Labor Management Relations in Modern Japan: A Historical Survey
of
Person-
nel Administration,” in Joseph Roggendorf, ed.,
Studies
in
Iapanese Culture: Tradition
and
Experiment
(Tokyo: Sophia University Press,
1966),
pp.
245-266;
Kazuo Okochi, Bernard Karsh, and Solomon
Levine, “The Japanese Industrial Relations System: A Summary,” in
op.
cit.,
pp.
485-512;
Evans, Jr.,
op.
cit.
Others, like Dore, have added it to their list
of
causal factors. Ronald Dore,
British Factory-
Japanese
Factory: The drigins
of
National Diversity
in
Industrial Relations
(Berkeley, CA.: University
of California Press,
1973).
‘SPiore is certainly aware of the extent of these purchases from vendors in the
U.S.
today. See his
“The Impact
of
the Labor Market Upon the Design of Productive Techniques Within the Manufacturing
Plant,”
Quarterly Iournal of Economics,
LXXXII
(November,
1968), 602-620.
On the lack of standard-
ized technology in the
U.S.
in the nineteenth century, see
H.
J. Habakkuk,
American and British Tech-
nology in the Nineteenth
Century:
The Search for Labor Saving Inventions
(Cambridge: Cambridge
University Press,
1962).
l6And what do these groups become more efficient at? Making more or “making out” (soldiering, etc.)?
Worker solidarity probably increases over time and may adversely affect productivity. It is an enterprise-
specific skill that the employer may have no interest in retaining.

190
/
SANFORDJACOBY
technology that de-emphasized skill on a widespread scale. One of the great
benefits of this technology was that it undercut the power of skilled craft
workers
by
replacing their jobs with ones that were relatively easy to learn.
Even if enterprise-specific skills were required under the new technology, it
is dubious that the time involved in learning these skills, viewed by the
employer as a cost, could have justified the much larger sunk costs entailed
by the establishment of internal labor markets, ceteris
paribus.
A
technology
based on the interchangability of workers cannot at the same time make
them more indispensable.’7
An
Alternative
Hypothesis
A
better understanding of the factors responsible for the
emergence of nenka-based employment systems18 rests on the realization
that this system was initially restricted to skilled (and white-collar) employ-
ees
of
large firms. The crucial enabling factors for this development,
I
would
argue, were:
(1)
the shift from pre-industrial forms of skilled labor organiza-
tion and supervision to more bureaucratic styles of management, and
(2)
the
formation of a dual economy and labor market, with nenko systems concen-
trated in the primary or oligopoly sector.
In this section
I
will briefly describe those interrelated developments and
show how they were responsible for the appearance
of
nenko-based person-
nel policies.
Skilled
labor
and
the
oyakata.
As
industrialization accelerated in the
nineties, employers were faced with the problem that their skilled labor
force was highly mobile, occasionally in short supply, and in possesion of a
work performance ethic that increasingly conflicted with desired effort
levels. The root of this problem lay in the initial preservation of a pre-factory
form of skilled labor organization
-
the
oyakata.
The purveyors of skilled labor to the first government arsenals and private
factories, the
oyakata,
had been master artisans in the craft guilds during
the feudal period and had had the power to sell or hand down craft privi-
leges to faithful apprentices. When industrialization began, employers were
forced to rely on the
oyakata
who had
a
monopoly on the supply of skilled
labor; and, since the
oyakata
already had a developed system of employment,
employers left them complete control over the hiring, training, payment,
I7See Hany Braverman,
Labor and
Monopoly
Capital:
The
Degradation
of
Work
in
the
Twentieth
Century
(New York: Monthly Review Press,
1974)
on the de-skilling process in
the
U.S.
18The phrase “nenko-based employment system” refers to a variety of labor policies based on some
degree
of
employment security. These include the partial linking of wage determination
and
the
payment
of welfare benefits to tenure, as well as attempts to foster enterprise loyalty.

Internal Labor Markets
in
Japan
/
191
and discipline
of
1ab0r.l~ The
oyakata,
like the use of butty-men or internal
contractors in early industrial England and the United States, represented a
transitional phase in the assumption of managerial control over the firm.
Prior to industrialization, and continuing thereafter, skilled artisans
moved around frequently from one
oyakata
to another, in part because
increased wages could often only be obtained through such shuffling, or by
bribery.20 Partly too, these “footloose” craftsmen were continuing
a
tradi-
tional pattern of artisan mobility and life style in which work was avoided
if possible, holidays were frequent, and mutual assistance within the craft
was available in times of need.2l
Such work habits posed serious discipline problems for employers. There
were also continued periodic shortages
of
skilled labor to plague the new
industrialists, and they were unable to readily increase supply
do
long as the
market was controlled by the
oyakata.
But one of the most serious problems
facing employers was the development of
a
labor force that would be loyal,
stable, and resistant to unions, a foreign institution that was an anathema to
employers and the state. The artisans, who formed the nucleus of the skilled
labor force in the first Japanese factories, had a proclivity for collective
identities that transformed itself readily into trade unions. Most of the early
Japanese unions were craft unions, some heavily influenced by the
AFL.Z2
To summarize, the
oyakata
provided employers with workers who gave
their first allegiance to their crafts, and who were highly mobile. In addition
to excess demand, skilled labor mobility was
no
doubt increased by pre-
industrial work habits, as well as the information network of the
oyakata.
‘SThe
oyakata
system also existed outside of the crafts. Large groups
of
unmarried men performed
unskilled labor in transport, forestry, and mining under the supervision
of
an
oyakata
and often under
very harsh conditions. On the
oyakata
system and skilled labor, see Robert
J.
Ballon, “Personnel Admin-
istration in Modern Japan: Historical Development,” Sophia University Industrial Relations Center,
Bulletin
3,
1962;
Solomon B. Levine, “Labor Markets and Collective Bargaining in Japan,” in William
W. Lockwood,
ed.,
The State and Economic Enterprise
in
Japan: Essays in the Political
Economy
of
Growth
(Princeton, N.J.: Princeton University Press,
1965);
Johannes Hirschmeier and Tsunehiko Yui,
The Development
of
Iapanese Business,
1600-1
973 (Cambridge, Mass.: Harvard University Press,
1975);
Hazama,
op. n’t.;
and Michael
Y.
Yoshino,
Japan’s Managerial System: Tradition and Innovation
(Cambridge, Mass.
:
Massachusetts Institute of Technology Press,
1968).
2oMovement between firms served by a single
oyakata
was common and may even have been more
frequent than interoyakata moves. Levine,
op.
n’t.,
p.
645.
ZIThese work habits bring to mind the English handloom weavers and other pre-factory artisans who
engaged in
“.
.
.alternate bouts
of
intense labour and of idleness wherever [they] were in control of
their working lives.” In the
U.S.
as well, “Hand coopers, potters, and cigarmakers among others, worked
hard but in distinctly pre-industrial styles.”
E.
P.
Thompson, “Time, Work-Discipline, and Capitalism,”
Past and Present,
XXXVIII
(December,
1967), 73,
and Herbert Guttman,
Work,
Culture and Industrial-
izing America
(New York: Alfred A. Knopf,
1976),
p.
38.
*2Takano Fusataro, who helped establish the Kiseikai, a union of metal workers, in
1897,
was an
official AFL field representative. Robert Scalapino, “The Beginnings of the Labor Movement in
Japan” (unpublished manuscript,
1958),
p.
24.
For more on early unions
in
Japan, see Iwao Ayusawa,
A
Hisfory
of
Labor
in
Modern Japan
(Honolulu: East-West Center Press,
1966);
Stephen Large,
The
Yuai-kai: The Rise
of
Labor in Japan
(Tokyo: Sophia University Press,
1972);
Kazuo Okochi,
Labor in
Modern Japan
(Tokyo: The Science Council of Japan,
1958);
Taira,
op. cit.;
and George
0.
Totten
111,
The Social Democratic Movement in Japan
(New Haven, Conn.: Yale University Press,
1966).

192
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SANFORDJACOBY
This mobility in turn could strengthen the craft unions and develop loyalties
outside the firrnF3
Bureaucratic
oligopoly.
If
the
oyakata
could be weakened, and skilled
labor brought more firmly into the fold of the enterprise, some of these
problems could be reduced. Such an effort first got under way in the primary
sector of the economy, reflecting both a greater concern with labor stability
and greater resources
to
effect such a transformation.
The joint influence of the state and of late economic development was
responsible for a dichotomization of firms by size, market power, and wage
levels early in the history of Japanese capitali~m.2~ Given a small domestic
market and the reduction
of
externally imposed tariffs after the war with
China, international competition forced the economy to leap, Gerschenkron-
like, to the large-scale, capital-intensive production frontier of the day. The
sales
of
government enterprises to private parties also encouraged the
growth of oligopolistic firms, the
zaibatsu,
which became enormous holding
companies linked through the usual devices
of
interlocking directorates and
mutual stockholding. The state continued to provide capital to these firms
either directly or through the financial apparatus that was controlled by the
zaibatsu.25
As
others have argued in the American case, the massive increase in firm
size that characterizes oligopolization implies a qualitative change in the
prospects and problems confronting such firms. The
key
to this behavioral
change in the firm is the increased importance
of
stability and the isolation
of instability in various aspects of the firm’s operations.26 With the threat
of
ruinous competition over market shares reduced, and the solvency of the
firm reasonably assured, large firms can extend their time horizons and
undertake long-run planning of future growth to ensure better utilization
L,’As
in England, “It was not necessarily the better labourer but the stable one who was worth most
to the manufacturer; often indced the skilled apprenticed man was at a discount, because
of
the working
habits acquired before entering the factory.” Sidney Pollard, “Factory Discipline in the Industrial Revo-
lution,’’
Economic Histoq Review,
2nd series,
XVI
(December,
1963), 255.
”‘On dualism in Japan, see Seymour Broadbridge,
Industrial Duahsrn in Japan:
A
Problem
of
Eco-
nomic Growth and Structural Change
(Chicago,
Ill.:
Aldine Press,
1966);
Teijiro Uyeda,
The Small
Industries
of
Iapan-
Their Growth
and
Development
(Shanghai: Kelly and Walsh,
1938);
Yasukichi
Yasuba, “The Evolution
of
Dualistic Wage Structure,” in
H.
T. Patrick, ed.,
op.
cit.,
pp.
249-298;
and
Walter Galenson and Konosuke Odaka, “The Japanese Labor Market,” in
H.
T.
Patrick and Henry
Rosovsky, cds.,
Asia:?
New
Giant:
How the Japanese Economy Works
(Washington, D.C.: Brookings
Institution,
1976),
pp.
587-682.
*“Kozo Yamamura, “The Japan Economy,
1911-1930:
Concentration, Conflicts and Crises,” in
H.
D.
Harootunian and
B.
S.
Silbermann, eds.,
Japan
in
Crisis-Essays
on
Taisho Democracy
(Princeton,
N.J.:
Princeton University Press,
1974),
pp.
299-328;
and William W. Lockwood,
The Economic Develop-
ment
of
Japan- Growth and Structural Change,
1868-1
938
(Princeton, N.J.: Princeton University Press,
1968,
expanded edition).
*tiuncertainty or instability may
also
be externalized. The proliferation
of
subcontracting firms feeding
into the
zaibatsu
may be seen as an attempt to transfer less profitable
or
more risky lines of production
to smaller firms.

Internal
Labor
Markets in Japan
/
193
of their large capital investments. Such planning requires both stability
and the extension of managerial control over the firm’s operations. The
stress on stability and control is transferred to input markets, including
labor. The existence of an autonomous sphere within the firm (the
oyakata),
and the related instability of skilled labor, proved increasingly untenable
as bureaucratic principles of organization and managerial hegemony were
extended throughout the large firm.27
The elimination of the
oyakata
was neither sudden nor rapid, but occurred
gradually, in stages.28 During the first stage of this process, the
oyakata
were turned into straw bosses under the supervision of foremen hired
directly by the firm. They were offered various incentives to cooperation
(such as bureaucratic titles and predetermined salaries) as their functions
were progressively subdivided and parcelled out to departments under
management’s direct control.
Oyakatas
whose operations had previously
spanned several firms were brought into a single firm, weakening their
bargaining power. Some of the
oyakatas
sought protection from conservative
craft unions like the
Yuaikai;
others set themselves up in subcontracting
firms.29 Once the
oyakata
were removed or incorporated into a single firm,
it would be more difficult for skilled workers to change employers. This
dovetailed with the oligopolistic stress on stability in input markets. But
there was still the problem of the artisan work ethic, compounded by the
greater likelihood that these workers would form unions. Labor unions
would certainly conflict with oligopolistic efforts to plan without external
interference.
Employers in the primary sector began to develop a new pool of skilled
labor that would allow them to circumvent the artisans. Training schools,
which were established before the war, and the procedure of hiring all new
employees directly from the public schools, which began after the war, were
an attempt to avoid traditional skilled labor as much as they were a new
271t should be stressed, as Dore notes, that the greater stability and likelihood of oligopolistic profits
allowed for experimentation in personnel policies; planning of production allowed for planning
of
em-
ployment. See Dore,
op.
cit.,
Chapter 14.
28This began with their removal from the giant Oji Paper Company in 1893. Dore guesses that they
were being eliminated in large firms in the late 1890’s through regulations requiring the direct employ-
ment of apprentices. By 1910 they had disappeared or had been greatly restricted in the basic steel and
shipbuilding industries. Ballon,
op.
cit.,
p. 14; Dore,
op,
cit.,
p.
387; Hirschmeier and Yui,
op.
n’t.,
p.
192.
IBThis process occurred in the oligopoly sector of the U.S.
as
well. “Manufacturers gradually reduced
the foreman’s power to recruit and train the labor force..
.
[and].
.
.
added new personnel programs
outside the foreman’s jurisdiction..
,
[that].
,
.ultimately reinforced the trend towards centralized control
over recruitment and training.” Daniel Nelson,
Managers and Workers: Origins
of
the New Factory
System in the United States
(Madison, Wisc.: University of Wisconsin Press, 1975). p. 101. Yoshino,
op.
cit.,
presents an excellent summary
of
the displacement of the
oyakata,
based on Masumi Tsuda’s
historical research. For an interesting glimpse at the bureaucratization of supervision in the twenties,
see
Hideaki Okamoto, “Management and Their Organizations,” in
Kazuo
Okochi and others, eds.,
Workers and Employers in Japan
(Princeton, N.J.: Princeton University Press, 1973), pp. 163-216.

194
/
SANFORDJACOBY
source of skill. As with the
oyakata,
the traditional craft workers were
gradually displaced from the primary sector and found jobs in the com-
petitive sector, especially in the burgeoning subcontracting firms.
The internalization of (general) training was made possible by the
destruction of institutions that had allowed for the mobility of skilled
workers, But the economic feasibility
of
such training depended on the
extent to which the mobility of these workers could be further held in
check.30 Nenko employment systems were one such additional brake on
mobility. The cost of a quit for skilled workers under this system rose as
wage differentials between sectors increased. Intraoligopoly sector moves
were discouraged by the difficulty of transferring seniority and the increas-
ing reluctance of primary sector firms to hire above the entry level.
The argument has often been made that, given the rapid pace of indus-
trialization in Japan, the ensuing shortage of skilled labor required the
establishment of the
nenk6
system to retain scarce, skilled labor. However,
the appearance of these practices must
be
seen as a partial attempt to eject
rather than retain workers trained outside the firm. During the expansion
of the thirties, as in the preceding war period, there were shortages of
skilled labor. But by this time the
nenk6
system was being solidified and
firms had internally trained labor in privileged positions. Additional skilled
workers were hired from outside the primary sector, but were placed at the
bottom of the new
nenko
rankings, despite their skill. The experience of
these transferred employees illustrates the priority given to internal, as
opposed to market, wage and status commensurability.31
The firm-trained skilled labor force was more likely to be loyal, stable,
and resistant to unions. Training probably increased identification with the
firm and inculcated dependable work habits. Since nenkii and permanent
employment were given to workers at the employer’s discretion, in addition
to limiting mobility these devices could also be used to elicit or reward loyal
behavior. That
is,
nenk6-based employment policies were also a way to
control effort in a broad sense, and as such their introduction was accom-
panied by new selection and indoctrination procedures. This control aspect
of the nenk6 system probably functioned to standardize effort in the transi-
’OIn one of the first critiques of Becker’s theory of the incidence
of
training costs, Eckaus notes that
while in perfect labor markets employers would not bear the costs of on-the-job training,
“.
.
.if
there
is
some degree of immobility, firms can collect part
of
the extra product training creates and therefore can
consider such general training as if it were an investment in fixed capital.” Thus if there is labor immo-
bility, one need not rely upon
the
notion
of
firm-specific skills
to
explain employer investment
in
training.
R.
S.
Eckaus, “Investment in Human Capital:
A
Comment,”
Journal
ofPolitical
Economy,
LXXl
(October,
1963),
501-504.
J’These employees were known as “half-way employees”
(chuto
saiyo
sha)
because their careers
spanned more than one firm. Levine, “Labor Markets and Collective Bargaining..
.
,”
p.
651.

Internal Labor Markets in Japan
/
195
tion to a new form of skilled labor organization. It also had much to do with
the spurt of labor unrest that shook Japan after World War
I.
Nenko-based employment policies were initially restricted to (widely)
skilled labor for several reasons. First, absolute training costs for these
workers were higher, and the greater time involved in replacement, in the
face of the need to maintain capacity utilization, made
a
quit relatively
more costly. Second, these workers were being assimilated into a new form
of organization and discipline, which meant that attempts to win their
loyalty were more intense. This was reinforced by their demonstrated
propensity to form unions. Finally, to the extent that the
nenko
system
involved the retention of these workers over the cycle, they became a
fixed cost that could be subsidized by adjusting labor requirements through
less skilled workers.32
Those workers who had the least to gain from mobility were the new and
growing group of semi-skilled workers, whose skills were relatively more
enterprise-specific compared to the skilled workers. The enterprise-specific
nature of their narrow skills, if rewarded, inhibited their mobility. But
because they could be trained relatively faster, they were not viewed as
essential to retain. These workers were more readily dismissed during
a
recession, thereby subsidizing the retention
of
workers with more general
skills. It was only with the appearance of powerful unions after World War
I1 that semi-skilled workers in the oligopoly sector began to share in the
benefits of
a
quasi-permanent employment relationship.
A
strict application
of specific human capital theory would not have predicted these results.
Conclusion
Particularist theories of the development of internal labor
markets in Japan suffer from a misplaced emphasis on cultural uniqueness
and
a
failure to appreciate the complexities of institutional change. An
analysis of the origins and functions of the internal labor market that relies
on a specific human capital approach is compelling in its elegance, but, as
I
have tried to show, here too there are logical and historical problems.
Previous treatments of the origins of internal labor markets in Japan (and
the United States) have sometimes veered too closely to
a
monocausality that
ignores the variety of factors that need to be taken into account. In contrast,
”During
a downturn, the need to reduce labor
costs
was transferred directly
to
nenkii-less subcon-
tracting firms. Within the large firm, added flexibility was provided by “temporary” and “permanently
temporary” workers, who, deprived
of
the costly trappings of
nenko,
still represented a variable cost.
At
the giant Yawata Steel
Works
in
1935,
nearly
70
per cent
of
the
work
force
of
21,000
were temporary
workers. Taira,
op.
cit.,
p.
161.

196
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SANFORD
JACOBY
the institutional approach within economics, which is broader in its analysis,
often has lacked empirical rigor and been too descriptive.
More careful historical research on the circumstances surrounding the
introduction
of
internal labor markets in Japan indicates the importance of
the increase in firm size and complexity, the change in skilled labor organi-
zation, and the desire to forestall unionization. These factors are causally
connected to the emergence of an emphasis on stability and control in input
markets, as well as the creation of new pressures to maintain employee
effort and loyalty.
Implicit in this alternative explanation is a recognition
of
the need to
identify the constraints that firm structure and the product market impose
on the choice of personnel policies. (Even today the nenko-based employ-
ment system is largely limited to male employees in primary sector firms).
It is also important to recognize the differences between groups of employ-
ees both within and across firms. The distinction between widely skilled
and less skilled labor leads to questions concerning the determinants of
group bargaining power and the influence this power has had on the devel-
opment of internal labor markets. Finally,
I
would argue that there
is
more
to internal labor markets than the nonmarket pricing and allocation
of
labor. Studies of the origins of personnel policies point to the crucial impor-
tance of the control
of
effort. The withdrawal of effort, either at the indi-
vidual, group, or firm level (as reflected, for example, by indiscipline, output
restriction, or strikes) has been a continual concern of management. The
relationship between the control of effort and the structure and efficiency
of the internal labor market cannot be ignored, although economists have
traditionally eschewed this problem. This is an area on which historical
studies
of
internal labor markets may shed some light.