Why Don't Wages Rise Despite 'Labor Shortages'? — The Structure of a Labor Market Where Supply and Demand Fail
Labor-shortage bankruptcies are surging, yet wages remain stagnant. With 1.76 million job seekers registered at Hello Work and companies still claiming 'labor shortages,' this column analyzes the structural factors that prevent supply-demand principles from functioning in Japan's labor market.
TL;DR
- Labor-shortage bankruptcies hit a record 441 in FY2025, while the labor share of income fell to 53.9% — a 51-year low
- The reality behind corporate 'labor shortages' is a structural mismatch — no workers at the wages firms can offer
- Three factors — subsidy dependence, labor mobility costs, and AI substitution — structurally block wage increases that supply-demand theory predicts
What Is Happening
Labor-shortage bankruptcies hit record highs while wages stagnate and job seekers remain abundant — a paradox
The phrase "labor shortage" has become a fixture of discourse on the Japanese economy. The effective job openings-to-applicants ratio stands at 1.25, meaning there are 1.25 job openings for every job seeker. Against a backdrop of population decline and aging, the narrative that labor supply is physically insufficient seems intuitively reasonable.
Yet the same labor market harbors a paradoxical set of coexisting realities.
Labor-shortage bankruptcies reached a record 441 cases in FY2025, a substantial increase over the prior year. Firms with fewer than 10 employees account for roughly 75% of the total, concentrated in construction and services. Companies are folding because they cannot hire. The labor shortage is a serious business problem.
At the same time, approximately 1.76 million people remain registered as job seekers at Hello Work (public employment service). People looking for jobs are far from scarce. Moreover, the labor share of income fell to 53.9%, the lowest level in 51 years since FY1973, indicating that corporate profits are not being channeled into wages.
If labor is truly scarce, textbook economics says wages should rise. A seller's market should improve workers' bargaining position. But that is not happening. Why do supply-demand principles fail?
Background and Context
The reality of 'labor shortages' is a shortage of cheap labor, sustained by a subsidy-dependent structure
Two Meanings of 'Labor Shortage'
The term "labor shortage" masks two fundamentally different phenomena behind a single phrase.
The first meaning is that no workers are available at a given wage level. When the care, construction, and food-service sectors report that "people aren't coming," they usually mean "no one applies at the wages we can afford." Raising wages significantly would attract applicants, but the profit structure does not permit it.
The second meaning is the absolute decline in the working-age population. Japan's working-age population (15–64) peaked at 87.26 million in 1995 and has since fallen to approximately 74 million by 2025. This is a demographic reality that higher wages alone cannot resolve.
The problem is that policy discussions and media coverage lump both meanings together under the single label "labor shortage." The first is a wage-and-profit-structure issue; the second is a demographic issue. The prescriptions are fundamentally different.
Subsidies That Sustain Low Wages
What Firms Call 'Labor Shortage'
No workers at low wages
Revenue depends on subsidies
Industries unable to pass on costs
What Workers Experience
Jobs exist, but conditions are poor
1.76M registered job seekers
'Jobs exist if you lower your standards'
Structural Outcome
441 labor-shortage bankruptcies (record)
Labor share 53.9% (51-year low)
AI substitution changes nature of 'shortage'
'Labor shortage' means 'a shortage of cheap labor' — structural barriers prevent the wage increases that supply-demand theory predicts
Why don't firms raise wages? Is it that they cannot, or that they choose not to?
One answer is that subsidies sustain the low-wage structure. Programs such as the Employment Adjustment Subsidy, the Career Advancement Subsidy, and the Specific Job Seeker Employment Development Subsidy are designed to maintain employment and develop human capital. Their side effect, however, is to create a structure in which businesses can continue operating at low wages.
Subsidies cover labor costs; basic pay stays low
Poor conditions deter applicants → declared 'labor shortage'
Shortage cited as basis for employment subsidies
Subsidies sustain revenue; wage pressure is deflected
If subsidies cover part of labor costs, firms can maintain operations without raising wages. When applicants fail to materialize, the shortage becomes grounds for requesting further support. Within this cycle, upward wage pressure is structurally dampened.
For SMEs, this structure is existential. In the 2026 Shunto, only 7.2% of small and medium enterprises achieved wage increases of 6% or more. While large corporations delivered raises above 5%, SMEs face growing "wage-hike fatigue." In a subcontracting structure where cost pass-through is difficult, there is no budget for wage increases without subsidies. Yet those same subsidies function as a safety valve that makes wage increases unnecessary.
60% of Executives Say 'AI Will Replace the Shortage'
AI adds another layer of complexity to what "labor shortage" means. 60% of business leaders say they plan to substitute AI for labor shortages.
The implications are significant. If "labor shortage" means a physical absence of workers, AI substitution is a rational solution. If it means "no one will work at the wages we offer," AI becomes a tool to avoid raising pay.
AI-related job salaries exceed the Japanese average by 25–71%, and the job openings-to-applicants ratio for IT and telecom reaches 3.35. Workers who can wield AI are in high demand at premium compensation, while mid-skill tasks susceptible to automation lose upward wage pressure. The "labor shortage" persists, but its character is transforming.
Reading the Structure
Monopsony power, labor mobility costs, and AI substitution render supply-demand mechanisms inoperative
Why Supply-Demand Principles Fail
In ordinary goods markets, scarcity drives prices up. The same should hold for labor. Yet Japan's labor market contains multiple structural barriers that prevent supply-demand mechanisms from functioning.
First, monopsony (buyer-side market power). In specific regional industries, employer options are extremely limited. Where a care facility, a construction firm, or an agricultural corporation is the community's dominant employer, workers face a binary choice: accept these conditions or leave the area. Competitive wage formation cannot take hold. Yuji Genda's edited volume Why Don't Wages Rise Despite Labor Shortages? offers a detailed analysis of this buyer-side concentration.
Second, high labor mobility costs. In Japan, the costs of moving across regions, occupations, and employment categories are substantial. High homeownership rates impede geographic mobility; reskilling support for occupational transitions is thin; and while moving from regular to non-regular employment is easy, the reverse is not. These barriers prevent effective matching between "firms that need workers" and "people who need jobs."
Third, the weakening of labor unions. The estimated union membership rate stands at 16.1%, a record low. Roughly 84% of workers are outside collective bargaining frameworks. Individual wage negotiation power is limited, and employers hold disproportionate wage-setting authority as a result.
What Labor-Shortage Bankruptcies Signify
The interpretation of rising labor-shortage bankruptcies depends on perspective.
One view is "market normalization." When firms that can only survive by paying low wages exit the market, it may be part of a process through which limited labor migrates to more productive enterprises. In the long run, this could raise the overall wage floor.
Another view is "regional economic crisis." When local construction companies and care providers close, the consequences for infrastructure maintenance and elder care in those communities are direct. There is no guarantee that replacement firms will emerge.
Both perspectives have merit. But the critical point is that the very increase in labor-shortage bankruptcies is evidence that supply-demand principles — "raise wages to attract workers" — are not functioning adequately. If the market mechanism were operating normally, firms would raise wages to secure workers before going bankrupt. That they cannot — because cost pass-through is blocked, operations depend on subsidies, or margins cannot absorb wage increases — is the structural heart of the problem.
Related Columns
- The 30-Year Structure of Stagnant Wages — The historical mechanisms of retained earnings, non-regular employment expansion, and union decline
- Why Wages Don't Feel Higher Despite 5%+ Shunto Gains — Nominal increases vs. negative real wages
- Non-Regular Employment: 21 Million Workers and Structural Transformation — Five years after "equal pay for equal work"
- Industries Where Wages Rose and Fell Over 30 Years — Sectoral wage disparities
Related Guides
References
Labor Shortage Bankruptcy Trends (2025) — Teikoku Databank. Teikoku Databank
Profits Up, but Not Wages — FY2024 Labor Share Falls to 51-Year Low — Nikkei. Nikkei
60% of Business Leaders to Substitute AI for Labor Shortages — Nikkei. Nikkei
Shunto Wage Increases at Prior-Year Levels — Beware SME 'Wage Hike Fatigue' — Diamond Online. Diamond Online
