Small and Medium Enterprises (SMEs) Are the Backbone of Japan’s Economy and Industry: Who We Are and What We Do

5. The Gap between SMEs and Large Businesses

There is a clear and significant gap between SMEs and large businesses in terms of both labor productivity and employee income. Despite efforts to resolve such differences in Japanese industry over the years, the gap seems to be expanding even wider.

(1) The Productivity Gap
The 90s showed a decline in output from SMEs, while large companies remained in an upward trend, further widening the productivity gap. Since then, the gap has expanded even further, with SMEs yielding only 41.6% compared to large business output in 2007. The decrease in productivity per person due to many SMEs maintaining their labor-intensive stance is particularly noticeable. Continued deflation since the 90s is another factor contributing to this negative productivity trend.

(2) The Wage Gap
Since 1995, we have seen the wage gap between SMEs and large companies widen again. Standard wages provided in smaller companies are currently less than 70% the wages offered by large companies.

In 2007, the average SME wage was 65.1% lower than that of large companies. Even wages provided by midsize businesses (100 to 499 employees) were 77.5% lower. Small-scale companies (5 to 29 employees) were only able to offer 52.9%, or nearly half, of what large companies could pay employees.

Examining the situation by category, we see that the wage gap with the manufacturing sector widened since 1995, with wages settling at a standard of about 60% of large company salaries. The service sector, on the other hand, boasts a minimal gap, paying its employees 92.2% of what large business pay.

The noticeable gap with the manufacturing industry can be traced to the industrialization of emerging markets, where the low cost of production has brought extremely low-priced products to market. Price wars have forced large manufacturers to implement drastic cost cutting, which small and midsize factories have had to bear as well.

In the end, this vast wage gap is fundamentally generated by labor productivity (value added per employee) of small and midsize businesses weighing in at only 40% in comparison to large corporations.