Report 3 Preliminary, not to be quoted English, to be refined ESRI International Collaboration Projects 2008 Declining Fertility and Its Related Economic Issues in Japan March 2009 Noriyuki Takayama, Hitotsubashi University (Leader) Reiko Aoki, Hitotsubashi University Toshie Ikenaga, Hitotsubashi University Iichiro Uesugi, Hitotsubashi University Sachiko Kuroda, Hitotsubashi University Kengo Yasui, Hitotsubashi University Kousuke Shiraishi, Hitotsubashi University Katsuyuki Matsumoto, Hitotsubashi University Hideaki Tanaka, Hitotsubashi University Hideki Kawashima, College of Healthcare Management Yukiko Saito, Hitotsubashi University Shinpei Sano, Kobe University 1 Chapter 1 Introduction1 There are many challenges in the Japanese economy which begins to suffer from declining fertility. In this paper we will focus on the persistent low birthrate in Japan, and its related economic issues. Chapter 2 analyzes the causes and implications of low birthrate in the long run, examining the Easterlin hypothesis cohort effect, while showing that the feedback mechanism of the economy may not reverse the declining birthrate. Chapter 3 tries to answer the question “Do Japanese work shorter hours than before?” Using Japanese time-series data from the Survey on Time Use and Leisure Activities, it indicates that market work per week increased from the 1970s until mid 1980s and has been relatively stable for the last two decades for both male and female full-time workers. Furthermore, it demonstrates that since the mid 1980s, people shifted their work time from Saturday to weekdays (Monday through Friday). Interestingly, as well, it shows that the average hours of leisure had increased for females, while hours for sleep declined consistently. Lastly, it suggests that Japanese work much longer than their American counterparts; 8.6 hours longer per week for males and 6.5 hours longer for females. Chapter 4 studies the causal effects of marriage and motherhood on wages of female Japanese workers, through correcting sample-selection bias and taking the endogeneity into account. It implies that in the short term, marriage and motherhood have no effects on wages. Chapter 5 examines the reasons for the increase in non-routine manual tasks in Japan, taking demand-side aspects into account, using the data from the National Survey of Family Income and 1 Chapter 1 is written by N. Takayama, Chapter 2 by R. Aoki, Chapter 3 by S. Kuroda, Chapter 4 by K. Yasui and S. Sano, Chapter 5 by T. Ikenaga, Chapter 6 by K. Shiraishi, Chapter 7 by I. Uesugi and Y. Saito, and Chapter 8 by N. Takayama, K. Shiraishi and H. Kawashima. The authors are very much grateful to Professors Akira Kawaguchi, Richard Percival and Susan St John for their insightful comments and helpful advices. 2 Expenditure and the Employment Status Survey. It suggests that the increase in workers performing non-routine manual tasks is due to demographic changes such as the advance in population aging and the decline in household sizes as well as the increase in the employment share of high-skilled workers. Chapter 6 provides a dynamic microsimulation model (PENMOD) to examine two policy options for reforming public pensions in Japan. The first option is a shift to the VAT finance of the first-tier, flat-rate basic pensions. The model shows that the transitional cost incurred additionally is approximately 3 percentage point in the VAT rate for over 40 years. The claw-back system will relieve the tax burden by 7% at the most. The second option is an introduction of the Swedish-style pensions which are composed of a notional defined contribution plan and a minimum guarantee. The chapter suggests that the Swedish system is feasible in Japan, more cost-effective than a shift to the VAT finance of basic pensions, contributing more to intergenerational equity. Chapter 7 examines the pattern of top executive turnover among small non-listed businesses in Japan using a unique panel data set of about 25,000 firms for 2001-2007. It found that 1) the likelihood of a change in top executive among non-listed firms is independent of their ex-ante performance, especially when the firms are managed by the owners themselves or by their relatives, and 2) non-listed firms which experienced a top executive turnover saw an improvement in ex-post performance relative to firm without turnover. The extent of the improvement is similar between non-listed firms and listed firms. These results indicate that underperforming non-listed firms do not face disciplinary executive turnover but that their top executives, once they succeed their predecessors, exert high managerial effort and thus significantly improve firms’ profitability. Chapter 8 makes a preliminary approach to examine the EITC in Japan. A US-type EITC is studied, using the Basic Survey of the Living Conditions of People on Health and Welfare. 3 Chapter 2 On the Persistence of Low Birthrate in Japan Abstract We first show that quality of consumption is an important determinant of fertility and labor supply. Taking this observation into account and using a general equilibrium model with vertical quality differentiation and heterogeneous labor, we show how low fertility may persist. This occurs because product quality and skilled labor supply adjust, never realizing the change in labor productivity necessary to reverse declining fertility. 2.1 Introduction This paper consists of two parts. First, we present a model of consumer choice where children and consumption experience require both goods and time. We demonstrate how change in marginal utility of consumption and change in wages generate different relationship between fertility and labor participation, i.e., possible source of the difference between cross section and time series. In the second half, we embed a simplified version of this consumer into a general equilibrium model with heterogenous labor and vertically differentiated products. Through comparative statics, we analyze the cause and implications of low birthrate in the long run. We show that the feedback mechanism of the economy may not reverse the declining birthrate, contradicting an implication of the Easterlin Hypothesis cohort effect. This is because the labor market structure and product market adjusts to change in birthrate and thus the cohort effect never materializes. The paper is in the spirit to papers in growth and trade that take into account the reaction of the economy in the long run (Acemoglu (1998), Flam and Helpman (1987), Thoenig and Verdier (2003)). Acemoglu (1998) showed that while in the short run, laborinput is reduced in response to scarcity of skilled labor and high wages, skilled labor supply increase in response triggers technological change that makes skilled labor even more productive, raising skilled labor wage in 4 the long run. Our analysis suggests that a similar long term adjustment of the economy will prevent a natural feedback mechanism from working. That is, smaller population will increase marginal product of labor more productive in the short run but consumption pattern will change in the long run reducing such an advantage. 5 2.2 Re-examination of female labor participation - birthrate relationship Large Time series among many OECD countries show negative relationship between female labor participation and TFR (Figure 2.1) , while cross country in 2005 (average of years 1985-1996 as well as year 2000, Sleebos (2003), d’Addio and d’Ercole (2005), Da Rocha and Fuster (2006)) show a positive relationship. In Japan, although time series relationship has been negative for 1980 - 2000 (Figure 2.1) , cross section among prefectures show positive relationship in 1987 and 2002 (2.2). Obviously conditions that differ across regions in Japan are different from difference between two points in time. We also note that countries with high per capita GDP have low birthrates (Figure 2.3), suggesting low fertility may be correlated with high consumption. In this section we introduce a consumer optimization model to capture differences in income difference and quality of consumption. We assume that a utility of a household depends on number of children, n , and consumption of a good x . Both child rearing and consumption of a good requires time. Number of children is determined by amount of good xc , and time devoted, c , nfx() f 00 f cc x Subscripts on functions denote partial derivatives. The utility of consumer is actually determined by amount of z , which is consumption experience that depends on amount of the good, x , and time devoted, , zgx() g 0 g 0 x Utility function is, unz() unz 0 u 0 Budget constraint depends on price of good and wage, and labor endowment, , pxpxwcc w w Figure 2.4 demonstrates the optimization problem. The opportunity set is defined as, ()zn n f ( xcc ) z gx () px ( x c ) w ( c ) w The frontier is downward sloping (see Appendix). It reflects the budget constraint as well as the technologies, g and f . 6 We further index consumption ( consumption experience) by quality, Q , so that utility function is uQzn() where z measures quantity of consumption. First-order conditions for utility maximization are, fgp xx (1) f gw ug nx Q (2) ufzx Equation (1) implies less labor intensive consumption and child rearing method will be used when wage increases. The time series of female wage that has been rising in Japan would lead to less labor intensive methods which means greater labor participation. Equation (2) implies better quality of consumption leads to more consumption and less children. Higher wage but not significantly higher quality means positive relationship. However the same higher relative wage and higher quality consumption means negative relationship between labor participation and fertility. Availability of consumption goods, such as entertainment and restaurants, is much greater in larger cities. This means higher Q , meaning less children and more consumption in cities.2 2.3 General Equilibrium with high quality product and heterogeneous labor In this section we analyze a general equilibrium model in which consumers have a utility function that reflect the previous analysis, although somewhat simplified.