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Is the Aging of Society a Threat to Japan?

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Is the Aging of Society a Threat to Japan? NIRA REPORT | 2010.５ Is the Aging of Society a Threat to Japan? -Increasing Productivity in the Next Decade is the Key- NIRA Report Is the Aging of Society a Threat to Japan? -Increasing Productivity in the Next Decade is the Key- *The Japanese version of this report was published in November, 2009. Copyright Ⓒ 2010 by National Institute for Research Advancement (NIRA) Publisher National Institute for Research Advancement (NIRA) Yebisu Garden Place Tower, 34th Floor 4-20-3, Ebisu, Shibuya-ku, Tokyo 150-6034, Japan (URL:http://www.nira.or.jp/english) For more information： [email protected] Tel +81-3-5448-1735 Fax +81-3-5448-1744 1 Contents Chapter 1 Statement of Problem and Overview of Study ................................................. 3 Hiromichi Shirakawa BOX 1: Looking at Productivity ....................................................................... 14 Hisakazu Kato BOX2: Survey of Literature concerning Employee Age and Productivity ...................................................................................... 17 Kensuke Miyazawa Chapter 2 Empirical Analysis of Population and Technological Progress..................... 23 Hisakazu Kato Chapter 3 Empirical Analysis of Relationship between Worker Age, Productivity and Real Wages ................................................................. 48 Hiromichi Shirakawa Chapter 4 Estimates of Labor Productivity from the Perspective of Age Groups ...... 72 Masatoshi Jinno Chapter 5 Aging of the Population and Employment among the Young: A Reconsideration of the Relationship .................................................. 88 Souichi Ohta 2 Chapter 1 Statement of Problem and Overview of Study Hiromichi Shirakawa [Abstract] The main purpose of this report is to respond to the question of what effect the aging of Japan’s society and the decline of its population will have on the nation’s economic productivity. It is highly possible that the aging and decline of the population will result in a decline in the growth of productivity in the Japanese economy. However, there is little likelihood that economic growth will be affected by a decline in productivity due to the aging of the population within the next decade. In the short-term at least, there is therefore no reason to emphasize the threat represented by the aging of the society. However, because growth in productivity will become negative from the latter half of the 2020s onwards, it will be essential to make efforts to increase the capacity for technological innovation and boost labor productivity within this ten-year period. 1. Statement of the Problem It is considered that the aging of Japan’s population, or in fact the aging and decline of its population, will create a variety of problems for the economy. First, it is possible that a worsening of the state of social security finances will result in a downward trend in domestic investment. If an increase in social security expenditure is authorized and the government attempts to stop an overall worsening of finances throughout its departments, unless quite significant tax increases are imposed, it will be necessary to drastically reduce discretionary expenditure, in particular public spending. If gross investment (gross fixed capital formation) declines as a result, it is quite possible that a deterioration in the quality of social capital, among other factors, will create downward pressure on economic growth. Second, it is possible that the Japanese economy will experience a decline in productivity. While there are a number of differing concepts of productivity, for example labor productivity and total factor productivity (see Box 1 at the end of this chapter for definitions of productivity and representative indexes of productivity), we cannot deny the possibility that the aging and decline of Japan’s population may reduce the capacity to produce value added per worker and cause a decline in the capacity for technological innovation in the economy as a whole. 3 The possibility that productivity might decline with the aging and decline of the population represents a considerable threat to the corporate sector due to reduced competitiveness and profitability. Profitability will be further affected if the company employs a seniority-based wage system. It may be assumed that a decline in corporate profits will also function to limit future-oriented investment in facilities and in research and development, in addition to the employment of young workers. From the medium- to long-term perspective, this would create a vicious circle which would put further downward pressure on productivity. If the aging and decline of the population results in declining investment and reduced productivity, a considerable decline in the trend growth rate of the Japanese economy will be unavoidable. This will increase the probability of financial collapses, and the government will ultimately be forced to implement major tax increases or adopt aggressively inflationary policies. It is not easy to offer an answer to the question as to whether Japan’s future economy and society can withstand these types of policy shock, but it will at least be necessary for the nation’s citizens to resign themselves to a significantly lower standard of living than that which they presently enjoy. Against this background, it is extremely important to analyze how the ongoing aging and decline of the population will actually affect future productivity in the Japanese economy, how it will affect the average wage of workers, and how these factors will impact on profitability and revenue in the corporate sector. This is precisely the purpose of this report. Two basic scenarios can be projected: Either productivity will decline but average wages will increase, exerting a strong downward pressure on corporate profits, or productivity will transition stably and average wages will decline, which will function to increase corporate profits. If the first scenario eventuates, many Japanese companies will be forced to revise their seniority-based wage systems in the face of declining productivity; if the second scenario eventuates, many companies will receive a “bonus” from the aging of their workers, which should be used to increase productivity through increased investment in research and development and increased hiring of young employees. 4 2. Summary of Empirical Analyses (1) Empirical analysis of relationship between rate of population change and productivity (TFP): Chapter 2 Does population decline result in reduced productivity (considered as TFP, which may also be taken as a measure of technological progress)? If it does, this represents a serious threat to the Japanese economy, given that the speed and the magnitude of the decline of Japan’s population is greater than in other advanced nations. The impact of population decline on productivity can be considered from a variety of perspectives: the reduction in the collective capacity of the workforce due to population decline may result in a decline in productivity; a decline in the youthful workforce may result in a reduction in creativity and enterprise in the economy as a whole, thus causing a decline in productivity; or, the necessity to make greater use of production factors other than labor power may spur technological progress and thus increase productivity in the economy as a whole. The perspective proposed by Kuznetz (1960), among others, that larger populations contain a greater number of potential innovators in addition to promoting a higher level of intellectual exchange, specialization, and division of roles, thus increasing the rate of technological progress, must also be taken into consideration. Based on these considerations, the present study proposed three hypotheses and subjected them to empirical analysis using panel data for OECD member nations and the G10 and time series data for Japan. These hypotheses were: 1) the working population increases with the size of the total population, resulting in a higher rate of technological progress; 2) that the rate of technological progress will decline with increases in the cost of technological development due to the aging of the society and other factors; and 3) that the rate of technological progress will be higher the more easily technologies can be introduced from other countries (the momentum of technological progress increases in proportion to the level of economic openness). The main conclusions resulting from this empirical analysis are as follows: ■ An empirical analysis for the G10 nations and 19 OECD nations (panel data analysis using MFP) showed that a positive relationship exists between total population and the rate of increase in productivity, and a negative relationship exists between the ratio of the elderly population (aged 65 and above) to the total population and the rate of increase in productivity. A positive relationship was also determined between the level of economic 5 openness (the percentage of GDP represented by total imports and exports) and the rate of increase in productivity. These results supported the three hypotheses outlined above. ■ Despite some degree of statistical unreliability, an empirical analysis for Japan (a cointegration analysis of time series data using TFP) showed that the size of the working population and the level of economic openness both had a positive effect on the rate of increase in TFP. This means that if the working population declines, the rate of increase of TFP will decline, but if the level of economic openness increases, the
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