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.

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National Institute for Research Advancement (NIRA)
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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 Ageand 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

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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 growthof productivity in the Japanese economy. However, there is little
likelihood that economic growth will be affected by a decline inproductivity 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 inproductivity will become negative from the latter half of the 2020s
onwards, it will be essential to make efforts to increase the capacity fortechnological 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 isauthorized 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 thequality 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 anddecline of Japan’s population may reduce the capacity to produce value added per worker andcause a decline in the capacity for technological innovation in the economy as a whole.
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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 andprofitability. 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 theemployment of young workers. From the medium- to long-term perspective, this would create avicious 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 andsociety can withstand these types of policy shock, but it will at least be necessary for thenation’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 anddecline 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 andrevenue 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 willtransition 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 theirseniority-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, whichshould be used to increase productivity through increased investment in research anddevelopment 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 betaken as a measure of technological progress)? If it does, this represents a serious threat to theJapanese 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 ofperspectives: 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 inproductivity; 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 greaternumber 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 timeseries data for Japan. These hypotheses were: 1) the working population increases with the sizeof the total population, resulting in a higher rate of technological progress; 2) that the rate oftechnological 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 momentumof 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 ofincrease 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 inproductivity. A positive relationship was also determined between the level of economic
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openness (the percentage of GDP represented by total imports and exports) and the rate ofincrease in productivity. These results supported the three hypotheses outlined above.
■ Despite some degree of statistical unreliability, an empirical analysis for Japan (acointegration 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 ofincrease 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 rate of increase in TFP
will also increase.
■ A simulation was conducted for the future rate of increase in TFP in Japan based on the
results of these empirical analyses. This simulation indicated a TFP growth rate of -0.6% in
2030 based on median working population estimates (a working population of 60.91 million
in 2030, as projected by the National Institute of Population and Social Security Research).
This result assumes no change in the level of economic openness from the average figure
for the period 2002-2007. The simulation showed that Japan’s rate of increase in TFP would
become negative in the latter half of the 2020s.
As the foregoing discussion indicates, the empirical analyses conducted as part of thisproject showed a broadly positive relationship between the size of the total population and thesize of the working population and the rate of increase in productivity (measured as TFP or MFP,
and considered as an indicator of the rate of technological progress) for advanced nations
including Japan. They also demonstrated the possibility that the continuing decline in Japan’s
working population will see its rate of increase in productivity, presently around 1%, decline toa negative level within the next 20 years.

(2) Empirical analysis of the relationship between average worker age andproductivity (TFP): Chapter 3
The effect of the aging of society on TFP at the macro level can also be analyzed from theperspective of the relationship between the average age of workers (or the age structure of theworking population) and productivity (TFP). It may be assumed that there are average worker
ages or specific age structures of the working population at which the potential for technologicaldevelopment and the level of technological progress reach their peaks for specific industries andthe economy as a whole. When these average ages are exceeded, or are not reached, specificindustries and the economy as a whole are unable to maximally exert their capacity fortechnological development.

6However, the theoretical framework for the relationship between worker age andproductivity is not as well-developed as that for the relationship between population andproductivity. It is possible to adopt a perspective based on human capital theory, but it isdifficult to develop arguments as clear cut as those deployed in the area of population andproductivity.
Nevertheless, attention has been drawn to the relationship between worker age andproductivity because it is generally observed that wages increase with increasing length of
employment and years of work experience. If recompense for labor in the form of wages
changes with worker age and years of work experience, then some relationship should also exist
between these factors and productivity. The fact that a comparatively large number of empiricalstudies of the relationship between worker age and productivity have been conducted can beconsidered to reflect this way of thinking (see Box 2 in this chapter for more detail regarding
this point).
In addition to regressing TFP on the ratio of different age groups in order to consider which
worker age groups a relative increase in would stimulate the greatest increase in TFP, thepresent study employed industrial panel data in order to examine the relationship between
average worker age and TFP. The following results were obtained from these empiricalanalyses:■ A strong possibility exists that TFP will display its maximum increase when there is anincrease in the working population aged 40-49. This indicates the possibility thattechnological capacity in the Japanese economy will maximally increase when there has
been a relative increase in the population of workers in their 40s.
■ When the relationship between the average age of the working population and TFP isanalyzed using industry panel data, the relationship is best described by a nonlinear curve
termed an inverse Weibull function. TFP reaches its highest level at an average worker age
of a little less than 46.
■ As this suggests, there is a strong possibility that technological capacity in the Japanese
economy will reach its highest level at an average worker age of a little less than 46,
following which the level of technological capacity (the level of TFP) will decline if there isfurther aging of society as viewed by average age.
■ However, the rate of decline in TFP following its peak at an average worker age of a little
less than 46 will be comparatively mild
■ A similar analysis conducted using median estimates for the working population (National
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Based therefore on the results of empirical analyses of the relationship between the averageage of the working population and TFP, we may conjecture that the level of TFP of the Japanese
economy will gradually increase (i.e., the total technological capacity of the economy will
gradually increase) until the average age of workers reaches just under 46, and it can bepredicted that TFP will continue to increase until the beginningof the 2020s.

(3) Empirical analysis of labor productivity for different worker age groups:
Chapter 4
An empirical analysis concerning the labor productivity of different worker age groups was next
conducted. Using panel data for different industry sectors, labor productivity for five-year age
groups was estimated based on a linear difference model. The sensitivity of the (change in)
output per worker to the ratio of each age group to the worker population was measured. The
15-24 age group was used as the standard age group. If the parameters estimated for the ratio ofworkers in a specific age group differed significantly from 1, the productivity of that age group
was considered to differ significantly from that of the 15-24 age group. In addition, because thepurpose was to isolate the effect of labor productivity, capital input and intermediate inputs per
worker were added as explanatory variables, and were controlled. The analysis discussed in (2)above had demonstrated that a fixed relationship existed between the average worker age andproductivity and the capacity for technological innovation in the economy as a whole. Labor
productivity by worker age groups was examined in order to determine whether, against thebackground of this macro-level relationship, any relationship existed between worker age andthe capacity of individual workers to produce added value.
The analysis of labor productivity by age group produced the following results:■ The level of labor productivity is highest for the 45-49 age group. However, the difference
between the labor productivity of the 40-44 age group and the 45-49 age group is not great.
■ Excluding the fact that labor productivity declines relatively significantly for the 50-54 age
group, there is an inverse U relationship between age group and labor productivity.
■ The decline in labor productivity after it reaches its peak in the 45-49 age group is relatively
mild. Caution must be exercised with regard to the relatively significant decline for the8

50-54 age group, but on an all-industry (excluding agriculture and the public sector) basis,the labor productivity of the 55-59 age group is virtually identical to that of the 40-44 age
group. Therefore, it is possible that further aging of society will not result in a particularly
dramatic decline in labor productivity.
■ However, when calculations were conducted for the manufacturing sector alone, while laborproductivity peaked in the 45-49 age group, as in the case of calculations conducted on an
all-industry basis, the decline in labor productivity in the 55-59 age group was more marked
than in all-industry estimates.
■ The future trend of labor productivity on a macro level was simulated using the calculated
values of labor productivity for each age group. Results for a scenario which assumed thatthe working population would change in line with the median projections of the National
Institute of Population and Social Security Research indicated that labor productivity would
maintain positive growth until around 2020. This results from the fact that thesecond-generation baby boomers will reach their 40s, their period of peak labor productivity,
between 2015 and 2025.
When labor productivity was used as the criterion, an empirical analysis showed that inJapan, on an all-industry basis, productivity increases until a worker age of 45-49, and laborproductivity will therefore continue to increase until around 2020. While it is predicted that therate of growth of TFP will become negative in the latter half of the 2020s as a result of theshrinking of the working population, as indicated above, this result showed that the growth rateof labor productivity will become negative slightly earlier, in the former half of the 2020s. It isof considerable interest that this result accords with the result of the analysis of the relationshipbetween worker age and TFP (the rate of growth of TFP will become negative in the former halfof the 2020s).

(4) Empirical analysis of relationship between average worker age, wages,
and company revenues: Chapter 3
The analysis discussed in (2) above showed:(a) that the rate of technological progress in the economy as a whole, i.e. considered from theperspective of TFP, is most likely to increase when there is a relative increase in the working
population aged between 40 and 49; (b) the level of TFP is highest when the average age ofworkers is just under 46; and (c) because of this, despite the ongoing aging of the population,
the existence of the second-generation baby boomers, among other factors, means that TFP in
the Japanese economy will display a relaxed growth trend until the beginning of the 2020s.
9Put simply, when considered from the perspective of TFP, or technological progress, theaging of Japanese society does not represent a significant threat to the nation’s economy
in the coming period of slightly over a decade.
If, then, TFP does display a relaxed growth trend for the next decade, what trend will be
displayed by average wages (real wages) in the same period?
An analysis of the relationship between average real wages, the worker age structure, andthe average age of workers indicated that when the ratio of older workers aged 50 and above
increased, the downward pressure on real wages was greater than the downward pressure on
TFP. An analysis of the relationship between the average age of the working population and real
wages using industry panel data (using an inverse Weibull function) showed that while the levelof real wages reaches its maximum at an average worker age of just under 44, the rate of decline
in the level of real wages due to the aging of the society is greater than that of TFP.
This means that, when considered from the macro perspective, the level of real wages
reaches its peak at an average age of the working population two years lower (younger) thanthat at which the level of TFP reaches its peak; however, its subsequent rate of decline as theaging of society proceeds is greater than that of TFP. The important point here is that the
average age of the working population in 2006 (44.0) had already, albeit very slightly, exceeded
the average age for the peak level of real wages. Therefore, as considered from its relationshipwith the average worker age, the level of real wages has already entered its phase of decline.
Thus, by complete contrast with the outlook for the level of TFP, which is projected to increase
until the beginning of the 2020s, the level of real wages is already trending downwards.
This difference in the future trends of TFP and real wages intuitively suggests that corporate
profits will tend to display an upwards trend. In fact, assuming as preconditions that the TFP
growth rate and the real GDP growth rate correspond, that the future working populationaccords with median estimates of the future population (i.e. there is no change from 2008
figures in rate of employment by age group), there is no change in working hours, and GDP
deflators maintain their past average rates of growth, estimation of the future trend of the ratio
of nominal labor costs to nominal GDP shows a downward tendency. Considering that it is very
likely that there is an inverse correlation between the ratio of nominal labor costs to nominal
GDP and the ratio of corporate revenues to nominal GDP, this indicates that the share ofcorporate revenues in the economy will trend upwards.

10This is to say that as the aging of society proceeds, there is a strong possibility that there will
be a transition in the distribution of income from the household to the corporate sector. Thissuggests that the majority of companies will receive a “bonus” from the aging of society (itshould be remembered here that this discussion only concerns the distribution of income; it isunclear whether there will be an increase in corporate income in absolute terms), and from thisperspective, it seems highly likely that Japanese companies possess sufficient margin to increase
their investment in research and development and their employment of younger workers inorder to avoid a future decline in productivity.

(5) Aging of society and employment of the young: Chapter 5
Future estimations of TFP and real wages suggest that the ratio of corporate income to GDP willtrend upwards, and there is a strong possibility that in this sense the corporate sector will receive
a “bonus” as a result of the aging of society. It can therefore be considered possible for Japanesecompanies to recirculate this “bonus” to the household sector in the form of more active
employment of younger workers.
We may therefore enquire as to what type of stance Japanese companies have adopted withregard to employment of young people up to the present.
It has been suggested that under a seniority-based wage system, the progressive aging ofsociety will threaten company profits, and will therefore function to restrict employment ofyoung people. However, the analysis of wage curves (the relationship between average
employee age and real wages) conducted in this report indicates that real wages peak at an
average employee age of slightly less than 44 and decline rather rapidly after this age,demonstrating that seniority-based wage systems are not standard in Japan.
Given this, it is highly likely that the aging of society has not directly restricted theemployment of young people up to this point.
In fact, the present report reexamines the “replacement effect” theory, which suggests that theexistence of middle-aged and older workers reduces employment opportunities for young
people, from a variety of perspectives and finds no evidence which strongly supports this theory.
Specifically, 1) an analysis of the employment accession rate produced no clear evidence
that employment opportunities for young people are being sacrificed in order to maintainemployment of middle-aged and older workers; 2) an analysis of the net inflow of young
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workers indicated the possibility that companies are adjusting their employee ratios in order toachieve the optimum age structure; and 3) an analysis of industry panel data showed that therate of growth in employment of young people tends to be higher the more the employee age
structure tends towards middle-aged and older, and that industries in which there is a highproportion of middle-aged and older workers are actually reducing their employment of theseworkers.
Summing up, we may assert that empirical analyses support the notion that there is a strong
possibility that Japanese companies are adjusting the ratios of their employee intake in order toachieve an optimum employee age structure. This fact suggests the possibility that thecompanies are somehow aware that an employee age structure exists which will enable themaximum level of productivity will be achieved, and are acting in accord with this awareness intaking measures to optimize their age structures. We therefore cannot rule out the possibility thatthe further aging of society in future will increase employment opportunities for young people.
In addition, it is highly possible that companies will be placed in an advantageous position interms of the distribution of income, and this may also act as a factor in promoting increased
employment opportunities for young people in future.
However, we do not know the absolute level of increase in employment among young
people which will result from companies seeking to optimize their employee age structure. In
particular, it is possible that the trend observed at present will continue, and an ongoing
long-term recession will reduce the level of employment of young people.

3. Conclusion and Policy Implications
The results obtained from the empirical analyses conducted in this report can be summarized asfollows:
1) There is a strong possibility that the decline and aging of the nation’s population will reduce
the growth of productivity in the Japanese economy. However, whether considered as TFP
or labor productivity, the productivity growth rate will not reach a continuing negative level
until the first half of the 2020s.
2) It is therefore unlikely that the decline in productivity resulting from the decline and agingof the population will dampen the rate of economic growth in the coming period of
approximately one decade. Given this, the threat represented by the aging of society should
not be over-emphasized in the short-term.
3) However, it is predicted that the negative effect of the aging of society – an ongoing12

negative rate of growth of productivity – will become manifest from the latter half of the2020s, and it will therefore be necessary in the coming period of approximately one decade
to make efforts in order to increase the capacity for technological innovation and laborproductivity in the economy.
4) Specifically, on the micro-economic level, companies should make active efforts to increase
their number of full-time employees, and to enhance in-house training, targeting older
employees also. It would also be desirable for the government to actively contribute toemployment training programs. Measures of this type may be expected to ameliorate thefuture decline in productivity.
5) On the macroeconomic level, among other measures, it will be essential to increase the levelof economic openness and open the labor market in order to increase the capacity fortechnological innovation, and to reconsider immigration policies and adopt policies toincrease the birthrate in order to increase the population.
The results of the analyses conducted in this report suggest a comparatively bright outlook
for employment among young people and investment in research and development. This isbecause they indicate the possibility, based on specific preconditions (that TFP determines thereal GDP growth rate, etc.), that the share of labor costs in nominal GDP (one measure oflabor’s relative share) will trend downwards in future, and there is therefore a strong possibility
that the share of corporate profits in GDP will consequently increase. This may be termed a“bonus” from the aging of society. However, this increase in corporate profits does not only
bring with it potential for increased employment of young people, but may also stimulate
investment in research and development. This can be expected to further increase TFP. The
important thing will be not to focus exclusively on the negative aspects of the aging of Japanesesociety, but to also bring its positive aspects into perspective.

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BOX 1:

Looking at Productivity

Hisakazu Kato

1. Defining productivity
The term productivity is frequently used, but it is a word with a very diverse set of significations.
Generally, productivity is interpreted as the ratio of a certain amount of output to a certain
amount of input, and the productivity growth rate refers to the rate of change in productivity
understood in this way. As will be clear, a variety of definitions of productivity are possible,
depending on what type of inputs are used as the indices for productivity measurements, andwhat type of data is selected to represent the outputs.
The major question when measuring productivity is what type of input is selected.
Depending on whether productivity in relation to the output is measured on the basis of a single
factor or a group of factors, we can distinguish productivity into single-factor productivity(SFP) and multi-factor productivity (MFP). If labor indices are used as the input, laborproductivity is measured, and if capital indices are used as the input, capital productivity ismeasured. Multi-factor productivity is measured using a combination of inputs, for example
labor and capital, or labor, capital, and intermediate inputs (raw materials, energy, etc.).
Furthermore, the definition of productivity will differ depending on how output is defined,
whether on a value-added basis, or on a product basis, incorporating intermediate inputs.
Another important point in addition to the above is the scope selected for the measurement of
productivity – i.e. whether company level, industry level, or national level.
Table 1, based on a table presented in Measuring Productivity – OECD Manual (OECD,
2001), classifies these definitions of productivity. In determining what type of productivity will
be used in a study, it is necessary to also consider the limitations of the data and other variables.

2. What productivity means
What, then, does “productivity” express? Generally, productivity is taken to express parameterssuch as technological progress. However, it cannot be taken as simply standing in fortechnological progress. Productivity is, of course, used as a proxy variable for technologicalprogress, but productivity also encompasses, for example, increases in efficiency or cost
reductions achieved under existing technological conditions (i.e. at a fixed technological level).
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In addition, in the case of MFP (to be discussed below), “something extra” in addition to thecontribution of the inputs, or a “residual,” is included among the factors expressed byproductivity, making it difficult to give the term a single, all-encompassing definition.
Figure 1: Overview of main productivity measures
Type of input measure
Type of output
measureGross output
Value added

LabourCapitalCapital and labour

Capital, labour andintermediate inputs(energy, materials,
services)

Labour productivity(based on gross output)

Capital productivity(based on gross output)

Capital-labour MFP(based on gross output)

KLEMS multifactor
productivity

Labour productivity(based on value added)

Capital productivity(based on value added)

Capital-labour MFP(based on value added)-

Single factor productivity measures

Multifactor productivity (MFP) measures

Source: OECD(2001), "Measuring Productivity -OECD Manual"

3. Representative Indices of Productivity(1) Labor productivity
Labor productivity expresses changes in the level of output (either output of products or output
of added value) produced by the input of a given unit of labor. This is the most representativeindex of productivity, but caution must be exercised when using it, as it can be affected bychanges in capital, technological progress, or (when the output is a product) intermediate inputs.

(2) Capital productivity
Capital productivity expresses changes in the level of output produced by the input of a given
unit of capital. Like labor productivity, capital productivity is influenced by other factors, being
affected by changes in the amount or quality of labor and intermediate inputs.

(3) Multi-factor productivity (MFP)
To find MFP, total input is determined as a sum of capital and labor inputs weighted for theirrespective shares in total costs; the difference between the rate of growth of the output and therate of growth of the total input is MFP. This represents the degree of increase in output due tothe contribution of factors other than an increase in inputs.
MFP is taken to be a proxy variable for technological progress, but it does not express the levelof technological progress in itself. MFP incorporates representative elements of technologicalprogress, but also the level of economies of scale and improvements in efficiency, etc., inaddition to measurement error.

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The Solow residuals employed in growth accounting are generally calculated with one categoryof labor and capital as input and termed total factor productivity (TFP). This is incorporated in
the concept of MFP.

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BOX 2: Survey of Literature concerning Employee Age andProductivity
Kensuke Miyazawa

1. Background
Theoretical consideration of the relationship between worker age and productivity can beconsidered to extend back to the theory of human capital advanced by Becker et al. (1964)*1.
According to this theory, education and on-the-job training represent investments that will
increase future labor productivity, and as such do not differ from investments in physical capital.
Assuming that the discounted cash flow of the future revenues from investments in humancapital exceed their cost, profits can be increased by making these investments. The profit fromeducation appears in the differences in the salaries available at different levels of education; thecosts are the expenses associated with education and the income foregone by not working. By
contrast, it is the increase in wages with increasing age or years of experience that can beconsidered to express the profit from on-the-job training.
Mincer (1974) is one representative study of wages, age, and years of experience on the job.
In this study, Mincer showed that if wages are regressed on years of education and years ofexperience, the work experience coefficient is positive. If wages are considered as reflecting
productivity, this would indicate that worker productivity increases with increasing experience.
This accords with the theory of human capital.
However, the possibility of short-term disjunctures between earnings and productivity has
also been indicated. According to the incentive contract model proposed by Lazear et al. (1979),
when uncertainty exists with regard to the relationship between workers’ level of effort and theresulting outcomes, contracts may be formed under which a worker receives a wage that does
not match his or her productivity when young, but exceeds his or her productivity when theworker reaches the middle or older age bracket. If the worker’s employment will be terminatedif it is realized that his or her level of effort has declined, and the employee will then be unable
to receive the earnings that he or she should have received in the future, this can be seen asfunctioning to control incentives for workers to reduce their level of effort. Lazear and Moore(1984) demonstrated the possibility, through a comparison with the earnings profiles ofself-employed individuals (where no issue of asymmetry exists between the worker and17

information), that incentive contracts are actually formed.

2. Analyses employing micro-data
The theories discussed above necessitated a framework that would enable consideration of therelationship between worker age and productivity without the use of earnings data. The
production function approach pioneered by Hellerstein and Neumark (1995) answered this need.
Using micro-data encompassing information on both workers and companies (or workplaces)
termed “employer-employee matched data sets”, Hellerstein and Neumark succeeded inestimating the productivity of workers in different age groups by estimating production
functions for the company with consideration of heterogeneity in workers’ ages. At the sametime, it became possible to study the validity of the theory advanced by Lazear et al (1979) bycomparing wage profiles and productivity.
Since the work of Hellerstein and Neumark (1995), Andersson et al. (2002), Crepon et al.
(2002), Dostie (2006), Haegeland and Klette (1998), Haltiwanger et al. (1999), Hellerstein and
Neumark (2004) , Hellerstein, Neumark, and Troske (1999) , Ilmakunnas et al. (2004), andMalmberg et al. (2008) have all conducted studies using similar frameworks. The results ofthese studies are basically identical in indicating that productivity considered by worker age
displays an inverse U shape, peaking between the ages of 35 and 54. Productivity between theages of 35 and 54 is between 10 and 20% higher than productivity at 34 and below. The
majority of studies showed that the earnings profile rises more steeply than productivity,
indicating the strong possibility that incentive contracts of the type described by Lazear (1979)
are being formed.*2
A similar study has been conducted in Japan by Kawaguchi et al. (2006). The researchers
formulated employer-employee matched data sets by matching the Census of Manufactures(Form A, 30 employees or more) with the Employment Structure Survey. The results of thisstudy resembled those of preceding studies. While some variations existed between industries, it
was found that worker productivity tended to reach its peak at 20 years of work experience,
following which it declined. Productivity at its peak was approximately 40% higher than
productivity at zero years of experience. Wage gradients rose more sharply than productivity,and in many cases there was no decline in earnings up to the 40th year of work experience. The
argument put forward by Lazear (1979) can therefore also be considered to hold true for Japan.

18

3. Analyses using macro-data
In addition to the company- and workplace-level studies discussed above, analyses using
macro-level data have also been the focus of attention. The background to this type of research
can be found in discussions of economic disparities between advanced and developing nations.
Recent empirical analyses of convergence between advanced and developing nations have notdemonstrated the type of convergence hypothesized by the simple neoclassical model.
Significant disparities in productivity are known to be the reason for this, and differences in theage structures of the workforces have been focused on as a causative factor in these disparities.
Using panel data for the GDP, TFP, and worker age structures of non-oil-producing
countries, Feyrer (2007, 2008) analyzed the effect of the population structure by regressing GDP
and TFP on dummy variables for the worker age structure. A similar analysis was conducted by
Werding (2007). These studies also showed that the productivity profile described an inverted U
shape, with worker productivity reaching its peak when workers were in their 40s. According toFeyrer (2007), advanced nations are characterized by the high average age of their workers, andbetween one-quarter and one-third of the disparity in productivity between OECD member
nations and low-income nations can be explained as an effect of the worker age structure.
The main point of difference between the results of these analyses and analyses using
micro-data is the quantitative effect of the worker age structure. As indicated above, analyses
using micro-data have demonstrated that changes in age can increase the productivity of eachworker between approximately 10% and 40%. This means that a 1% increase in the number ofworkers in the most productive age group could increase productivity at the macro-economic
level by 0.1% to 0.4%. By contrast, the studies conducted by Feyrer (2007, 2008) and Werding(2007) indicate that a 1% increase in the working population in the 40-49 age group could
increase productivity at the macro-economic level by up to 3%.
Feyrer (2008) emphasizes externalities to the worker age structure as the reason for thisdivergence in results. Feyrer suggests two potential mechanisms for these externalities. The firstis that a higher concentration of inventions tends to be produced by individuals in their 40s, andtherefore an innovation externality can be considered. However, the aging of the baby boom
generation has not generated a significant change in patent trends. This hypothesis therefore
lacks explanatory power.

19

The other potential mechanism is a change in the age structure of managers. When the baby
boom generation began to participate in the labor market, there was a shortage of experienced
managers, and it is therefore possible that employees in the middle-aged and older age groups
who lacked ability were selected for managerial positions. This problem was resolved when thebaby boomers gained a certain degree of experience and began entering managerial positions.
Feyrer (2008) tested this hypothesis using data for U.S. states and cities, but this study did not
determine any quantitative effects resembling those of the macro-level analyses. Feyrer (2008)
also took Mincer’s wage function (Mincer (1974)) as a subject for comparative study. However,given that the micro-data analyses studied the productivity of companies and workplaces, if theage structure of managers actually did produce an effect, it should also have appeared in theoutcomes of these analyses.
We may consider the problem of the studies using macro-level data to be that they reversed
causality from productivity to the age structure. The birthrate is declining in the majority ofadvanced nations, and this can be considered to be a result of economic development. Becker(1960) and Becker and Lewis (1973) point out that as the economy develops, parents tend toemphasize quality over quantity in terms of their offspring, and there is a possibility that thiswill result in a decline in the birthrate. It is also true in the majority of cases that the mortality
rate declines with economic development. When long-term differences in GDP and TFP exist
between nations, or economic development is projected in advance, it is likely that there will,
accordingly, be a correlation between the present level of aging of the society and the present
economic level or the economic growth rate. Under these circumstances, there will be no clear
correlation between the ratio of workers aged 50 or older, the ratio of workers in their 40s, andGDP and TFP. According to Feyrer (2008), when an instrumental variable method is used, orwhen the log level rather than the log difference of TFP, the explained variable, is employed, thedifference between the effect of the ratio of workers aged 50 and above and of the ratio ofworkers in their 40s becomes insignificant, and the argument above may hold true.

[Notes]*1 Becker (1964) indicates that the human capital concept had its dual origins in Solow residual
analysis (Solow (1957)) and discussion of the importance of education as a factor in economic
development.
*2 Research conducted prior to 2003 is summarized in Skirbekk (2003).

20

[References]in Japanese

Kawaguchi, Daiji, Ryo Kambayashi, YoungGak Kim, Hyeog Ug Kwon, Satoshi Shimizutani,
Kyoji Fukao, Tatsuji Makino, Izumi Yokoyama, "Nenkochingin-ha-seisansei-to-kairishiteiruka:

kogyo-tokei-chosa-chingin-kozo-kihon-chosa-kohyo-data-niyoru-Jissyo-

bunseki," Hi-Stat DP, no. 189.
in English
Becker, Gary S. and H. Gregg Lewis (1973), “On the Interaction between the Quantity andQuality of Children,” The Journal of Political Economy, vol. 81, no. 2, pp.289–288.
Crepon, Bruno, Nicolas Deniau, and Sebastien Perez-Duarte (2002),“Wages, Productivity
and Worker Characteristics, ”mimeo.
Feyrer, James (2007), “Demographics and Productivity,” The Review of Economics andStatistics, vol. 89, no. 1, pp. 100–109.
Feyrer, James (2008), “Aggregate Evidence on the Link Between Age Structure andProductivity,” In Population Aging, Human Capital Accmulation, and Productivity
Growth edited by Alexia Prskawetz, David E. Bloom, and Wolfgang Lutz, Population
Council: New York.
Haegeland, Torbjorn and Tor Jacob Klette (1999),“Do Higher Wages Reflect Higher
Productivity? Education, Gender and Experience Premiums in a Matched Plant-Worker
Data Set, ”In The Creation and Analysis of Employer-Employee Matched Data, edited by
J. Haltiwanger, J. Lane, J. R. Spletzer, J. Theeuwes, and K. Troske, Amsterdam: North
Holland.
Haltiwanger, J. Lane and J. R. Speletzer (1999), “Productivity Differences AcrossEmployers,” American Economic Review, Papers and Proceedings, vol. 89, no. 2, pp.
94–98.
Hellerstein, Judith K. and David Neumark (1995), “Are Earnings Profiles Steeper than
Productivity Profiles?” Journal of Human Resources, vol. 30, no. 1, pp. 89–112.
Hellerstein, Judith K. and David Neumark (2004), “Production Function and Wage Equation
Estimation with Heterogeneous Labor.” NBER Working Paper, no. 10325.
Hellerstein, Judith K., David Neumark, and Kenneth R. Troske (1999), “Wages, Productivity,
and Worker Characteristics.” Journal of Labor Economics, vol. 17, no. 3, pp. 409–446.
Ilmakunnas, Pekka, Mika Maliranta, and Jari Vainiomaki (2004), “The roles of employer
and employee characteristics for plant productivity,” Journal of Productivity Analysis, vol.
21, no. 3, pp. 249–276.
Lazear, Edward P. (1979), “Why is there Mandatory Retirement?” Journal of Political

21

Economy, vol.86, pp. 1261–84.
Mincer, Jacob (1974), Schooling, Experience and Earnings, New York: Columbia University
Press.
Skirbekk, Vegard (2003), “Age and Individual Productivity,” MPIDR working paper 2003－
028.
Solow, Robert M. (1957), “Technical Change and the Aggregate Production Function,”
Review of Economics and Statistics, vol. 39, pp. 312–320.

Werding, Martin (2007), “Ageing, Productivity and Economic Growth: A Macrolevel Analysis,”Ifo Institute for Economic Research & CESifo.

22

Chapter 2

Empirical Analysis of Population andTechnological Progress
Hisakazu Kato
[Abstract]
An international comparative analysis was conducted using data forOECD countries in order to study the effect of trends in population size
and aging on technological progress (multifactor productivity (MFP) andlabor productivity). The results show that MFP rates become higher thelarger a country’s population or the lower its ratio of elderly citizens. In
addition, the results of an analysis of the effect of the size of the working
population and the level of economic openness on the rate of increase intotal factor productivity (TFP) using time series data for Japan indicated along-term positive relationship (a cointegration relationship) between thesize of the working population and the rate of increase in technologicalprogress (rate of increase in TFP). The future rate of increase in TFP wasprojected on the basis of these results. Despite a long-term rate of increasein TFP of around 1%, in a scenario in which a significant decline in theworking population occurs, it is possible that the growth rate of TFP will
become negative in a little over a decade.

1. Introduction
Japan’s population is declining, and Japanese society is moving towards a level of aging uniquein previous human experience. Population decline and the aging of society are not affecting
Japan alone; the majority of advanced nations appear to be entering the same trajectory. Thissituation gives rise to a simple question: How can we maintain continuing growth under these
conditions of population restriction?
In Japan’s period of high economic growth in the 1950s and 1960s, the nation boasted alarge population of young people, and their diligence in saving was one engine of the nation’s
economic growth. This is the so-called “population bonus,” by which population factors have apositive impact on economic growth. In the future, this situation will be entirely reversed, andlong-term economic growth will be in danger from a “population onus.” The volume of researchon the status of economic growth from the perspectives of the working population and thesavings rate defies enumeration. If we consider economic growth from the supply side and base
our analysis on simple growth accounting, technological progress represents a third factor, butwhat effect will population trends exert on technological progress? The purpose of this paper is23

to empirically examine this question.
Technological progress is realized by means of the outcomes of technological innovationand increases in the quality of capital and labor inputs. An increase in technological progressappears in the short-term as increased productivity, and in the long-term as innovation.
Short-term increased productivity and long-term technological innovation contain manydiffering elements, and historical factors also play complex roles. It is difficult to strictly
distinguish the two either in theory or in practice. However, if normal increases in productivity
are considered (and these are regarded as technological progress), hypotheses can be formulated
regarding the ways in which population factors are involved. This paper will consider short-term
productivity increases as representing technological progress, and will study the relationshipbetween recent trends in technological progress, the population, and the working population.

2. The Relationship between Population Growth andTechnological Progress(1) Population decline and technological progress(A survey of empirical analyses of the relationship between population decline
and technological progress)
If the total population or the rate of population growth is positively correlated withtechnological progress (increased productivity), then the future declines in population projected
for Japan and other advanced nations can be expected to result in declines in the rate oftechnological progress. In Japan, where the speed and the scale of population decline are
expected to be greater than in other advanced nations, this is an issue that affects thesustainability of economic growth*1. This view of the issue emerged in the latter half of the
1990s, leading to the implementation of a variety of research projects. This section will provide
a brief survey of that research.
The Economic Planning Agency (1995) identified three effects of the relationship between
technological progress and the working population. The first of these was a decline in collective
capacity resulting from the decline in the rate of growth of the working population, due to a lossof economies of scale. The second was a loss of creativity: A decline in the working populationand consequently in the young working population would result in a decline in the creativity andenterprise displayed by the young. The third was a promotion of labor-saving efforts: A greateruse of production factors other than labor power, including technological progress, would be24

necessitated, and this would promote technological progress. Based on the above, if the effect ofthe promotion of labor-saving efforts is greater than the effect of the loss of economies of scale
and the effect of the loss of creativity, then the rate of increase in productivity will rise inproportion to the decline in the rate of increase of the working population; on the other hand, if
the effect of the promotion of labor-saving efforts is insufficient, then there is a positive
correlation between the rate of growth of the working population and the rate of increase inproductivity. Employing cross-country data to examine the relationship between the two, thisstudy concluded that the rate of increase in productivity rises in proportion to the decline in therate of increase of the working population.
Numerous similar studies were conducted following the publication of this study. Yashiro(1999) studied the relationship between the rate of increase in labor supply and the rate ofincrease in TFP in eight advanced nations between 1980 and 1991, and found a negative
relationship between the two. Using average figures for the period 1975-1994 for ten advanced
nations including Japan, the then Ministry of Labor (2000) found a significant negative
relationship between the rate of increase in the working population and the rate of increase in
TFP. A cross-country analysis conducted by the Cabinet Office (2003) using 1981-2000 data forOECD member nations concluded that a loose negative correlation existed between the rate ofincrease in the number of workers and the rate of increase in TFP.
By contrast, following a detailed analysis of the theoretical relationship between the size ofthe population and technological progress, Koguro and Morishita (2008) examined panel data
for five advanced nations and concluded that a positive relationship existed between the rate ofincrease in TFP and the total population. This research differed from the research discussed
above in using total population rather than the rate of increase in the working population as the
explanatory variable.

(2) Formulation of hypotheses for empirical analysis(The larger the population, the greater the stimulus to technological progress)
This section will set out hypotheses to function as a theoretical model for a study of therelationship between the rate of increase in TFP and the size of the population*2. The basic
framework is provided by the view, presented for example in Kuznetz (1960) and Simon (1977),
that the number of potential innovators increases in proportion to the increase in the population,and that a large population increases the degree of intellectual exchange and spurs specialization
and a greater division of roles, promoting technological development. Similarly, Aghion andHowitt (1992) and Grossman and Helpman (1991) see an increase in the size of the population25

and the consequent expansion of the market as promoting research and development output, andthus as linked to technological progress. However, these studies also indicate that a large
population may reduce the efficiency of the process of technological progress due toredundancy of effort and other factors.
We will term the working population L , the segment of the working population
participating in technological development L A , and the segment involved in production LY .
Therefore,

L = LY + L A(1)
If γ A = L A / L , the segment of the working population involved in production activities is
LY = (1 − γ A )L
(2)
Assuming Y = ALY as the simple production function (where A is productivity) and terming
output per person y gives us
y = A(1 − γ A )(3)Assuming that the rate of technological progress accelerates in proportion with the percentageof the working population involved in technological development, and terming the “cost” oftechnological development μ , we may hypothesize the relationship expressed in the following
equation:A& / A = LA

(4)Here, μ is a parameter affecting the population of L A required in order to achieve a fixed
rate of technological progress. For example, as the aging of a society proceeds, there will be a
relative decline in groupings within the population which generate new ideas; μ will increase,and the rate of technological progress will decline.
Rewriting the equation above as A& = (γ A / μ )L , and given that y& = A& based on the

hypothesis that γ A

is constant, theny& = A& = (γ A / μ )(5)

Based on this, the working population increases with the size of the total population, and therate of technological progress also increases. However, if the cost of technological development
increases due to the aging of the society or other factors, the rate of technological progress will
decline.
It may not be the case, however, that this relationship expresses past historical facts. It
cannot be definitely stated that income per capita becomes higher the higher the population of acountry. The propagation of technologies is a background factor, and the rate of technologicalprogress will be higher the more easily technologies can be introduced from other countries. It
26

can therefore be considered necessary to incorporate a proxy for the introduction oftechnologies from other countries as an explanatory variable in an empirical analysis.
In the rest of this section I will examine the relationship between the rates of increase of
population and technological progress (productivity) discussed above. First, I will conduct ananalysis using panel data for OECD countries, following which I will discuss results obtainedusing time series data for Japan*3.

3. Empirical Analysis using OECD Panel Data
An analysis was conducted using OECD panel data in order to study the relationship between
the size of the population, the rate of growth of the population, and the rate of increase inproductivity (the rate of increase in MFP). First, I provide an overview of the data, followed bya discussion of the results of the analysis.

(1) Data■Source of data
(Use of OECD data and definition of MFP)
MFP figures published by the OECD were used in the analysis. Figures from the database “MFP
based on Harmonized Price Indices for ICT Capital Goods, Capital Input, Cost Shares, Total
Factor Input” (2007) were employed. This database contains the results of measurements of
MFP for 19 OECD countries from 1985 to 2007. However, some fiscal years are missing fromsome of the data, and new countries became OECD members during the period covered by thedata; for these reasons, the data does not represent a balanced panel data set for the 19
countries*4.
MFP is defined as the difference between the rate of change in output (Q) and the rate ofchange in input (X). Equation (6) provides the definition:ln (MFPt / MFPt −1 ) = ln (Qt / Qt −1 ) − ln ( X t / X t −1 )(6)Here, output is real gross domestic product in the OECD National Accounts, and input is labor
power and seven categories of capital stock. The difference between this measure and standard
TFP lies in this use of seven categories of capital stock*5.
The empirical analysis below uses, in addition to MFP, labor productivity indices formulatedon the basis of OECD databases. Labor productivity is the level of GDP per unit of input labor,
and its rate of increase was calculated and employed in place of MFP as an index of27

technological progress. It was calculated based on the GDP for each country published in theOECD Annual National Accounts, using the working populations found in the OECD Labour
Force Statistics. Labor productivity was calculated for 29 OECD countries, but certain data
were missing and, as in the case of MFP, a balanced panel data set was not obtained*6. Data for
total population and percentage of the population aged 65 or above were obtained from OECD
Labor Force Statistics. When working population and total population were used, they wereconverted into logarithms.

■Cross-national comparison of MFP(Japan displayed highest MFP in cross-national comparison)
Figure 2-1 shows changes in MFP for seven major nations (Canada, France, Germany, Italy,
Japan, the UK, and the U.S.). Averaged across the period covered by the calculations, Japan
displayed the highest rate of increase in MFP at 1.70% (1985-2006), followed by France at
1.36% (1985-2007), and Germany at 1.20% (1992-2007). Canada displayed the lowest rate ofincrease in MFP at 0.49% (1985-2007). The figure for the U.S. was 1.06% (1985-2007).
Figure 2-1 Changes in MFP in major nations
5
4
3
2
1
0
-1
-2
1985

1990

1995

2000

2005

CANADAFRANCEGERMANY

ITALY

JAPAN

UNITED KINGDOMUNITED STATES

Source: OECD (2007)28

(2) Results of Empirical Analysis
The hypotheses discussed above were examined using the OECD panel data.

■Results of empirical analysis of MFP (1)(An empirical analysis conducted for 19 OECD nations showed a positive
relationship between population and technological progress)
Figure 2-2 shows the results of panel regression for 19 OECD nations, with the rate of increasein MFP as a proxy variable for technological progress. Based on the discussion in section 1.(2)above, the ratio of elderly citizens in the population, the level of economic openness, and therate of population increase were used as explanatory variables, with total population used as theaxis. Of these, the ratio of elderly citizens in the population was used as a proxy variable for thecost of technological development, and was defined as the percentage of citizens aged 65 orabove in the total population. The level of economic openness was used as a proxy variable fortechnological exchange with other countries, and was defined as the percentage of GDP
represented by total imports and exports.
Pooled models and random effects models were used in the analysis*7. In Case (1-1), pooled
regression was applied to MFP on total population, and in Case (1-2) a random effects model
was employed. The calculated parameters were negative and significant (-0.288 for the former
and -0.254 for the latter), and did not support the hypothesis discussed above. In Cases (2-1) and(2-2), when the ratio of elderly citizens in the population was included, the total population
parameters were negative but not significant at -0.163 and -0.037 respectively. Results for theratio of elderly citizens were negative but accorded with expectations at -0.06 and –0.095
respectively.
Taking the determining factors of MFP into consideration, it was possible that insufficient
controls were applied in the selection of explanatory variables. In Cases (3-1) and (3-2),
therefore, economic openness was added to the explanatory variables*8. For Case (3-1), using apooled model, a positive result of 0.398 was obtained for the total population parameter, and theresult was significant, with a p value of 0.03. The total population parameter was also positive at
0.582 for Case (3-2), using a random effects model. However, the result was not significant,with p= 0.107. By contrast, the ratio of elderly citizens (-0.133) and the level of economic
openness (1.450) were both significant for Case (3-2). Results supporting the hypothesis above
can therefore be considered to have been obtained for total population, ratio of elderly citizens,and level of economic openness.

29

Figure 2-2 Effect of population and other factors on rate of increase in MFP: Results for 19
OECD nations

Model
Constant
Total Population
Ratio of Elderly
Population
Economic
Openness
Growth ofPopulation
R^2s.e.
Sample

(1-1)

(1-2)

(2-1)

Pooled2.410(0.55)-0.288(-2.27)

Random2.229(1.29)-0.254(-0.851)

Pooled2.651(4.69)-0.163(-1.18)-0.060(-2.29)

0.010
1.334
369

0.002
1.184
369

0.012
1.180
361

(2-2)
(3-1)
(3-2)
19 OECD nations
RandomPooledRandom2.550-0.080-0.601(1.89)(-0.09)(-0.38)-0.0370.398
0.582(-0.12)(2.196)(1.613)-0.095-0.097-0.133(-2.40)(-3.61)(-3.26)1.192
1.450(4.56)(3.25)
0.017
1.180
361

0.081
1.302
357

0.038
1.169
357

(4-1)

(4-2)

(5-1)

(5-2)

Pooled1.326(12.6)

Random
1.326(7.01)-0.262(-2.03)
0.011
1.336
369

-0.316(-2.06)
0.012
1.177
369

Pooled0.377(0.82)
0.423(2.36)-0.121(-4.36)
1.177(4.55)-0.404(-3.01)
0.105
1.287
357

Random-0.591(-0.36)0.661(1.81)-0.148(-3.61)
1.609(3.58)-0.416(-2.66)
0.065
1.158
357

Notes
1) MFP is the explained variable.
2) Figures within parentheses are t-values.
3) Certain data were missing from the database, and a complete panel data set was not obtained.
4) The period for calculations was 1985-2007.

In Cases (4-1) and (4-2), MFP was explained by the rate of population increase. Section 1.2
assumed a positive relationship between technological progress and the rate of population
increase, but the results for Case (4-1) (-0.262) and Case (4-2) (-0.316) are both negative andsignificant, and do not support the hypothesis.
Cases (5-1) and (5-2) used all of the abovementioned explanatory variables. The pooled
regression in Case (5-1) produced a positive result of 0.423 for the total population parameter;
this result was significant, with a p value of 0.019. Case (5-2), using a random effects model,
also produced a positive result for the total population parameter at 0.661. With respect to otherresults for Case (5-2), the result of -0.148 for the ratio of elderly citizens and 1.609 for the levelof economic openness fulfilled the expected sign conditions, and a significant negative result of-0.416 was obtained for the rate of population growth.

■Results of empirical analysis of MFP (2)(A positive relationship between population and technological progress was also
obtained in the case of G10 nations)
The results in the previous section were obtained from an analysis for 19 OECD nations. Figure30

2-3 shows the results of the same analysis conducted for the 10 nations with the largest
economic scale from among those 19 (Canada, France, Germany, Italy, Japan, Spain, Sweden,
Switzerland, the UK, and the U.S.) *9.
Figure 2-3 Effect of Population and Other Factors on Rate of Increase in MFP: Results for
G10

Model
Constant
Total Population
Ratio of Elderly
Population
Economic
Openness
Growth ofPopulationR^2s.e.
sample

(6-1)

(6-2)

(7-1)

Pooled
-0.766(-0.97)0.370(2.20)

Randam
-0.945(-0.65)0.406(1.31)

Pooled-0.786(-1.00)0.549(2.95)-0.061(--2.19)

0.020
1.083
203

0.010
1.026
203

(7-2)
(8-1)
(8-2)
10 largest OECD nations
RandamPooledRandam-1.150-3.127-7.628(-0.74)(-1.89)(-3.30)
0.753
0.984
1.979
(2.15)(3.04)(4.14)-0.104-0.076-0.165(-2.89)(-2.64)(-4.22)
1.038
3.005(1.58)(3.81)

0.046
1.072
203

0.046
1.005
203

0.061
1.069
201

0.097
0.974
201

(9-1)

(9-2)

Pooled1.189(9.97)

Randam1.117(6.25)-0.403(-2.41)
0.028
1.080
203

-0.309(-1.49)
0.011
1.026
203

Notes
1) MFP is the explained variable.
2) Figures within parentheses are t-values.
3) Certain data were missing from the database, and a complete panel data set was not obtained.
4) The period for calculations was 1985-2007.

By contrast with the results shown in Figure 2-2, cases (6-1) and (6-2), which also used total
population as the sole explanatory variable for MFP, both produced positive results. Case (6-1),
for which a pooled regression was conducted, produced a result of 0.370 for the total population
parameter; with a p value of 0.029 the result was significant at the 5% level. However, whilecase (6-2), using a random effects model, produced a positive result of 0.406, the result was not
significant, with a p value of 0.193.
Cases (7-1) and (7-2) included the ratio of elderly citizens as an explanatory variable.
Positive results of 0.549 and 0.753 for the total population parameter were produced
respectively by the cases, and both results were significant at the 5% level. Negative results of-0.061 and -0.104 respectively were obtained for the ratio of elderly citizens. Cases (8-1) and(8-2) added the level of economic openness as an explanatory variable. The results support the31hypothesis, with positive results for the total population parameter, negative results for the ratioof elderly citizens, and positive results for the level of economic openness.
Cases (9-1) and (9-2) explain MFP using the rate of population growth. As in Figure 2-2,
negative results were obtained, and these results fail to support hypothesis 3 in the theoreticalmodel. For cases (10-1) and (10-2), calculations were conducted using all of the variables
discussed above. The cases produced positive results of 1.374 and 1.773 for the total population
parameter, and both results were significant.
The results above show that the total population is almost always a positive parameter in
relation to MFP, demonstrating the validity of the positive relationship between the size of the
population and technological progress asserted in Chapter 1, Section 2. This result supports theviews of Kuznetz (1960) and Aghion and Howitt (1992).
Figure 2-4 compares the cross-section effect for the 10 countries for Case (10-2) in Figure 2-3.
The cross-section effect was greatest for Japan at 0.507, followed by France at 0.307, Sweden at
0.100, and Switzerland at 0.01.
Figure 2-4 Cross-section effect for Case (10-2)

0.507
0.307
0.100
0.011
-0.012-0.070 -0.077-0.120-0.313-0.33332

■Results of empirical analysis of MFP (3)(The size of the working population also displayed a positive relationship withtechnological progress)
The results discussed above used total population and the rate of population growth as
explanatory variables for MFP. Figure 2-5 shows the results obtained when the size of theworking population and the rate of growth of the working population were substituted as
explanatory variables*10. A random effects model was used in each case.
For the 19 OECD countries, as in Figure 2-2, negative results were obtained for the working
population parameter in the cases in which the working population or the working populationand the ratio of elderly citizens only were used as explanatory variables for MFP (Cases (1-3)
and (2-3)). The results were positive when the level of economic openness was added as an
explanatory variable (0.427 for Case (3-3) and 0.490 for Case (5-3)). However, these results
were not significant. Positive and significant results were obtained for the level of economic
openness in Cases (3-3) and (5-3) (1.353 and 1.501 respectively). A negative result of -0.066
was recorded for the rate of growth of the working population when included as an explanatory
variable in Case (5-3).
Figure 2-5 Effect of working population and other factors on MFP

(1-3)
Model
Constant
Working population

2.586(2.17)-0.364(-1.23)

Ratio of Elderly
Population
Economic Openness
Growth of Working
populationR^2s.e.
sample

0.004
1.183
369

(2-3)
(3-3)
19 OECD Nations
2.967
0.186
(2.38)(0.123)-0.1590.427(-0.49)(1.186)-0.091-0.126(-2.30)(-3.13)1.353(3.06)
0.018
1.179
361

0.042
1.170
357

(5-3)

(6-3)

-0.026(-0.02)0.490(1.307)-0.132(-3.22)
1.501(3.21)-0.066(-1.04)
0.045
1.168
357

-0.681(-0.49)0.374(1.19)

0.007
1.028
203

(7-3)
(8-3)
(10-3)
10 largest OECD nations-0.701-6.269-6.077(-0.48)(-2.88)(-3.20)
0.689
1.809
1.744
(1.94)(3.77)(4.24)-0.099-0.152-0.130(-2.74)(-4.02)(-3.85)2.738
2.559(3.55)(3.45)-0.146(-1.92)
0.042
0.097
0.096
1.008
0.981
0.998
203
201
201

Notes
1) Only a random effects model was used.
2) MFP is the explained variable.
3) Figures within parentheses are t-values.
4) Certain data were missing from the database, and a complete panel data set was not obtained.
5) The period for calculations was 1985-2007.

33

The working population parameter was positive for the 10 largest OECD nations in all cases.
The total population parameter was significant at 1.809 for case (8-3). For the same case,significant results were recorded for the ratio of elderly citizens and the level of economic
openness, at -0.152 and 2.738 respectively. Case (10-3) adds the rate of growth of the working
population as an explanatory variable, and obtains a negative result of -0.146 for this parameter.
For the other explanatory variables, there is almost no difference between case (10-3) and case(8-3).
Like Figure 2-4, Figure 2-6 shows the cross-section effect for 10 nations, this time for case(10-3). Again, the cross-section effect was greatest for Japan at 0.584, followed by France at
0.361, and Sweden at 0.132.
Figure 2-6 Cross-section effect for Case (10-3)

0.584
0.361
0.132

0.054

0.016

-0.038-0.077-0.113-0.430-0.491■Results of empirical analysis of labor productivity(The same conclusion is obtained when labor productivity is substituted for rateof increase in MFP)
The analysis discussed above was conducted for the rate of increase in MFP as the explained
variable. It was decided to modify the definition of productivity employed and to conduct ananalysis for labor productivity. Figure 2-7 shows the results of this analysis.

34

When the total population was employed to explain labor productivity for 19 OECD nations(Cases (1-4) and (2-4)), the results for the working population parameter were negative and not
significant. When the ratio of elderly citizens and the level of economic openness were added as
explanatory variables (Cases (3-4) and (5-4)), the working population coefficient became
positive but not significant. The results did not support the hypothesis outlined above.
However, the results obtained for the 10 largest OECD nations do in general support the
hypothesis. Case (7-4) takes the working population and the ratio of elderly citizens as
explanatory variables, and obtains significant results of 0.989 and -0.145 respectively for theseparameters. This indicates a positive relationship between the size of the working populationand labor productivity. Case (8-4) adds the level of economic openness as an explanatory
variable, and Case (10-4) further adds the rate of growth of the working population. The results
for the working population parameter in both these cases (1.413 and 1.924) were both positiveand significant.
Figure 2-7 Effect of working population and other factors on labor productivity

Constant
Working Population
Ration of elderly
Population
Economic Openness
Growth of Working
Population
R^2s.e.
Sample

(1-4)

(2-4)
(3-4)
19 OECD nations
3.214
4.059
3.230
(3.09)(2.17)（2.58）-0.249 -0.161 0.002(-0.78) (-0.49)(0.01)-0.095-0.105(-2.22) (-2.37)
0.396-1.010

(5-4)

(6-4)
-0.514(-0.31)0.510(1.341)

0.001
1.732
611

3.300
(2.26)
0.040(0.117)-0.122(-2.78)0.700(1.79)-0.236(-4.92)
0.051
1.713
577

0.009
1.739
611

0.011
1.750
578

0.008
1.255
230

(7-4)
(8-4)
(10-4)
10 largest OECD nations-0.621-2.543-4.627(-0.34) (-0.96) (-1.94)
0.989
1.413
1.924
(2.26)(2.37)(3.59)-0.145-0.174-0.203(-3.55) (-3.69) (-4.72)
0.923
2.108
(1.01)(2.48)-0.429(-5.93)
0.059
0.064
0.187
1.220
1.224
1.133
224
220
219

Notes
1) A random effects model was used in all cases.
2) Labor productivity is the explained variable.
3) Figures within parentheses are t-values.
4) Certain data were missing from the database, and a complete panel data set was not obtained.
5) The period for calculations was 1985-2007.

35

Figure 2-8 Cross-section effect (Case (10-4))

0.769
0.380

0.426
0.208

0.202

0.025
-0.052-0.515-0.554-0.890Figure 2-8 shows the cross-section effect calculated for the results of Case (10-4). The
cross-section effect was greatest for Japan at 0.769, followed by Spain at 0.426, and France at
0.380.
These results indicate, as suggested in the hypotheses outlined in Section 1.2, that a positive
relationship exists between technological progress and the size of the population for advanced
nations. This supports the hypothesis of Kuznetz (1960) and others that the size of markets
increases in proportion to the size of the population, thus intensifying intellectual exchange andincreasing the pool of potential innovators. In addition, the fact that the ratio of elderly citizens,considered as a cost of technological development, has a negative effect and the level of
economic openness, which is a proxy variable for the propagation of technology, has a positiveeffect in relation to technological progress, also basically supports the theoretical model.

4. Verification of Model using Time Series Data for JapanAn analysis conducted using panel data for advanced nations demonstrated the existence of apositive relationship between population size and technological progress. This section willconsider whether an analysis conducted for Japan using time series data modifies thisconclusion.

36

(1) Data■Rate of increase in TFP in JIP Database(Rate of increase in TFP in JIP data: Trends and characteristics)
Here, the rate of increase in TFP in the macroeconomy as a whole as recorded in the JIP
Database will be used as a proxy variable for technological progress*11. The 2008 edition of the
JIP Database recorded the rate of increase in TFP from 1973 to 2005. 33 samples were taken.
Figure 2-9 Trends in rate of increase in TFP in JIP data and component analysis (HP filter)

0.06
0.04
0.02
0
-0.02

TFP
Long-term component
Short-term fluctuatuions

-0.04
-0.06
1973

1978

1983

1988

1993

1998

2003

Figure 2-9 shows trends in the rate of increase in TFP and results for a decomposition of thedata into long-term components and short-term fluctuations using an HP filter. Looking atchanges in the long-term component, we see that from 1973 to the latter half of the 1980s, there
was a stable fluctuation close to the 2% mark; in the 1990s there was a sudden decline, with therate dropping to close to zero in the latter half of the 1990s, following which it began to climb
again in the 2000s.

■Variables and unit root tests(Verification of stationarity of variables)
Figure 2-10 shows a comparison of changes in the rate of increase in TFP in the JIP database
and the rate of increase in MFP in the OECD data used in the previous section from 1985
onwards. Despite some discrepancy between the figures, increasing and decreasing trends
correspond well, and no major differences can be observed.
Based on the hypotheses outlined in Section 1.2, the effect of the working population (LG)on the rate of increase in TFP (TFP) was considered using time series data for Japan*12. The
level of economic openness (ROP) was employed as a control variable.
37

Figure 2-10 Comparison of JIP data and OECD data

5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0

JIP Data

-3.0
1985

1990

OECD Data
1995

2000

2005

Figure 2-11 shows the results of tests of unit roots conducted to verify the stationarity ofthese three variables. In addition to these variables, other variables relating to age factors, forexample the size of the working population aged 39 or below and its ratio to the total working
population, were employed but significant results were not obtained.

ADF, DF-GLS, and

Ng-Perron tests were conducted for the unit roots. Despite the fact that rather vague results wereobtained for the rate of increase in TFP, the null hypothesis that unit roots existed could not be
discarded for any of the three variables*13. Based on this result, the analysis below will attempt
to determine a cointegration relationship between the three variables, and if cointegration exists,
will formulate a vector error correction model in order to seek the relationship between thevariables.
Figure 2-11 Unit root tests

Estimation equation:
Constant term only
ADF
TFP

Estimation equation:
Constant term +Time trend

DF-GLS Ng-Perron-2.571-1.842-0.929lag order

l=4

l=4

l=4

cv(5%)-2.972-1.953LG-2.339lag order

ADF
TFP

DF-GLS Ng-Perron-3.487-3.929-4.305lag order

l=4

l=4

l=4

-1.980cv(5%)-3.581-3.190-2.910-0.789-1.061LG

1.557-0.850-2.611

l=1

l=2

l=2

lag order

l=0

l=1

l=1

cv(5%)-2.954-1.951-1.980cv(5%)-3.553-3.190-2.910ROP
lag order-1.553l=0-1.487l=0-1.388l=0

ROPlag order-1.494l=0-1.597l=0-1.338l=0cv(5%)-2.954-1.951-1.980cv(5%)-3.553-3.190-2.910Note: The lag order was selected using the Schwarz Information Criteria. The period for the tests was
1973-2005.

38

(2) Formulation of Cointegration Equation and Impulse Response Function■Formulation of cointegration equation(The possibility of a cointegration relationship could not be rejected, and apositive relationship exists between population and the rate of increase in TFP)
Johansen cointegration tests were conducted in order to determine the existence of acointegration relationship between the rate of increase in TFP and the working population, andbetween the rate of increase in TFP, the working population, and the level of economic openness.
The results are shown in Figure 2-12.
Figure 2-12 Results of Johansen maximum likelihood cointegration test

(TFP、LG)
Number of
cointegration vectors Eigenvalue

Trace

5% C.V.

eigenvalu
e5% C.V.

0

0.308

20.99

20.26

11.04

15.89

1

0.282

9.95

9.17

9.95

9.17

(TFP,LG,ROP)
Number of
cointegration vectors Eigenvalue

Trace

5% C.V.

eigenvalu
e5% C.V.

0

0.482

36.41

35.19

19.75

22.30

1
2

0.350
0.117

16.66
3.73

20.26
9.16

12.93
3.73

15.89
9.16

Note: The lag order (the order of VAR used in the maximum likelihood approach) was 2 in each case.

In the two-variable case (the combination of the rate of increase in TFP and LG), the test
statistic in the trace test was 20.99, and the null hypothesis that no cointegration existed was
rejected. However, the null hypothesis could not be rejected in the maximum eigenvalue test. In
the three-variable case (the combination of the rate of increase in TFP, LG, and ROP), despite
the fact that the trace test statistic, 36.41, indicated the existence of cointegration, the null
hypothesis could similarly not be rejected in the maximum eigenvalue test. While some points
remain vague in these results, they can be considered to indicate the existence of a cointegration
relationship in both cases.
With the existence of cointegration as a precondition, the maximum-likelihood approach was
employed to formulate cointegration equations, generating Equations (7) and (8) (figures inparentheses are t-values).

TFP = −1.254 + 0.113 × LG(− 1.90) (1.89)

(7)

39

TFP = −2.762 + 0.240 × LG + 0.469 × RO(− 3.32) (3.29)(3.22)(8)

In both Equations (7) and (8), the effect of the working population on the rate of increase in TFP
is positive, and there is a positive relationship between the size of the working population andthe rate of increase in TFP. The level of economic openness also has a positive effect on the rateof increase in TFP. These results are consistent with those obtained from the analysis using
OECD panel data.

■Calculation of impulse response functions(A shock to the population increases the rate of increase in TFP)
Based on Equations (7) and (8) above, vector error correction (VEC) models were formulated,
and impulse response functions were calculated from the results. The results are shown in
Figures 2-13 and 2-14. Generalized impulse response functions that were not sensitive to theorder of the variables were determined.
Figure 2-13 shows the effect of a shock to the working population on the rate of increase in
TFP based on a two-variable VEC model, and Figure 2-14 shows the effect of shocks to theworking population and the level of economic openness on the rate of increase in TFP based ona three-variable VEC model. In both cases, a shock to the working population has a positiveeffect on the rate of increase in TFP. Figure 2-14 shows that while a shock to the level of
economic openness has a negative impact on the rate of increase in TFP in the 3rdyear, theoverall effect is positive.
When the effect of the size of the population (the working population) on technologicalprogress (the rate of increase in TFP) is considered based on time series data for Japan,
therefore, a positive relationship can be observed. This can be considered to support the
hypothesis that the rate of increase in technological progress will become higher in proportion
with the size of the population.

40

Figure 2-13 Impulse response of rate of increase in TFP (Two-variable VEC)
0.00440.00420.00400.00380.00360.00340.00320.0030

1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20

Figure 2-14 Impulse response of rate of increase in TFP (Three-variable VEC)

0.012
0.01

Working population

0.008

Economic openness

0.006
0.004
0.002
0
-0.002-0.004
1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20(3) Attempted Prediction of Future Trends(TFP could grow at a rate of approximately 1% in the macroeconomy as a whole)
Japan’s total population has begun to decline, and it is predicted that there will be a significant
decline in the working population in future. According to the Employment Policy Workshop(2007), the present (2008) working population of 66.5 million will fall to 55.84 million in 2030
unless more women and elderly citizens participate in the labor market. However, even if more
women and elderly citizens were to participate in the labor market, it is predicted that theworking population would nevertheless decline to 61.8 million in 2030.

41Under these circumstances, how can we expect the rate of increase in TFP to change in the
future? To provide some indication, the author attempted to predict the rate of increase in TFP
until 2030. Two methods were employed. The first of these was the extension of thethree-variable (rate of increase in TFP, LG, and ROP) VEC model discussed above into the
future. This method enabled the steady-state TFP growth rate to be calculated without
formulating special scenarios for future exogenous variables. The second method involved theformulation of scenarios with the working population (LG) and the level of economic openness(ROP) as exogenous variables, using a cointegration equation (Equation (8)).
Figure 2-15 Projection of rate of increase in TFP until 2030 (VEC model)

0.06
0.05
0.04
0.03
0.02
0.01
0
-0.01
-0.02
-0.03
-0.04

1973

1983

1993

2003

2013

2023

Figure 2-15 shows the results obtained by extending the VEC model into the future.
According to these results, the rate of increase in TFP will stabilize at a basically steady levelfrom 2010. A rate of increase of 0.95% was calculated for 2020 and a rate of 0.99% for 2030.
The working population for 2030 calculated from the VEC model was 62.76 million, and thelevel of economic openness was 26.2%. Considered from a macroeconomic perspective, a baserate of growth of approximately 1% year-on-year can therefore be predicted.
For the second method, scenarios were formulated for the working population and the levelof economic openness. The following three scenarios were formulated for the working
population (for each case the annual average level of economic openness was the 2002-2007
average of 27.3%):42

Case 1: Based on the projections of the Employment Policy Workshop (2007), the working
population in 2030 was assumed to be 61.8 million (with increased labor market
participation by women and elderly citizens), and was assumed to transition linearly
from 2008 onwards.
Case 2: Based on the projections of the Employment Policy Workshop (2007), the working
population in 2030 was assumed to be 55.84 million (without increased participationin the labor market by women and elderly citizens), and was assumed to transition
linearly from 2008 onwards.
Case 3: The future working population was determined by multiplying the future population
projections of the National Institute of Population and Social Security Research(median estimates) by the average rate of labor force participation from 1992 onwards.
In this scenario, the working population in 2030 was 60.91 million.
Figure 2-16 shows the results of calculations based on these scenarios. For all cases, the rateof increase in TFP is negative at around 2030. A rate of increase of -0.2% was obtained for Case
1, in which the working population was highest. This was followed by -0.6% for Case 3, and-2.7% for Case 2, in which the decline in the working population was greatest.

Figure 2-16 Projection of rate of increase in TFP until 2030 (Exogenous model)

0.06
0.05
0.04
0.03

Actual figures

Case 1Case 2

Case 3

0.02
0.01
0
-0.01
-0.02
-0.03
-0.04
1973

1983

1993

2003

43

2013

2023

The fact that, based on a growth accounting perspective and assuming a decline in theworking population and a slowing of capital stock accumulation, the future rate of increase in
TFP becomes negative indicates a strong possibility that the potential GDP growth rate will also
become negative. Growth strategies adopting medium- to long-term perspectives will become
increasingly important.

5. Summary and Implication
The purpose of this paper has been to delineate the relationship between population andtechnological progress, and it has demonstrated a virtually exclusively positive relationshipbetween the size of the population and the rate of technological progress (considered in terms of
TFP and other measures). The relationship between population and technological progress has
been extensively discussed, and has been the subject of a great deal of theoretical research, from
Kuznetz (1960) to Kremer (1993) and Jones (2005). However, few attempts have been made to
conduct empirical analyses focusing on the recent situation in advanced nations, and there is
therefore significance in doing so.
Since the publication of Hayashi and Prescott (2002), there has been increased discussion
concerning productivity and economic growth in Japan, resulting for example in the creation of
the JIP database. However, research on productivity in Japan has focused on topics such as
R&D and IT investment, and the relationship between productivity and the size of the
population or population growth has been pushed to the side. The relationship between
population and technological progress will presumably become a more important subject of
research in future, when the nation’s population commences a fully-fledged decline.
In addition, it is clear that technological progress does not depend exclusively on the size of the
population or population growth. TFP, used here as a proxy variable for technological progress,is also affected by a variety of factors, including the measurement methods employed, the statusof allocation of production factors, etc., and improvements in the quality of labor and capitalstocks. When these points are considered, the treatment of technological progress in this paper
can be seen to have been somewhat deficient. It will be necessary to give further consideration
to this issue in future.
To conclude this paper, I would like to consider the implications of the empirical research
conducted here for future sustainable growth in Japan.
If, as indicated up to this point, the size of the population and the size of the working
population are essential elements in supporting technological progress, then a decline in44

population will result in a decline in the output of a potential engine of growth. Naturally,
economic growth is not determined exclusively by technological progress, just as technologicalprogress is not determined exclusively by the size of the population. However, measures willneed to be put in place in order to maintain the potential for sustainable growth in Japan. Twopolicy orientations can be considered here.
The first of these is to boost the size of the population through family and population
policies. Both policies to increase the birthrate and immigration policies may be considered.
Policies to increase the birthrate are important, but taking into consideration the scale of theireffect and the period required for that effect to be manifested (even if the birthrate returns to thenecessary level, 20-25 years will be required before the effect is manifested in the market as anincreased working population), they cannot be regarded as possessing immediate effectiveness.
Immigration policies would supplement the shortfall in labor power with an influx of skilledworkers from other countries, but it would be essential prior to their implementation to
sufficiently study potential lifestyle and cultural issues in addition to the cases of advanced
nations such as France and Germany, which have already adopted extensive immigration
policies.
The second policy orientation that can be considered is to actively increase technologicalprogress. This would naturally involve increasing education and training of skills, encompassing
efforts to improve the quality of human capital, and at the same time it would be necessary tocreate an environment enabling a high level of intellectual exchange. The further advancementof globalization will promote intellectual exchange, and will also contribute to the dispersion oftechnologies. This is surely the time to seriously consider policies to boost technologicalprogress by means of opening markets and promoting broad-ranging and large-scale exchangesof people and goods. It will be necessary to study this policy orientation in tandem withimmigration policies.

[Notes]*1 According to UN population projections published in 2006, the average annual rate of population
increase from 2005 to 2050 will be -0.49% for Japan, against -0.16 for Italy, -0.24 for Germany, -0.27%
for South Korea, 0.66% for the US, and 0.29% for the UK.
*2 See Kremer (1993), Barro and Sala-i-Martin (2003), and Jones (2005) for theoretical discussions.
*3 Below, the rate of increase in TFP (or MFP) is used for the rate of increase in technological progress.
The rate of increase in TFP alone does not express the rate of increase in productivity. For further detailregarding these points, see Miyakawa (2006).

45

*4 MFP is formulated for the purpose of international comparison, and OECD statistical data cannot
necessarily be considered the optimal basis for calculating MFP for individual nations.
*5 However, there is no significant difference with TFP figures calculated for Japan using JIP data, as
discussed later in the paper.
*6 Because only the rate of increase in labor productivity is considered, there is no necessity to adjust theexchange rate, which frequently represents a problem in international comparisons.
*7 Given the significant differences in the populations of the countries compared, the effect for eachcountry could not be sufficiently considered through the use of cross-sections and dummy variables alone,
and the results of measurements using a fixed effects model were unstable. Because of this, a random
effects model based on GLS estimates was employed.
*8 The ratio of investment to GDP was also considered, but significant results were not obtained.
*9 In addition to economic scale, whether or not figures were missing was also considered in theselection.
*10 Theoretical models generally do not distinguish between the total; population and the working
population, but in actuality they differ in terms of size and rate of growth. In the case of Japan, thedecline in the working population had already commenced from the latter half of the 1990s.
*11 The Japan Industrial Productivity (JIP) database is published as part of the “Study on Industry-Level
and Firm-Level Productivity in Japan” of the Research Institute of Economy, Trade and Industry. The
present study employed the JIP Database 2008.
*12 Converted to logarithms, as in the case of the analysis using OECD panel data.
*13 Variables displaying a one-stage difference were determined to be stationary.

[References][in Japanese]

Oguro and Morishita(2008), "Jinko-gensho-no-wana-ha-dashutsu-dekirunoka?"

Kaizuka eds. Jinko-gensho-syakai-no-syakai-hosho-no-kenkyu, Chuokeizaisha.
Economic Planning Agency eds.(1995), "Economic Survey of Japan"
Cabinet Office eds.(2003), "White Paper on the Economy and Public Finance"
Miyagawa(2006),"Seisansei-no-keizaigaku~Wareware-no-rikai-ha-dokomadesusundaka~," Japan Bank Working Papers, No.06－J－06.
Yashiro(1999), "Shoshi-korei-no-keizaigaku," Toyokezaishinposha.
Department of Labor(2000), "White Paper on Labor."[in English]
Aghion, Philippe, and Peter Howitt(1992), "A Model of Growth Through Creative
Destruction," Econometrica, Vol.LX, pp.323－52.

46

Barro, Robert, and Xavier Sala-i-Martin(2003), Economic Growth 2nd.ed., The MIT Press.
Grossman, Gene, and Elhanan Helpman(1991), Innovation and Growth in the Global
Economy, MIT Press.
Jones, Charles(2005), “Growth and Ideas,” in Handbook of Economic Growth, Vol.1B. eds. by
Philippe Aghion and Steven N. Durlauf, Elsevier B.V.
Kremer, Michael(1993),” Population Growth and Technological Change: One Million B.C. to1990,” The Quarterly Journal of Economics, Vol. 108, pp. 681－716.
Kuznets, Simon(1960), "Population Change and Aggregate Output," in Demographic andEconomic Change in Developed Countries, Princeton University Press.
Lee, Ronald(1988), "Induced Population Growth and Induced Technological Progress: Their
Interaction in the Accelerating Stage," Mathematical Population Studies, Vol.I, pp.265－88.
Simon, Julian(1977), The Economics of Population Growth, Princeton University Press.

47

Chapter 3 Empirical Analysis of Relationship between
Worker Age, Productivity, and Real Wages
Hiromichi Shirakawa[Abstract]
This study analyzed the effect of the worker age structure and the average
worker age on TFP (the rate of technological progress in the economy as awhole) and real wages. Plots of TFP and the wage rate against average
worker age both display inverse U shapes with their peaks between
average ages of 40 and 45. Beyond the mid-40s, TFP and real wages both
decline, with the wage gradient steeper than that of TFP. The peak in thewage rate occurs approximately two years earlier than the peak in TFP.
Future estimates of TFP and real wages based on this result indicated astrong possibility that despite the fact that TFP would peak in 2023 andthereafter decline, the ratio of labor costs to GDP would decline. These
results can be considered to demonstrate that the aging of society will nothave a profoundly negative effect from the perspective of productivity andof costs. It will be important in the future to direct the “bonus” producedby the aging of society from changes in TFP and real wages towards theemployment of young people and investment in research and development.

1. Problem and Approach(1) Problem and research orientation
Japanese society is aging, and population decline as a result of the nation’s low birthrate has
already commenced. What effect will these demographic trends – a low birth rate, the aging ofsociety, and population decline – have on the Japanese economy?
The majority of analysts and market participants appear to believe that the aging of Japanesesociety will further weaken the fundamentals of the nation’s economy. Pessimistic
commentators predict a dark future for Japan’s economy and markets, with an increasing deficit,
declining household savings, loss of the trade surplus, significant interest rate increases, and a
declining exchange rate.
However, it is important that we do not restrict ourselves to analyzing the impact of theprocess of the aging of society on the nominal variables of the economy and markets, but also
focus on the real variables represented by productivity and real wages. This is because there is apossibility that the distribution of income in the Japanese economy (the distribution of income
between the corporate and household sectors) will change significantly if the aging of society
48

exerts different effects on productivity and wages (real wages).
The important point is that it is clear that if there is a change in the distribution of income,there will be changes in the trends of corporate capital spending and productivity, and as a result
there will be a change in the potential growth rate of the Japanese economy. In other words,
many dynamics analyses predicated on the concept that there will be no change in the potential
growth rate could be rendered meaningless.
Based on this view of the issue, this chapter will consider the relationship between worker
age, productivity, and wages (real wages) in the Japanese economy from a variety ofperspectives, and will attempt to project the effect of the progressive aging of Japanese societyon the future course of productivity, wages, and corporate income.

(2) Previous research on the relationship between worker age andproductivity
A certain amount of research has been conducted outside Japan regarding the relationshipbetween worker age and productivity, but the type of productivity focused on differs with thedata employed in the analysis. It tends to be the case that when data concerning individual
workers is employed, work performance (for which indexes have been formulated) is the subjectof the analysis, when workplace data is employed it is labor productivity, and whenmacro-economic data is employed, it is total factor productivity (TFP)*1.
The interesting point here is that despite the different types of productivity focused on as aresult of the type of data employed, it is generally the case that the analyses find that whenplotted, the relationship between worker age and productivity describes an inverse U, and that
productivity peaks when workers are in their 40s. This point is made clear in Prskawetz, et al(2006), a survey of empirical analyses of the relationship between worker age and productivity.
Skirbekk (2008) presents an analysis which finds that productivity reaches its peak inworkers’ 40s using data for individual workers. Using the results of psychological research, thisstudy formulated indexes of the productivity of individual workers based on a variety of work
performance-related data, including the results of U.S. job performance tests and intelligencetests, and produced worker age and productivity curves. The results indicated an inverse U
relationship between the age and productivity of individual workers, with productivity peaking
between the ages of 35 and 45. To explain the inverse U relationship, the study indicated thepossibility of the coexistence of abilities that increase with advancing age (vocabulary, work49

organization ability, etc.) and abilities that decline with increasing age (strength, memory,
numerical ability, etc.).
Malmberg, et al (2008) conducted research on productivity at the workplace level. Usingpanel data for value-added productivity and worker attributes (personality) in Swedish
workplaces, this study analyzed the relationship between the worker age structure and laborproductivity. Dividing worker age groups into 29 and below, 30-49, and 50 and above, the study
found that workplace productivity tended to reach its highest level when the ratio of workers
aged 30-49 increased. Kawaguchi, et al (2006) conducted similar research concerning blue
collar workers in the Japanese manufacturing industry. Conducting a panel analysis on datafrom the Survey of Industry Statistics and the Basic Survey on the Wage Structure, this study
found that the relationship between years of work experience and labor productivity described
an inverse U shape, and that labor productivity peaked at approximately 20 years of work
experience (around the age of 40).
Feyrer (2008) analyzed the relationship between worker age and TFP using macro-economic
data. Using OECD cross-country panel data, this study regressed changes in TFP on the age
structure, grouped into ten-year units. The results showed that the rate of growth of TFP tended
to reach its highest level when the ratio of workers in their 40s increased. Werding (2008)
analyzed the relationship between the worker age structure and TFP using large-scalecross-country panel data for advanced and developing nations. This study found that there wasan inverse U relationship between worker age and TFP, and that the rate of growth of TFP was
highest in those countries in which the ratio of workers in their 40s had increased.

(3) Approach adopted and data used in the present paper
As indicated above, previous research suggests that productivity at both the micro-economic
and macro-economic levels tends to reach its peak for individual workers in their 40s and for an
average worker age in the 40s.
Based on the results of this previous research, this paper will analyze the relationshipbetween productivity and worker age in Japan, focusing on TFP. TFP has been chosen as thefocus of the analysis because I seek to obtain an image of the future course of the trend growthrate of the Japanese economy based on a growth accounting perspective.
TFP is understood to provide a measure of the efficiency with which all factors of
production (capital, labor, raw materials, etc.) are deployed, i.e., as a measure that expresses the50capacity for technological innovation. It can be conjectured that a fixed relationship exists
between worker age and the capacity for technological innovation in the economy, or the
economy’s potential for growth, because there is some relationship between the work
performance, technical ability, and age of individual workers, or there is some relationshipbetween the average age of workers or the worker age structure and the capacity fortechnological innovation in the economy as a whole. However, the present paper will not delve
too deeply into the theoretical basis of the relationship between worker age and TFP.
In addition to TFP, this paper will analyze the relationship between wages (real wages) andworker age. There is no theoretical basis for the assertion that a stable relationship exists
between macro-economic productivity in the form of TFP and real wages. This is because there
is no necessity for the “fruits” of the capacity for technological innovation - economic growthand increased corporate profits - to be distributed only to workers. The reason that this paper
will nevertheless analyze the relationship between worker age and real wages is that if theongoing aging of Japanese society has a differing impact on TFP and real wages, it is possiblethat there will be a significant change in the share of corporate profits and worker recompense in
GDP.
The data concerning TFP, real wages, and worker age in the following empirical analysis issourced from the JIP Database created by the Research Institute of Economy, Trade andIndustry*2.
First, TFP was calculated independently of the JIP Database. The JIP Database formulates
labor service input indices and capital service input indices that consider labor quality andcapital quality, and subtract the contribution to growth of these indices from real value-added
growth to calculate TFP. When this method is used, part of the relationship between age andproductivity is incorporated in labor quality*3, but it is not incorporated in TFP. In order toresolve this issue, the present paper will define TFP as the contribution of man hour labor input
and real capital stock subtracted from the real growth rate. Further details can be found in
Section (1) of the Appendix.
To obtain real wages, the nominal labor costs by industry in the JIP Database have been
divided by the sum of the number of workers by industry and GDP deflators, giving the reallabor cost per worker. The calculation of the nominal labor costs by industry in the JIP Databaseuses wages classified by worker attributes (sex / level of academic achievement / age / job
position), based on information obtained from the Basic Survey on the Wage Structure and the51Basic Survey on the Employment Structure, and they therefore do not correspond to SNA-based
wages.
Average worker ages are weighted averages found by multiplying the number of workers ineach age five-year age group by the median figure for that age group.

2. Formulation of Productivity Curves and Real Wages Curves(1) Empirical analysis of the age structure ratio (elasticity analysis using
linear panel model)First, an analysis was conducted in which TFP was regressed on the proportion of workers in
different age groups, following the method used by Feyrer (2008). Panel data for 106 industries
drawn from the JIP Database was employed. The sample period was the 34-year period from1973 to 2006. TFP was indexed with figures for 1973 defined as 100 for each industry. 10-year
worker age groups were used. When five-year age groups were used, the existence of the baby
boom generation skewed the composition of the age structure (Figure 3-1), generating issues ofreliability. The model was formulated as shown below. Here, “log” refers to natural logarithms.

log(Yi ,t ) = α i + ∑ β h log(xh,i ,t ) + ε i ,tHhYi ,t ∈ (TFPi ,t , LCi ,t ) : TFP or real wages for industry i at time t

α i : Individual industry effectxh,i ,t : Proportion of workers in age group h; h∈(20s, 30s, 40s, 50s, 60s)

β h : Parameters to be calculated
ε i,t : Error term

52

(1)

Figure 3-1. Changes in TFP and age ratio(5-year groups vs. 10-year groups)
TFP(left axis)

age 35-39

age 30-39
30%

160
25%

150

20%

140

15%

130
120

10%

110

5%

100

1973

1978

1983

1988

1993

1998

2003

0%

Source: JIP Database, RIETI
Calculation: Credit Suisse

A first difference was taken, and the following model, which excludes the effect of eachindustry, was employed in the actual calculations. The proportion of workers in their teens was
taken as the benchmark, and the coefficient for this group was set at 0.
H

Δ log(Yi ,t ) = ∑ β h Δ log(xh ,i ,t ) + ε i ,t(2)hFigures 3-2 and 3-3 show the results of least squares estimation for the model. The coefficients
calculated for each age group show the percentage increases in TFP and real wages when the
proportion of workers in that age group increases by 1% against the proportion of workers intheir teens.
The results of this analysis demonstrate the following: The regression coefficients were lower in the case of both TFP and real wages for workers intheir 20s, 30s, 50s, and 60s than for workers in their 40s. This is to say that TFP and real
wages will each be most prone to increase when there is an increase in the number ofworkers in their 40s.
 When results were plotted with worker age composition on the horizontal axis and TFP andreal wages on the vertical axis, both TFP and real wages described inverse U shapes with
their vertices occurring for workers aged in their 40s.
 Real wages were more sensitive to changes in age groups than TFP. The gradients of real
wages curves from the 30s to the 40s, and from the 40s to the 60s, are therefore steeper than
the gradients of TFP curves.

53

Figure 3-2. Results for linear panel model Figure 3-3. Results for linear panel model(Equation 2) (Elasticity)
0.30(Equation 2) (Elasticity)

0.28

0.25
0.20

0.18

0.19
0.15

0.15
0.10

0.13
0.13

0.10

0.08

0.05
0.00

0.02

-0.05
20s

30s

40s

Source: JIP Database, RIETI
Calculation: Credit Suisse

TFP

TFP
real wage rate

50s

-0.03
60s

Real wage
Calculated t value
value

Calculatedvalue

t value

20s

0.02

1.59

0.19

6.33

30s

0.10

2.67

0.15

5.00

40s

0.18

5.02

0.28

9.43

50s

0.13

4.05

0.13

4.27

60s

0.08

3.05

-0.03

-1.76

Source: JIP Database, RIETI
Calculation: Credit Suisse

These results match the results obtained by Feyrer (2008) and Werding (2008). They
indicate the possibility that in Japan also, there is an inverse U relationship between worker age(age structure) and TFP, and that TFP reaches its highest level when workers are aged in their
40s. The results also show that there is an inverse U relationship between real wages and worker
age, and that TFP reaches its peak for workers in their 40s. The elasticity of real wages withregard to the proportion of workers in different age groups is greater than that of TFP, and therate of decline in real wages when age increases is greater than that of TFP.

(2) Empirical analysis of average age (Formulation of curves using
nonlinear panel model)
As the previous section demonstrated, it is highly possible that the relationship between worker
age, TFP, and real wages is a nonlinear relationship. Based on this possibility, nonlinear curves
were directly formulated for the relationship between average worker age and TFP, and between
average worker age and real wages. An econometric explanation of the method used can befound in Appendix 2.

Results of calculation of TFP curves (Average worker age / TFP curve)This section will discuss the results obtained using a fixed effects model employing inverse
Weibull coefficients, which was most suited to this case.

54

Figure 3-4 shows a curve plotted using functions calculated for the entire sample (paneldata). This can be considered to be the theoretical relationship between average worker age and
TFP for the entire sample. Figure 3-5 shows curves for individual industries (106 curves)
generated by applying this theoretical curve to data for individual industries.

Overall, thefunctions seem to display a relatively good fit.
Based on the calculated curves, TFP reaches its peak at an average worker age of 45.8,
following which it gradually declines. The gradient of the decline in TFP following 45.8 ismilder than that of the gradient of the increase in TFP from 35 to 45.8. In fact, when changes inthe elasticity of TFP with regard to average worker age is considered, we find that the average
elasticity as TFP is increasing is +2.24 and the average elasticity when TFP is decreasing is-0.62 (the maximum value for elasticity with regard to average worker age when TFP is
increasing is +3.56 for age 35.6, and the minimum value for elasticity when TFP is decreasing is-1.79 for age 60). The form of this TFP curve indicates the possibility that TFP will not decline
radically even as the aging of Japanese society progresses.
Figure 3-4. Theoretical values for inverse Figure

3-5.

Fit

of

inverseWeibull

Weibull distribution for TFP; fixed effects distribution for TFP; fixed effects model
model
Entire Sample
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
35

150

TFP Curve

Curves for individual industries using
inverse Weibull functions

100
50
0
-50

(Average age)

-100
-150

40

45

50

55

60

30

35

40

45

(Theoretical model values with values for 35 as Source: JIP Database, RIETI
benchmark)Calculations: Credit Suisse
Source: JIP Database, RIETI
Calculations: Credit Suisse

55

50

55

60

 Results of calculation of real wages curves (Average worker age / real
wages curves)
The use of inverse Weibull functions also displayed the best performance in the case of real
wages curves, and as shown in Figure 3-7, resulted in a good fit for the entire sample. Based on
the calculated curve, real wages reach their peak at an average worker age of 43.9,
approximately two years before 45.8, the age at which TFP reaches its peak.
As in the case of TFP, after an average worker age of 43.9 is exceeded, real wages display agradual decline. The pace of this decline when the peak has been passed is faster for real wages
than for TFP. The average elasticity of real wages with regard to average worker age is +5.44
when real wages are increasing, and is -2.30 when real wages are declining. The gradients of theincrease and of the decline are both comparatively steep. This is indicated visually in Figure 3-6,
which shows both the real wages curve and the TFP curve. This suggests the possibility that as
the aging of Japanese society proceeds, real wages may decline more sharply than TFP.
Figure 3-6. Theoretical values for inverse Figure

3-7.

Fit

of

inverseWeibull

Weibull distribution for real wages; fixed distribution for real wages; fixed effects
model

effects model

Entire sample

1

TFP Curve

2.4

Real wage curve

2.2
2
1.8
1.6
1.4

（Average age)

1.2
1
35

40

45

50

55

5
4
3
2
1
0
-1
-2
-3
-4
-5

60

30

Curves for individual industries using inverse
Weibull functions

35

40

45

(Theoretical model values with values for 35 as Source: JIP Database, RIETI
benchmark)Calculations: Credit Suisse
Source: JIP Database, RIETI
Calculations: Credit Suisse Source: JIP Database,
RIETI
Calculations: Credit Suisse

56

50

55

60

(3) Accuracy of calculated ages for peaks of TFP and real wages
As indicated above, the formulation of nonlinear curves showed that real wages reach their peakat an average worker age approximately two years younger than the age for peak TFP, and thatthe pace of the decline in real wages following this peak is more rapid than for TFP. Given thatthe former result will have a decisive effect on the difference in the trajectories of TFP and real
wages in the next five-to-ten-year period, it was considered desirable to subject it to a more
rigorous examination.
A duration analysis*4 was conducted in order to estimate the probability of TFP and real
wages reaching their peak for each age group, and it was discovered that statistically significant
differences existed in the calculated probabilities. The results showed that the average age forthe peak in real wages displayed a lower level of significance than the average age for the peakin TFP (1 percent significance criterion)*5. Figure 3-8 shows the estimated probabilities of TFP
and real wages reaching peaks for each age group considered.
Figure 3-8. Probability of TFP and real wages
reaching peaks
Probability of TFP reaching peak
Probability of real wages reaching reaki

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
30

35

40

45

50

55

60

Source: JIP Database, RIETI
Calculations: Credit Suisse(4) Summary of empirical analyses
Empirical analyses of the relationship between the average age of workers, TFP, and real wages
using data classified by industry from the JIP Database for the period 1973-2006, indicated thefollowing:▪ A linear model analysis of the relationship between the worker age structure, TFP, and real
wages showed that TFP and real wages both displayed the greatest tendency to increase57when the proportion of workers in their 40s increased, and that real wages were moresensitive than TFP to changes in the worker age structure.
▪ A nonlinear model analysis of the relationship between the worker age structure, TFP, andreal wages showed that the TFP curve and the real wages curve each reach their peaks when
workers are in their 40s, but real wages reach their peak at an age approximately two years
younger than the age for the peak in TFP. Statistical examination of this difference in peakages showed it to be significant. In addition, a comparison of the forms of the curves showed
the gradient of the real wages curve to be steeper than that of the TFP curve, both whenincreasing and when declining.
▪ These observations indicate the strong possibility that the ongoing aging of Japanese society
will result in long-term declines in TFP and real wages, but also suggest that real wages will
begin to decline earlier, and the pace of their decline will be more rapid.

3. Future Outlook for TFP and Real Wages
Next, the future course of TFP and real wages was simulated. For this simulation, 1) the future
average worker age was estimated based on estimates of the future population by age grouppublished by the National Institute of Social Security and Population Research (assuming nochange in 2008 figures for employment rate by age group), and 2) future values for TFP and real
wages were estimated using inverse Weibull functions and fixed effects models, which can beconsidered to display the greatest reliability.
The following observations can be made with regard to the future course of the estimatedaverage worker age and the corresponding TFP and real wages. (The median birthrate was usedas the birthrate condition for estimation of future population).
1) The average worker age, 44.03 in 2006, will begin to increase. By 2030, a period of slightly
more than 20 years, the average age of workers will increase by approximately 2.5 years.
However, the effect of the retirement of the so-called second baby boom generation around2040 will slow the pace of this increase. Because of this, the increase in the average age ofworkers will slow to approximately 1.2 years in the 20-year period between 2030 and 2050
(Figure 3-9).
2) Because the average worker age for peak TFP is relatively high and the pace of increase in
the average worker age will slow from around 2040, it is projected that figures for TFP in
2050 will be virtually identical to 2006 figures. If 2006 figures are indexed as 100, the index
in 2050 will be 100.03. TFP will gradually increase until 2023, when the average age of58

workers reaches 45.8, the age at which TFP is at its peak. It can therefore be indicated thatthe aging of Japanese society will have a limited impact on the productivity of the economy,
measured as TFP, in the medium- to long-term.
3) By contrast, because the average worker age at which real wages reach their peak, 43.9, isslightly lower than the actual average worker age in 2006, 44.03, real wages can beconsidered to have entered a phase of decline at some stage in 2005. Because of this, if 2006
figures for real wages are indexed as 100, the index will decline to 98.14 in 2023, the year
when TFP reaches its peak. Following this, the decline will increase in pace until themid-2030s, and the index will reach 93.64, a decline of more than 6% against the 2006
figure, in 2050 (Figures 3-9, 3-10).
4) As this indicates, the future trend of real wages will be quite different to the future trend of
TFP. This difference can be easily visualized using a graph that plots year-on-year changes(Figure 3-11).
Figure 3-9. Future estimates of TFP and real wages
TFP

Real wage

Averageworker age

2006

100.00100.00

44.03

2010

100.64

99.72

44.62

2015

100.97

99.19

45.13

2020

101.10

98.56

45.56

2023

101.11

98.14

45.80

2025

101.10

97.79

45.98

2030

100.92

96.63

46.52

2035

100.60

95.36

47.02

2040

100.30

94.41

47.37

2045

100.11

93.87

47.55

2050

100.03

93.64

47.63

2055

99.91

93.32

47.74

Source: JIP Database, RIETI
Calculations: Credit Suisse

59

Figure 3-10. Future estimates of TFP and Figure 3-11. Future estimates of TFP andreal wages (2006 = 100)

real wages (Year-on-year changes)

102
101
100
99
98
97
96
95
94
93
92
91
90
2007

0.30%
0.20%
0.10%
0.00%
-0.10%

2015

TFP-0.20%

real wage rate

-0.30%

2023

2031

2039

2047 2055

Notes: The dotted lines in the upper part of thegraph show projected figures based on a highbirthrate scenario, and the dotted lines in the lower
part of the graph show projected figures based ona low birthrate scenario.
Source: JIP Database, RIETI; National Institute ofPopulation and Social Security Research; Ministryof Internal Affairs and Communications
Calculations: Credit Suisse-0.40%
2007

TFP
real wage rate
2015

2023

2031

2039

2047 2055

Source: JIP Database, RIETI; National Institute ofPopulation and Social Security Research: Ministryof Internal Affairs and Communications
Calculations: Credit Suisse

4. Future Trends of Ratio of Labor Costs to GDP
As indicated in the preceding section, a consideration of the future trajectories of TFP and real
wages shows that while the former will remain largely unchanged against 2006 figures in 2050,
the latter will decline by more than 6%. This difference between the two reflects the facts thatthe average age of the working population at which TFP reaches its peak is two years greaterthan the average age at which real wages reach their peak, and that the rate of decline following
the peak is greater in the case of real wages.
It does not need to be restated that the reliability of this projected difference in the future
trends of TFP and real wages is dependent on the reliability of the projected TFP curve and real
wages curve. However, given that 1) the results of a duration analysis demonstrate that thedifference between TFP and real wages in terms of peak ages is statistically significant, and 2)
the fact that the rate of decline following the peak is greater in the case of real wages isconfirmed by calculating functions other than the inverse Weibull functions (specifically,
Mincer functions) used in this report (see Appendix 2), the fact that there will be a difference inthe future trend of the two variables can be considered a reliable conclusion.

60

The remainder of this section will attempt to simulate the effect of this difference in the
future trend of TFP and real wages on the future trend of the ratio of labor cost to GDP based on
this assumption. The future course of nominal GDP and labor costs, and therefore of the ratio oflabor costs to GDP, can be simulated on the basis of future projections for TFP, real wages, andthe working population, using fixed preconditions for the rate of price fluctuation, working
hours, and capital investment. The results of such a simulation would present suggestive
implications with regard to the way in which the ongoing aging of Japanese society will change
the future course of the allocation of income in the nation’s economy.
Intuitively, we may state that there is a strong possibility that the aging of society will tend
to reduce the ratio of labor costs to GDP (which can be considered as a type of measure oflabor’s share). The results of the simulation accorded with this intuition. The procedures
employed in the simulation and the results obtained were as follows:
1) The future course of nominal GDP was considered to be determined by the future course ofreal GDP and GDP deflators, and the future course of real GDP was considered to be
dependent on the future course of TFP. It was assumed that the 1998-2008 average growthrate of GDP deflators (-1.1%) would continue into the future. Nominal GDP was assumed to
decline at an annual average of a little more than 1% (1.1%) from 2011 to 2055. Credit
Suisse projections were employed for nominal GDP for 2009 and 2010; simulation figures
were used from 2011.
2) The assumption that real GDP is dependent on TFP is equivalent to assuming that thecontribution of labor input and capital input essentially cancel each other out. This assumes
that the reduction in labor input due to the aging of society will be canceled by an increasein capital input. Broadly speaking, the concept is that the reduction in human capital due tothe aging of society will to some extent demand a substitutive capital input from thegovernment and companies.
3) With regard to the future trend of nominal labor costs, the future rate of decline in thenumber of workers based on Population Projections for Japan, 2006-2055 (assuming nochange in the age composition of the workforce against 2008 figures) was subtracted fromnominal wages, found by adding future projections for GDP deflators (an average annual
growth rate of -1.1%) to future projections for real wages. Total nominal labor costs wereassumed to decline at an average annual rate of 2.3% from 2011 to 2055. Data for total
nominal labor costs can only be obtained from the JIP Database up to 2006. For 2007-2010,
estimated figures based on actual figures and projections for nominal compensation forworkers were employed; simulation figures were employed from 2011).

614) In this manner, when the difference in the future courses of TFP and real wages are reflected,
a difference in the future courses of nominal GDP and nominal total labor cost is also
revealed. Nominal GDP and nominal total labor costs both decline, but the rate of thisdecline is slower in the case of the nominal GDP (Figure 3-12). Because of this, the ratio of
nominal total labor costs to nominal GDP declines continuously. According to thesimulation, the actual 2006 figure of approximately 56%, estimated to reach approximately
57% in 2009, will decline to less than 51% in 2020 and to approximately 32% by 2055
(Figure 3-13).
Figure 3-12. Change in nominal GDP and Figure 3-13. Change in ratio of labor costs tototal labor costs

nominal gross value-added
Nominal GDP index(2010=100)
120.0
110.0
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
1981

Total nominal laborcosts index

Ratio of total nominal laborcosts to nominal GDP

0.70
0.65

→Simulation

0.60
0.55
0.50
0.45
0.40

→Simulation

0.35
1993

2005

2017

2029

2041

2053

Note: The figure for gross value-added forcalendar year 2009 is a Credit Suisse estimate
Source: JIP Database, RIETI; National Institute ofPopulation and Social Security Research; Cabinet
OfficeCalculations: Credit Suisse

0.30
1981

1993

2005

2017

2029

2041

2053

Source: JIP Database, RIETI; National Institute ofPopulation and Social Security Research: Cabinet
OfficeCalculations: Credit Suisse

5. Conclusion
When the aging of society is considered as an increase in the average age of the working
population, future projections see both productivity measured as TFP and real wages declining
in the Japanese economy. However, the average worker age for peak TFP is 45.8, approximately
two years in advance of the average age for the peak in real wages. Because the average age of
the working population in Japan at present is a little over 44, if all other conditions remain thesame, TFP will continue to increase until 2023. By contrast, the average worker age for peakreal wages has already been exceeded, and it is likely that real wages will begin to decline fromthis point onwards. The rate of decline will be higher in the case of real wages than TFP.

62

Because of this, there is a strong possibility that as the aging of Japanese society proceeds, theratio of total labor costs to GDP (or labor’s share) will decline, and that there will be aconsequent increase in the ratio of corporate income to GDP. In this sense, the aging of Japanesesociety will represent a transfer of income from households to companies. However, if
companies actively invest this “bonus” from the aging of society in employing young people
and conducting research and development, the future decline in productivity can be mitigated.
A more important point is that while it is very likely that the aging of society will reduce
household savings, it is also quite possible that it will increase corporate savings. The total of
net savings and consumption of fixed capital (for the nonfinancial corporate sector), a proxyvariable for corporate savings, displays a stable inverse correlation to total nominal labor costs.
The simulation conducted in this study indicates that if the ratio of total nominal labor costs to
GDP trends downward, the ratio of corporate savings to GDP will trend upward (Figure 3-14).
This suggests that even as Japanese society ages, the IS balance of the economy will not easily
tip towards excess investment, and consequently the balance of payments will not easily tend
towards deficit.
Figure 3-14. Ratios of corporate savings and total nominal labor costs to GDP

Net savings + consumption of fixed assets in nonfinancial
corporate sector (Left axis)
Labor costs

19
18
17

50
52
54

(Right axis, inverse scale)

Simulation

16

56

15

58

14

60

13

62

12

64

11

66

10
1980

85

90

95

00

Source: Cabinet OfficeCalculations: Credit Suisse

63

05

10

15

20

68

[Notes]*1 A measure of how efficiently total production factors (labor, capital, raw materials) are employed.
Defined as “Productivity per unit for all production factors (labor, capital, and raw materials) combined”(Fukao and Miyakawa (2008)). In terms of treatment using production functions, generally treated as aresidual. TFP is also considered as representing the capacity for technological innovation in the economy
as a whole.
*2 The Japan Industry Productivity (JIP) Database was formulated by RIETI using data classified byindustry to enable growth accounting analyses. The database contains data for 108 industries covering theperiod 1973-2006. The present report used data for 106 industries, excluding the classifications “Housing”(a sector in which value-added corresponds to imputed rent) and “Activities Not Elsewhere Classified.”
The total number of samples was 3,604 (106 industries X 34 years).
*3 The labor input indices in the JIP Database are weighted aggregates of man hour input by worker
attribute, weighted for the differences in wages for different worker attributes (sex, age, academic
achievement, job position). Labor quality is defined as the difference between the rates of growth of labor
input indices and man hour labor input indices. For more information, see Fukao and Miyakawa (2008),
pp. 85-105.
*4 Duration analyses, or survival assays, are chiefly used in medical fields, for example to determine
whether there is any difference in the period of survival of patients who receive a specific treatment andthose who do not. In economics, the method is used to analyze the expansion or contraction of theeconomy across a continuous duration. In the analysis conducted here, the period for which TFP or real
wages continue to increase for a specific average worker age is considered a continuous duration. An HP
filter was used to determine the trend, and a non-parametric estimation method (the Kaplan-Maier
method) which is not dependent on specific probability functions was employed. The probability of theoccurrence of peaks shown in Figure 3-8 is defined as the estimated probability subtracted from 1.
*5 A log-rank test of the difference in the Kaplan-Meier curves in Figure 3-8 produced a p value of0.0077; a statistically significant (1% level) difference was determined between the Kaplan-Meier curves
for TFP and real wages.

[References]in JapaneseFukao and Miyagawa(2008) eds. Productivity and Japan's Economic Growth:
Industry-Level and Firm-Level Studies Based on the JIP Database, Universityof Tokyo Press.
Kawaguchi, Kambayashi, Kim, Kwon, Shimizutani, Fukao, Makino, and Yokoyama,"Nenkochingin-ha-seisansei-to-kairi-shiteiruka:

Kogyo-tokei-chosa-chingin-kozo-kihon-

chosa-kohyo-data-niyoru-jissyobunseki," Hi-Stat Discussion Paper, no. 189.

64

Kwon, Kim, and Fukao(2008), "Nihon-no-TFP-zyoushouritsu-ha-naze-kaizenshita
ka: Kigyo- katsudo-kihon-chosa-ni-motozuku-Jissyobunseki," RIETI Discussion
Paper, no. 50.

in English
Cameron, A., Colin and Trivedi, Pravin, K., Microeconometrics: Methods and Applications,
New York: Cambridge University Press, 2005.
Feyrer, J., "Age Structure and Productivity," in Prskawetz, A., Bloom, D., E., Lutz, W., eds.,
Population and Development Review Supplement to Volume 34, New York: Population
Council, 2008, pp.78－99.
Skirbekk, V., "Age and Productivity Potential: A New Approach Based on Ability Levels andIndustry-Wide Task Demand," in Praskawetz, A., Bloom, D., E., Lutz, W., eds.,
Population and Development Review Supplement to Volume 34, New York: Population
Council, 2008, pp.78－99.
Malmberg, B., Lindh, T., and Halvarsson, M., "Productivity Consequences of Workforce
Aging: Stagnation or Horndal Effect?," in Praskawetz, A., Bloom, D., E., Lutz, W., eds.,
Population and Development Review Supplement to Volume 34, New York: Population
Council, 2008, pp.78－99.
Mincer, J., Schooling, Experience and Earnings. Columbia University Press, 1974.
Prskawetz, A., Mahlberg, B., Skirbekk, V., Freund, I., and Winkler-Dworak, M., "TheImpact of Population Ageing on Innovation and Productivity Growth in Europe," Vienna
Institute of Demography, Austrian Academy of Sciences Research Report, 28, 2006.
Werding, M., "Ageing and Productivity Growth: Are There Macro-Level Cohort Effects of
Human Capital?," CESifo Working Paper, No.2207, 2008.

65

Appendices(1) Growth accounting and TFP in the JIP Database
Growth in value-added in the economy is expressed as the sum of the contribution of labor andcapital input and the increase in total factor productivity (TFP). Growth accounting is anapproach that seeks to understand economic growth by breaking it down into these three factors.
TFP is defined as the figure obtained by subtracting the contributions of labor services input, L,
and capital services input, K, from value-added, Y. The JIP Database created by RIETI employs
the growth accounting approach. Breaking the entire Japanese economy down into 108 detailed
industry sectors, it records annual data for each sector including gross productivity andintermediate inputs, capital stock and capital cost by asset, and labor input by worker attribute.
The explanation of the growth accounting methodology used for each sector in the JIP databaseoffered here follows that provided by Fukao and Miyagawa (2008).

First, linear homogeneous productivity functions are consecutively formulated forintermediate inputs X, labor L, and capital K. T expresses the level of productivity.

Q(t ) = F ( X (t ), L(t ), K (t ), T (t ) )(1)(t), which expresses the fact that the parameter is a time function, is omitted below. Based on
Euler’s theorem regarding homogeneous functions, Equation (1) can be transformed as follows:

Q=

∂F
∂F
∂F
K
X+
L+
∂L
∂K
∂X

(2)

Taking natural logarithms for both sides of Equation (2) and differentiating, the following
equation is obtained:

∂F
∂F
∂F
X &
L &
K
&
Q ∂X
X ∂L L ∂K K& TF&P
=
+
+
+
Q
Q X
Q L
Q K TFP(3)

TFP/TFP is defined as follows using the rate of increase in TFP:∂F
T&
TFP ∂T T&=
TFP
Q T
Assuming that each company behaves as a price taker in the production factors market, thefollowing equation can be obtained from the first-order condition of the cost minimization
problem ( p x X + wL + rK ):

66

λ=

px
w
r
=
=
∂F ∂F ∂F
∂X
∂L ∂K

(4)

λ : Limit cost (Lagrange multiplier of cost minimization problem)px : Price of intermediate inputs
w : Wage rater : Capital cost
The following equation is obtained by substituting Equation (4) in Equation (2):λQ = p x X + wL + rK

(5)

The following equation is obtained when Equation (4) is substituted in Equation (3):

TF&P Q& p x X X& wL L& rK K&= −−−TFP Q λQ X λQ L λQ K

(6)Because, from Equation (5), the term that is multiplied by the rate of change of each variable
can be rewritten as the following cost share

px X
px X
=
λQ
p x X + wL + rK

(7)Equation (6) can be expressed as follows

K&
X&
L&
TF&P Q&= − vX− vL − vK ,
L
K
TFP Q
X
px X
vX =
：Intermediate input cost share
p x X + wL + rKwLvL =p x X + wL + rK

：Capital cost sharerK
p x X + wL + rK

：Capital cost share

vK =

(8)

Finally, Equation (8) is used in actual growth accounting as the following discrete time
approximation:

Δ ln(TFP) = Δ ln(Q) − v X Δ ln( X ) − v L Δ ln(L) − v K Δ ln( K )(9)Based on this growth accounting concept, the RIETI JIP Database records annual data including
gross production, intermediate inputs, capital stock and capital cost by asset type, and labor
input by worker attributes for 108 industries.

67

The JIP Database contains labor input indices that consider labor quality and capital input
indices that consider capital quality. That is, L and K in Equation (9) are not man hour labor
input and actual capital stock, but, respectively, a labor input index, in which differences in
productivity due to worker attributes (age, sex, academic achievement, job position) have beentaken into consideration, using wage data, and a capital input index, in which differences in
productivity for different types of capital have been taken into consideration, using capital cost
data. TFP in the JIP Database is determined following Equation (9) by subtracting thecontribution of L and K formulated in this way from the rate of growth.
In this way, productivity dependent on the attributes of workers and capital is excluded from
TFP in the JIP Database. However, age is one of these worker attributes. Considering the
purpose of the present research – to determine the effect of the aging of workers on productivity
and the capacity for technological innovation in the macroeconomy, TFP as formulated in the
JIP Database could not be used without modification. The studies discussed in this report
therefore employed TFP recalculated using Equation (9), with L as man hour labor input(number of workers multiplied by working hours) and K as actual capital stock.

(2) Model for nonlinear panel estimation
As Figures 3-A1 and 3-A2 in this section show, an inverse U relationship exists between
average worker age and TFP, with the peak in the mid-40s. The same relationship holds in thecase of real wages (Figures 3-A3 and 3-A4). Figures 3-A1 and 3-A3 plot deviations from theperiod average (i.e. plot data to which a Within transform has been applied).
Figure 3-A1: Average worker age - TFP Figure 3-A2. Average worker age - TFP
scatter diagram- Pooled sample

scatter diagram
Pooled Sample

400- Within sample

150

350

Within Sample

100

300
50

250

0

200
150

-50

100
-100

50
0
30

-150
35

40

45

Source: JIP Database, RIETI
Calculations: Credit Suisse

50

55

60

30

35

40

45

Source: JIP Database, RIETI
Calculations: Credit Suisse

68

50

55

60

Figure 3-3: Average worker age - Real wages Figure 3-4: Average worker age - Real wages
scatter diagram- Pooled sample
16

scatter diagram -Within sample
Pooled Sample

14
12
10
8
6
4
2
0
30

35

40

45

50

55

Source: JIP Database, RIETI
Calculations: Credit Suisse

Within Sample

5
4
3
2
1
0
-1
-2
-3
-4
-5

60

30

35

40

45

50

55

60

Source: JIP Database, RIETI
Calculations: Credit Suisse

Three types of function (inverse Weibull functions, Mincer functions, and third-orderpolynomial functions were employed in the modeling of the nonlinear relationship between
average worker age and TFP and average worker age and real wages. With average worker age
as A, the respective model formulas can be expressed as follows:▪ Inverse Weibull⎡ μ − μ −1
⎛ ⎛ s ⎞ μ ⎞⎤exp⎜ − ⎜ ⎟ ⎟⎥ + α
g ( A) = β ⎢ μs A
⎜ ⎝ A ⎠ ⎟⎥⎢⎣⎝⎠⎦m, s , α , β：Parameters(10)ln g ( A) = β A + γA 2 + α
α , β , γ : Parameters(11)▪ Mincer▪ Third-order polynomialg ( A) = β1 A + β 2 A 2 + β 3 A 3 + α(12)α , β1 , β 2 , β 3：パラメータ

The inverse Weibull formula above is a generalized linear model with the inverse Weibull
function as a link function. Inverse Weibull functions are generated by taking the inverse of the
independent variables in Weibull functions, which are chiefly used for the expression ofdeterioration and lifespan, for example in duration analyses (survival assays). A distribution
using an inverse Weibull function as the probability density function is regarded as a type ofPareto distribution.
69

Mincer’s equation was proposed by Mincer (1974) to consider the effect of the accumulationof human capital on wages, and is widely used in the field of labor economics. This equation
offers the advantage of simplicity of interpretation; if the linear term is positive and thequadratic term is negative, the former expresses accumulation and the latter attrition. However,
because it is a quadratic equation, it presents the problem of producing an identical gradient forincreasing and decreasing tendencies.
The use of fixed effects models and random effects models are standard methods of working
with panel data. However, if a nonlinear equation is employed in a random effects model, theanalyst has no choice but to rely on a simulation method, and as a result the Hausman test
cannot be used to provide a criterion for selection of the model. With this consideration in mind,
the present analysis employs fixed effects models exclusively.
Specifically, an additive individual effect of the type shown in Equation (13) was assumed.
Following the application of a Within transform in order to eliminate this (Equation (14)), a
generalized method of moments (GMM) approach was applied to the nonlinear panel data. The
error terms were assumed to follow a normal distribution. Equation (13) is a general equation
for TFP and real wages, with no specification of particular functions.

Yi ,t = g ( Ai ,t , β ) + μ i + ei ,t
Yi ,t :TFP or real wages for industry i at time t

Ai ,t :

Average age of workers in industry i at time tμ :Individual effect of industry i

i

e

i, t

:

(13)

誤差項

The application of a Within transform generates the following equation:Yˆi ,i = gˆ ( Ai ,t , β ) + eˆi ,twhere：Yˆi ,t = Yi ,t − ∑ Y
i, t
t

(14)

T

⎛
⎞
gˆ i ,t = g i ,i − ∑ g ⎜⎜ A , β ⎟⎟ T
i
,
t
⎠
t ⎝

In this manner, the fixed effects model generates the shared shapes when an attempt is made to
employ the optimum curve for each industry. Table 3-5 shows the results generated by the fixed
effects model for the three equation types.
70

Table 3-5: Results for TFP curves and real wages curves generated by fixed effects
TFP curve

Real wage curve
Fixed effects model

Fixed effects modelCalculated valueCalculatt value

ed value

InverseWeibull

Inversemu

4.3(47.8)

Weibullequation

equation

4.4(20.4)

48.1(167.6)s

45.9(63.8)

beta

3194.0(81.8)

beta

117.0

(45.9)

AIC

12,679AIC

10,686

Peak age

45.8

Peak age

43.9

Average increase

2.2

Average increase

5.4

Average decrease-0.6

Average decrease

-2.3

beta

0.25

(16.7)

beta

0.25(13.5)

gamma-0.003(-15.9)gamma-0.003(-6.2)

AIC

14,819AIC

11,302

Mincer’s
equation

Peak age

47.3

Peak age

45.4

Average increase

1.7

Average increase

1.5

Average decrease-1.9

Average decrease

-2.2

b1

1.8

(11.9)

Third-orderpolynomialmuequations

Mincer’st value

Third-order
b1

328.7

(16.9) polynomial

equation

equationb2-6.88(-15.7)b2-0.03(-9.0)

b3

0.048(14.6)

b3

0.000

(2.6)

AIC

12,832AIC

11,263

Peak age

43.9

Peak age

Average increase

9.0

Average increase

Average decrease

0.8

Average decrease

Source: JIP Database, RIETI
Calculations: Credit Suisse

71

4.0

Chapter 4 Estimates of Labor Productivity from the
Perspective of Age Groups
Masatoshi Jinno[Abstract]
Labor productivity was estimated for different age groups, and the effect of
the future aging of Japan’s population on productivity was projected. This
research differs from previous research in employing more detailed age
groupings and in considering productivity for industry as a whole rather
than limiting itself to the manufacturing sector. The results show that laborproductivity in relation to age basically describes an inverse U shape, withproductivity peaking when workers are in their 40s. When productivity wascompared between younger and older age groups, it was found to be higher
among the latter. The effect of changes in the age structure of the population
on future productivity was considered based on future population estimates.
Over the next 10-12 years, Japan’s second baby boom generation will enterits 40s, i.e. its period of maximum productivity, and this change in the age
structure will produce an effect of increased productivity. However, thiseffect will not be sufficiently large to continue to compensate for the
reduction in the working population due to the decline in the birth rate, andlabor power-dependent productivity will therefore decline against its
present level in a little over one decade.

1. Estimation of Labor Productivity by Age Group(Survey of literature concerning labor productivity by age group)
The purpose of this chapter is to conduct estimates of labor productivity by age group using
panel data sets for different sectors in Japan. This section will briefly consider the findings ofseveral overseas and Japanese publications concerning the estimation of labor productivity by
age group.
Hellerstein, et al. (1999) conducted estimates for three age groups in the manufacturingsector (34 and below, 35-54, and 55 and above), and found that productivity was higher in the
35-54 and 55 and above age groups than the 34 and below age group. Hellerstein and Neumark(2004) also focused on the manufacturing sector, and conducted new estimates using a larger
sample size. This study found that while productivity remained high for the 35-54 age group,
the productivity of the 55 and above age group was lower than that of the 34 and below age
group. Dostie (2006) considered productivity for all industry sectors, and found that the72

productivity of the 35-54 age group was greater than that of the 55 and above age group, which
was in turn greater than that of the 34 and below age group. Collectively, these studies therefore
all find that productivity is highest among the 35-54 age group, but leave room for further
discussion as to the order of precedence of younger and older age groups.
In Japan, Kawaguchi et al. (2006) focused on the manufacturing industry and used
workplace-level data to estimate labor productivity by age group. According to the results ofthis analysis, worker productivity peaks at around 20 years following the commencement of
employment, and the productivity of older workers is higher than that of younger workers. In
terms of actual age, it was considered that the productivity of workers reaches its peak in their
40s. However, a comparison of productivity among older and younger segments produced
different results for different detailed industry categories such as light industry, heavy industry,
and machinery industry. Ochiai (2008) compared productivity for two age categories, 40 andabove and below 40, and found that productivity became higher for the higher age group*1.
The results reported above indicate that while productivity increases with increasing age, it
begins to decline above a certain age. Labor productivity by age group therefore displays aninverse U shape. However, opinions are divided as to the relations observed when younger andolder segments are compared.
The majority of analyses of the relationship between age groups and labor productivity havefocused on the manufacturing industry and have employed workplace-level data. Given that the
purpose of the present research was to study the medium-term outlook for Japan, it wasessential to conduct the analysis for all industries rather than focusing exclusively on the
manufacturing industry. It was also considered that more detailed age groupings would benecessary. This study therefore conducted a macro-level analysis of labor productivity by age
group using data for all of Japan’s 106 industry sectors. The analysis employed 11 agegroupings. The details of the estimation model are provided in Section 2. Section 3 discusses thedetails of the data employed, and Section 4 brings together the results of the analysis. The
chapter is then summarized in Section 5.

2. Details of Estimation Model(The productivity of the benchmark age group is considered as 1, and the
productivity of other age groups is evaluated against this figure)73

This chapter attempts to estimate labor productivity by age group using panel data sets fordifferent industry categories. This section will provide a detailed discussion of the model used
for this purpose. Two analyses were conducted using separate age groupings. One employed thethree age groups used in previous research (34 and below, 35-54, and 55 and above). The other
employed 11 age groups, as follows: 15-19, 20-24, 25-29, 30-34, 35-39, 40-44, 45-49, 50-54,
55-59, 60-64, and 65 and above.

Given the lack of explicit data, the estimation of labor productivity for different age groups
is not a simple task. The ratio of workers in each age group was therefore added to the
production function separately to the labor input, defining the production function in such a waythat the effect of age groups on productivity would be absorbed. I.e., the production function
was defined to demonstrate the effect of the specific age ratio on produced value.
α1

α2

α3

Yt j = Ae φ e φt K t j Ltj M t j Div tj Pt jj

( (Here, Pt j ≡ exp a1 L(1)t / Lt
j

j

(1)

)) exp(a (L(2) / L ))exp(a (L(3) / L )) , P expresses the
2

j
t

j
t

3

j
t

j
t

j

t

sum of the effect of each age ratio. Each variable is the variable for the jth industry in the tth
period. Yt j is the value of production, K t j is physical capital stock, M t j is intermediate
input, L (i )t is the number of workers in the ith age group, and Ltj is the total number ofjworkers in each industry sector. Divtj is the standard deviation of the worker age structure,and expresses the degree of scattering in the age structure.

The intuitive implication of Equation (1) can be described as follows. In this chapter, it ishypothesized that the productivity of workers will differ in each age group. It can be consideredthat the productivity of workers is composed of (A) a segment that differs depending on the agegroup, and (B) a segment that is homogeneous irrespective of age group, and that production in
the production function would be affected through both of these channels. These two channels
are expressed in Equation (1). (B), the segment that is homogeneous irrespective of age group,
appears as Ltj , and (A), the segment that differs depending on the age group, appears as(L(1) / L ), expressed as the ratio for each age group. The total of the effects of these two
j
t

j
t

factors becomes labor productivity by age group.

Dividing Equation (1) by Ltj and taking logarithms gives

( )

( )

( )

(

log y t j = log A + φ j + φt + α 1 log k t j + α 3 log m t j + α 4 log Div t j

74)

+ a1l (1)t + a2l (2)t + a3l (3)tjjjHere ytj k t j , and mtj respectively represent production value, amount of capital, and amount
,
j
j
j
j
of intermediate input per worker. l (i )t is defined as l (i )t ≡ L(i )t / Lt and represents the,ratio of the number of workers in the ith age group to the total number of workers. Constantreturn to scale has been assumed for the amount of capital, the amount of labor, and the amountof intermediate input.

Taking the externality of the 1st age group as 1, the equation was reorganized as follows:

( )

( )

( )

(

log y t j = log A + φ j + φt + α 1 log k t j + α 3 log m t j + α 4 log Div t j+ l (1)t + a 2 l (2)t + a3l (3)t
j

j

)

j

(1’)

Taking a first difference gives

(

)

(

)

(

)

(

log y t j / y t j−1 = φ + α 1 log k t j / k t j−1 + α 3 log m t j / m t j−1 + α 4 log Div t j / Div t j−1

(

)

(

) (

+ l (1)t − l (1)t −1 + a 2 l (2)t − l (2)t −1 + a3 l (3)t − l (3)t −1
j

j

j

j

j

j

)

)

(2)

In the following section, estimates will be conducted using panel data sets for different industry
categories and Equations (1’) and (2). In addition, productivity for the worker ratio for each age
group will be calculated. The focus of the analysis will be ai , which expresses productivity by
age group.

3. Data
The data employed covered the period 1974-2006. Figures for actual production value, numberof workers by age group, actual capital stock, and value of intermediate input were obtained
from the JIP 2009 database(http://www.rieti.go.jp/database/JIP2009/index.html), and figures for the number of working
hours by age group were drawn from the Basic Survey on the Wage Structure, published by the
Ministry of Health, Labor and Welfare. The descriptive statistical data can be summarized asshown in Figure 4-1.

75

Figure 4-1 Descriptive statistical data (Period: 1973-2006)
Benchmark: 2000

(1) Total data: 106
industry categories(Million yen)
(1,000 people
hours)(Person)Actual physicalcapitalValue ofintermediate input
Value ofintermediate input
Total number ofworkers
Working hours
Number ofworkers in 15-19
age group
Number ofworkers in 20-24
age group
Number ofworkers in 25-29
age group
Number ofworkers in 30-34
age group
Number ofworkers in 35-39
age group
Number ofworkers in 40-44
age group
Number ofworkers in 45-49
age group
Number ofworkers in 50-54
age group
Number ofworkers in 55-59
age group
Number ofworkers in 60-64
age group
Number ofworkers in 65 andabove age group
Standard
deviation inworker age
structure

AverageStandard
deviation(2) Industry categories
following removal ofgovernment-related andagricultural categories: 90
categories
AverageStandard
deviation(3) Manufacturingindustry-related
categories: 52 categories

AverageStandard
deviation

6,674,036

8,536,937

6,945,189

8,607,499

4,829,039

4,020,984

7,264,914

13,410,683

6,839,714

12,273,533

3,158,643

3,112,755

3,227,131

3,827,012

3,519,570

3,954,001

3,147,602

2,725,256

103,000

166,000

99,054

170,000

47,48647,847

13,80932,087

14,976

34,403

7,618

11,45856,485

101,127

57,938107,098

24,98325,01963,506104,195

63,728108,904

28,06326,054

63,056

102,426

63,173106,918

29,60629,31665,940107,076

65,705111,51332,421

34,06769,081

112,595

68,107116,375

34,67137,00968,637112,381

66,630114,495

34,144

36,14963,520104,551

60,549104,736

30,97832,72651,471

88,41547,618

86,112

23,56626,19233,49965,86928,48757,18412,016

15,56537,793

94,44527,191

63,96910,551

16,1401,232,956

2,076,906

1,031,002

1,633,209

550,274.2

553,761.6

3604

3060

76

1768

4. Results of Estimates(Worker productivity peaks in the 40s)
First, estimates were conducted for three age groups (34 and below, 35-54, and 55 and above),to enable comparison with previous research. Calculations were conducted using data for 106
sectors (the JIP108 classifications, excepting the Housing sector, for which value-added
corresponds to imputed rent, and Activities not Elsewhere Classified), for 90 sectors following
the exclusion of agriculture- and government-related sectors (JIP classification numbers: 7-97,
excepting 72), and for 52 manufacturing sectors(JIP classification numbers: 8-59). Figure 4-2
shows results for Equation (1). A two-way fixed effects model was employed in the calculations.
Figure 4-2 Two-way fixed effects model(1) Total data: 106
industry
categories(2) Industry categories
following removal ofgovernment-related andagricultural categories:
90 categories(3) Manufacturingindustry-related
categories: 52 categories

1.283***-1.276***-1.749***(6.452)(-13.798)(-6.275)

Amount of capital per

0.090***

0.159***

0.046

person(6.471)(13.103)(2.226)

Amount of intermediate

0.989***

0.653***

1.130***

input per person(66.544)(40454)(53.829)

Standard deviation of-0.158***

1.88E-08***

0.113***

structure of working(-10.628)(2.783)(5.543)

Ratio of workers in

2.246***

1.400***

1.714***

35-54 age group(22.139)(8.867)(9.982)

Ratio of workers in 55

1.919***

1.372***-0.048and above age group(13.216)(10.978)(-0.181)

A.R-squared

0.965

0.966

0.976

D.W.

0.119

0.082

0.201

Coefficient

Constant term

population

Notes: ***: 1% significance; **: 5% significance; *: 10% significance.
time-based fixed effects were also calculated, but are not shown here.

77

Separate fixed effects andFor each of the three sets of results, the Durbin-Watson values are low, and negative serial
correlation may be suspected. Unit root tests were therefore conducted for each type of
calculation, with the following results (the superscripts 1, 2, and 3 respectively represent
calculations for Total data, Data excepting agriculture- and government-related categories, andManufacturing-related categories):

Δet1 = − (4.18E − 17)− 0.073et1−1( −3.86 E −14 )( −12.641)

Δet2 = (0.004) − 0.040et1−1***( 3.570 )***( −15.291)

Δet3 = − (2.33E − 17)− 0.111et1−1( −1.44 E −14 )

***

***

( −10.305 )The null hypothesis that a negative serial correlation exists cannot be discarded for any of thecalculations. This indicates that the correlation is artificial. The calculations were therefore
conducted again using a difference model. The results are shown in Figure 4-3.
As Figure 4-3 shows, the results of calculations for each grouping of industry categories
generated largely identical results. With regard to the differences in labor productivity between
age groups, because the productivity of the 34 and below age group was defined as 1, acoefficient higher than 1 indicates that the age group in question displays a higher level of laborproductivity than the 34 and below age group. Figure 4-3 shows that the 35-54 and 55 andabove age groups display coefficients higher than 1. In descending order, the results are: 35-54
age group, 55 and above age group, and 34 and below age group. Significant negative results
were also obtained for the standard deviation of the worker age structure, which expresses thestatus of scattering of the age structure. This indicates that the rate of growth of production
value declines in proportion to the degree of scattering of the worker age structure.

78

Figure 4-3 Difference model

Coefficient(1) Total data:
106 industry
categories(2) Industry categories
following removal ofgovernment-related andagricultural categories: 90
categories(3) Manufacturingindustry-related
categories: 52
categories

Constant term

0.003**

0.002

0.002

(2.124)(1.258)(1.556)

Amount of capital per

0.088***

0.089***

0.072***

person(4.742)(4.343)(2.595)

Amount of intermediate

0.625***

0.666***

0.756***

input per person(28.624)(30.382)(33.178)

Standard deviation of-0.149***-0.120***-0.065**structure of working(-6.154)(-4.832)(-2.214)

Ratio of workers in

1.819***

1.803***

1.828***

35-54 age group(15.143)(14.444)(14.116)

Ratio of workers in 55

1.681***

1.701***

1.703***

and above age group(10.069)(9.312)(9.178)

A.R-squared

0.602

0.635

0.711

D.W.

1.730

1.729

1.890

population

Notes: ***: 1% significance; **: 5% significance; *: 10% significance. The heterogeneity of variance ofthe cross-section was corrected and a White corrected covariance matrix was employed. Because the 34
and below age group was defined as representing 1, it does not appear on the table.

A linear difference model using five-year increments was employed in calculations of laborproductivity for more detailed age groups. The results are shown in Figure 4-4. Excepting thefact that productivity for the 50-54 age group is considerably lower than productivity for thecontiguous age groups on both sides, the results shown in Figure 4-4 indicate that therelationship between worker age and productivity describes an inverse U shape. The coefficientfor the ratio of workers in the 65 and above age group was not significant in the calculations
using data from which agriculture- and government-related categories had been excepted andcalculations using data for manufacturing industry-related categories. This is thought to bebecause there is no significant difference between the productivity of workers in this age groupand that of workers in the 15-24 age group. The labor productivity of the 65 and above agegroup can therefore be considered approximately equivalent to that of the 15-24 age group.

79Figure 4-4 5-year increment difference model
Benchmark: 2000

(1) Total
data: 106
industry
categories(2) Industry categories
following removal ofgovernment-related andagricultural categories:
90 categories(3) Manufacturingindustry-related
categories: 52 categories(Million yen)
(Person)0.005***

0.005**

0.006***(2.942)(2.699)(3.527)

Actual physical capital

0.067***

0.066***

0.056*(3.510)(3.071)(1.892)0.619***

0.655***

0.742***(29.107)(29.778)(30.975)

Standard
deviationof -0.180***
structureofworking(-7.504)
population
Number of workers in 1.178***
25-29 age group-0.156***-0.093(-6.089)(-2.757)

1.015***

0.778***(6.355)(5.643)(4.403)

Number of workers
30-34 age groupin 1.035***

1.089***

0.851***(6.300)(6.587)(4.863)

Number of workers
35-39 age groupin 1.259***

1.287***

1.428***(7.375)(7.163)(8.266)

Number of workers
40-44 age groupin 2.263***

2.119***

1.962***(12.442)(11.365)(9.271)

Number of workers
45-49 age groupin 2.419***

2.380***

2.206***

12.555(11.399)

Number of workers
50-54 age groupin 1.564***1.390***

1.075***(7.610(6.552)(4.365

Number of workers
55-59 age groupin 2.148***

2.137***

1.594***(8.329)(7.946)(6.786)

Number of workers
60-64 age groupin 1.228***1.225***

1.465***(3.628)(3.013)(4.041)

Number of workers in 65 1.335***
and above age group

0.442

0.285

(4.089)(0.837)(0.504)

A.R-squared

0.621

0.651

0.721

D.W.

1.753

1.758

1.921

Value of intermediate input(13.138

Notes: ***: 1% significance; **: 5% significance; *: 10% significance. The heterogeneity of varianceof the cross-section was corrected and a White corrected covariance matrix was employed.
Because the 15-24 age group was defined as representing 1, it does not appear on the table.

80Figure 4-5 shows results obtained when the labor allocation rate is added to productivity
figures, i.e. the marginal productivity of labor, as a bar graph*2. For all the calculations,marginal productivity displays a rapid increase in the 40s. It can therefore be considered that in
the case of Japan, labor productivity reaches its peak when workers are in their 40s, and remains
high in older age groups; it appears that the labor productivity that has been realized does not
simply fade away. The result that labor productivity peaks in the 40s is consistent with the result
obtained by previous research (Kawaguchi et al.). Long-term calculations and calculations for
multiple sector classifications also showed that labor productivity peaks in the 40s.
The fact that companies, based on a concept of long-term employment, have establishedstable employment environments and conducted extensive in-house training can also be
considered to be a factor in the high productivity of workers in their 40s. Leaving aside theargument as to whether a system of long-term employment is desirable, if companies were to
discontinue in-house training, it might not be possible to maintain the present high level ofproductivity among workers in their 40s. This factor must also be taken into consideration.
Figure 4-5 Productivity indices for five-year age groups(Productivity of 18-24 age group defined as 1)
2.5
2
1.5
1
0.5
0
18‐24

25‐29

30‐34

35‐39

40‐44

45‐49

50‐54

55‐59

60‐64

65‐

Productivity index for all industry categories
Productivity index for industry categories excluding agriculture‐ andgovernment‐related categories
Productivity index for manufacturing‐related industry categories
Productivity index for industry categories excluding agriculture‐ andgovernment‐related categories (2nd‐order approximation equation)

Note: Labor allocation rate added to productivity figures for each age group, with figures for 18-24 age
group defined as 1.

81

(A period of a little over 10 years is available for policy action)
Next, the future effect of the structure of the working population on productivity was calculatedusing employment rates by age group (1973-2006 averages) based on the Male-Female
Population by Age Group: Estimates of Median Births and Deaths published by the National
Institute of Population and Social Security Research, and the Labor Force Survey published by
the Statistical Survey Department of the Statistics Bureau of the Ministry of Internal Affairs andCommunications. The results are shown in Figure 4-6.
The vertical axis of Figure 4-6 shows the rate of divergence of the working population from2006 figures (2006, the final year of the calculation period, was used as the base year). The
results show that due to the declining birth rate, the working population will fall below thefigure for the base year around 2017, and will then continue to decline. The effect of the age
structure of the working population is comparatively high from 2015 to 2025, when the second
baby boom generation enter their 40s, but this effect does not persist for the long-term and isdeclines following this period. These variables combined can be considered to represent the
combined effect of the size of the working population and the age structure of the working
population. As the results in Figure 4-6 show, the combined value for these variables remains
positive until around 2020.
This indicates that, assuming that the labor productivity of each age group consideredremains the same as it is at present, productivity will be maintained until about 2020, when it
will fall below present levels. Even if policies to increase the birth rate were to be adopted
immediately and were to have a dramatic effect, at least 40 years would be required before thegeneration born this year reached the peak of its productivity in its 40s. Some 30 years from
2020, labor productivity will have dropped well below present levels. The next ten years is theperiod for action. Within this ten-year period, it will be essential to give extensive consideration
to measures that can be effected for the following thirty years.
Here, I would like to focus once again on the employment rate by age group. Data forchanges in the working population were used in Figure 4-6; this data shows the actual status of
employment. If the status of employment continues into the future as it has to the present, theresults of these calculations can be applied to the future. However, if there is a divergence
between past data and present trends, the calculation results will lose meaning. It is therefore
necessary to consider the nature of present trends.

82

Figure 4-6 Estimates of future effect of age structure of working population and changes in
the working population

Rate of divergence from base year
4
2
0
‐2

Effect of age structure of working population‐4

Rate of divergence of working population from baseyear
Effect of age structure of working population + Rate ofdivergence of working population from base year

‐6
‐8
2005

2010

2015

2020

2025

2030

Note: Formulated using data from Male-Female Population by Age Group: Estimates of MedianBirths and Deaths published by the National Institute of Population and Social Security Research,and the Labor Force Survey published by the Statistics Bureau of the Ministry of Internal Affairs
and Communications

Based on the Labor Force Survey published by the Statistics Bureau of the Ministry ofInternal Affairs and Communications, averages were taken of the employment rates for each age
group for 1973-2006, the period used in the calculations, and of the employment rates from2000 onwards. The results are shown in Figure 4-7. As Figure 4-7 shows, despite slightdivergences for younger and older age groups, there is no dramatic change between data for the
past 30 years and the most recent data from 2000 onwards. However, the story becomes rather
different when the issue of regular and irregular employment among younger age groups, which
has recently attracted considerable attention, is focused on.

83Figure 4-7 Employment rate by age group
Employment
rate
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0

Average for 1973-2006
Average for 2000 onwards

0.0
15-19 18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65 andabove
Note: Formulated using data from the Labor Force Survey published by the Statistics Bureau of the
Ministry of Internal Affairs and Communications

Figure 4-8 shows the rates of regular and irregular employment for the different age groups.
Despite a slight increasing tendency, Figure 4-8 shows the rate of irregular employment amongthe 35-44 and 45-54 age groups to be comparatively stable. However, a conspicuous increasing
tendency from 2000 can be observed for younger age groups, in particular the 25-34 age group.
What is the meaning of this tendency? Analyzing Figures 4-7 and 4-8 in tandem, it can besuggested that while the level of employment has been maintained among younger age groups,
the form of that employment has shifted towards irregular employment. This can only indicatethat employment is becoming unstable among younger age groups.
Figure 4-6 indicated that if forms of employment are maintained enabling companies tocontinue in-house training as has been the case up to the present, a period of ten years isavailable for policy action to address the future labor force. However, Figures 4-7 and 4-8
indicate that at present younger people are increasingly entering unstable forms of employment.
These unstable forms of employment will prevent them from receiving sufficient in-housetraining. The calculation results discussed here indicate that there is a rapid increase inproductivity when workers reach their 40s, but unstable employment will impede this effect.
This point must be given further consideration.

84

Figure 4-8 Rate of regular and irregular employment
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1988

1993
15-24
25-34
45-54
65 and above

1998

2003
2008
15-24(excluding students)
35-44
55-64

Note: Formulated using data from the Labor Force Survey published by the Ministry ofInternal Affairs and Communications

I would now like to briefly consider future policy based on the above analysis. In the current
situation of a declining birth rate and a worsening status of employment among younger
segments of the population, it will naturally be necessary to adopt enhanced policies to increase
the birth rate, and in order to at least maintain labor productivity at its present level, it will also
be essential to enhance policies to promote increased full-time employment of young people bycompanies and to create stable employment environments enabling sufficient in-house training.
In addition, in order to mitigate the approaching effect of the decline in the population during
the next ten years, the period during which productivity can be expected to continue to increase,
we should build a bulwark by actively employing elderly citizens, whose labor productivity
remains at a comparatively high level. I would like to conclude by stressing this point.

5. Conclusion
In this chapter, I have estimated labor productivity by age group using long-term panel data forJapan. These estimates have shown that the labor productivity of Japanese workers peaks whenthose workers are in their 40s. In addition, the results show that labor productivity among older
age groups remains higher than that of younger age groups, suggesting that the labor85

productivity that has been developed does not simply wane as workers get older. Future
population projections show that the ratio of workers in their 40s in the general working
population will decline below present levels around 2020. It will be essential during the next
decade to actively adopt policies that will serve to boost labor productivity. As part of thispolicy initiative, we can consider policies to boost the birth rate, the enhancement of educationand training by companies, and, during the next decade, the creation of an environment thatencourages the active employment of elderly citizens.
The analysis discussed in this chapter was conducted on the basis of comparatively limited
data sets. In future, it will be necessary to conduct the analysis using more detailed categories,
for example by educational level, gender, etc. Despite the fact that many such points must beborne in mind in relation to this analysis, I believe that there remains considerable significancein conducting an analysis of the effect of the structure of the working population in the near
future.

[Notes]*1 For a survey of the literature concerning the gap between productivity and wages, see Chapter 2 of thisreport.
*2 The benchmark figure of 1 for the 15-24 age group is used for the 65 and above age group in forindustry

categories

excludingagriculture-andgovernment-related

categories

and

for

the

manufacturing-related categories, for which significant results were not obtained. For the
manufacturing-related categories, results for the 25-29 and 30-34 age groups are markedly lower than thebenchmark figure for the 15-24 age group. These estimates do not take educational level or gender into
consideration, and simply reflect differences for age groups. (This can also be said of the other estimates).
Because of this, the effect of factors other than age may be expressed in the results without being explicit.

[References]in Japanese
Ochiai(2008), "Seisansei-kojo-no-kagi-ha-dokoni-Sei,･Gakureki･Kinzokunensu-ni-yoru- bunseki,"Asu-no-Nihon-wo-tsukuru-jinteki-shihon~Aratana-Koyo･ikusei-shisutemu-wo- Tou, pp. 29-47.

Kawaguchi, Kambayashi, Kim, Kwon, Shimizutani, Fukao, Makino, and Yokoyama,"Nenkochingin-ha-seisansei-to-kairi-shiteiruka:

Kogyo-tokei-chosa-chingin-kozo-

kihon-chosa-kohyo-data-niyoru-jissyobunseki," Hi-Stat Discussion Paper, no. 189.
in English
Dostie, B(2006), “Wages, Productivity and Aging,” IZA Discussion Paper No. 2496.

86Hellerstein, J. K., D. Neumark, and K. R. Troske(1999), “Wages, Productivity, and Worker
Characteristics: Evidence from Plant-Level Production Functions and Wage Equations,” Journal ofLabor Economics, vol. 17, no. 3, p. 409－446.
Hellerstein, J. K. and D. Neumark(2004), “Production Function and Wage Equation Estimation with
Heterogeneous Labor: Evidence from a New Matched Employer-Employee Data Set,” NBER Working
Paper, No. 10325.

87

Chapter 5 Aging of the Population and Employment among
the Young: A Reconsideration of the Relationship
Souichi Ohta
[Abstract]
It has been suggested that employment opportunities are being lost to theyoung because companies are retaining their existing middle-aged orelderly employees. In considering employment issues among the young,the analysis conducted here did not confine its focus to the accession rate
for young people, but also studied the net accession rate (accession rate –separation rate) and the employment growth rate ((Number of young
employees this year – Number of young employees in previous year) /Number of young employees in previous year), which show the actual rateof increase in employment among the young. An analysis of the net
employment rate indicated the possibility that companies are adjusting
their employee intake, seeking an optimum employee age structure. In
addition, an analysis of industrial panel data showed that the rate of
employment of younger people tends to increase the more the age
structure of a company is weighted towards middle-aged or elderly
employees, and that companies with high ratios of middle-aged andelderly employees are actually reducing new employment of workers inthese age groups. This suggests that Japanese companies have adopted astrategy of reducing (or controlling the increase of) employee categoriesof which they have an excess, and of increasing (or controlling the
reduction of) employee categories of which they have a shortage, seeking
to maximize the benefits available from an optimal employee age
structure.

1. Introduction
In the world of economics textbooks, which is to say, a world of perfect competition, long-term
unemployment does not exist. This is because unemployment indicates an over-supply in thelabor market, and this would function as a pressure driving down the wages of existing workers.
If wages decline smoothly, demand for labor will increase among companies, and theunemployed will ultimately find employment. In the world of the real economy, information is
not completely available as it is in the world of textbooks, and in many cases wages are rigid.
This tends to lead to a situation in which jobs are “allocated” among job seekers, i.e., some job
seekers will find employment, and some will not.

88Naturally, there is a diverse range of “jobs,” and some are more prone to this phenomenon of“allocation” than others. Comparatively simple jobs, and jobs for which the wage level isgenerally agreed upon, are not prone to “allocation.” If an over-supply of labor for jobs of thistype occurs, wages will be adjusted downwards. On the other hand, the link between wage
levels and the market is weak in the case of jobs which demand employees to increase theirskills in the company (and jobs for which high wages are generally agreed upon). In addition,“job competition,” in which the superior candidate receives the job, is more important than
“wage competition,” in which the first candidates selected are those prepared to accept thelowest wages. This point is expressed succinctly in Thurow’s “job competition model,” but also
accords with the intuitive feeling of most people.
When “job allocation” is practiced extensively in the actual labor market, competition arises
over jobs. When someone fills a job “space,” employment opportunities for other candidates
decline by the same amount. Taking competition between educational levels as an example, themajority of white collar positions at large companies are occupied by workers with higher levelsof education, and workers with lower levels of education are barred from these jobs. In thissense, in the case of white collar positions at large companies, employment opportunities forworkers with lower levels of education have been replaced by employment opportunities forworkers with higher levels of education.
Extending this reasoning to age groups, we see that when “good jobs” are occupied bymiddle-aged and older employees, it will be difficult for young, recently graduated job seekers
to find such positions. Because maintaining employment among full-time employees is viewed
as particularly important by Japanese companies, they display a strong tendency to vigorously
resist letting workers go even in a recession. Because of this, the process of employee
adjustment focuses most strongly on hiring choices, and it is the younger age segments,
centering on recent graduates, who are most affected by this phenomenon.
Genda (2004) termed this displacement of employment opportunities for young people bymiddle-aged and older workers the “replacement effect theory,” and conducted a detailed
empirical analysis. This research, which showed using workplace-level data that the higher therate of employment of middle-aged or older workers in a workplace, the more employment
opportunities are lost by younger people, is still having considerable impact even today.
This paper will reconsider the “replacement effect theory” from a different perspective tothat adopted by Genda (2004). It will analyze the relationship between employment89

opportunities for the young and the ratio of middle-aged and older individuals in the population
using a variety of published data.

2. Analytic Perspective
It is well known that restricting new employment is the standard procedure employed by
Japanese companies to adjust employment in a recession, and that this method is prioritizedover letting employees go in order to restructure. If new employment is restricted, the level of
employment can be reduced, given that it is possible to expect natural attrition of employee
numbers as a result of retirement or cessation of employment for other reasons. Because young
people, and particularly recent graduates, make up the bulk of candidates for new employment,
employment of young people declines conspicuously during a recession.
Company actions of this type can also be demonstrated statistically. For example, using dataclassified by industry and time period from the Survey of Employment Trends conducted by the
Ministry of Health, Labour and Welfare, Ota (2009) examined the relationship between theincrease or decline in employment for all age groups and the increase or decline in employment
by age group. The results showed that while a 1% decline in total employee numbers translated
into a 1.5% decline in employment among the 15-19 age group and a 1.1% decline in
employment among the 20-24 age group, it represented a decline of only around 0.8% in
employment among the 40-44 age group.
Similar estimates for employment growth (accession minus separation) showed that when thenumber of employees declines by one person for all age groups, employment declines by 0.16
persons among the 15-19 age group and 0.18 persons among the 20-24 age group, while itdeclines by only 0.06 persons among the 40-44 age group.
A variety of factors generating such a situation can be conjectured, and one of these is thatJapanese companies tend to protect their existing full-time workers by restricting employmentof young people. However, the “replacement effect theory” discussed above is not limited to thisphenomenon. Going further, the aging of the age structure of full-time employees will alsofunction to restrict employment of young people. If the “replacement effect theory” is correct,
then a future reduction in employment opportunities for young people is looming in Japan,
where the working population is aging. In fact, Genda (2004) found that employment of recent
and future graduates is more strongly limited in workplaces with a higher ratio of workers aged
45 and above. However, there are still points that require consideration with regard to the level
to which the aging of the working population will reduce employment among the young.
90

First, there is the problem of the indices used in the analysis. Analyses up to the present havefocused on indices such as the planned rate of hiring of new graduates and the actual rate of
employment of young people at each workplace considered. These are clearly important indices,
but we must be aware that each is only a single indicator. It is necessary for the rate of new
hirings to exceed that of job terminations in a specific year in order for a company to increase its
rate of employment of young people in that year. No matter how many young people thecompany employs, if it lets go more workers than it employs, young people will have lost actual
employment. We can therefore argue that the rate of growth in employment is a more important
indicator than the rate of employment of young people.
By giving consideration to the relationship between the rate of growth in employment
among young people and the age structure of the population, we can also direct our attention to
the problem of the optimum age structure for companies. Assuming that companies make theachievement of an optimum worker age structure a target, companies with an excess of
middle-aged and older employees should employ young people (or reduce the number of
middle-aged and older staff members), and companies with large numbers of younger
employees should supplement middle-aged and older workers from outside. In this case, theeffect of the age structure on growth in employment would be the exact opposite of thatassumed by the “replacement effect theory.”
Second, there is another point concerning the relationship between indicators of
employment of young people at the company or workplace level and the age structure thatmerits further consideration. If the average age of company employees increases, there will be a
relative decline in the number of young people within the companies. As a result, there will also
be an overall decline in the number of young people being terminated from or leaving theirpositions. If companies hire in order to replace workers that have been terminated or have left
their positions, then there will be a decline in the hiring of young people corresponding to thedecline in young people being terminated from or leaving their positions. If this is the case, thenpart of the effect of the average age structure reflects the age structure of employees who havebeen terminated from or have left their positions.
Third, even if “aged” companies are restricting their employment of young people, wecannot assume that the logic behind this is empirically clear. If there are fixed production factorsthat can substitute for the labor of young people, and if those production factors increase, there
may be a negative impact on employment of young people. However, here we face the problem
that this effect of substitution is not limited to middle-aged and older workers aged 45 and91

above, but also to workers in their 30s. The reason that analyses have thus far focused on
middle-aged and older workers is that in Japan, given the combination of a difficulty in letting
employees go and an age-based wage system, the high cost of wages for middle-aged and older
workers can be considered to have an effect on the desire to employ young people. If the cost of
wages for middle-aged and older workers is an important determining factor, then the ratio of
the age groups with the highest wage levels in the company and the percentage of the total
wages paid by the company allocated to middle-aged and older workers should affect theemployment of young people. It will be necessary to study this point empirically.
The rest of this paper will reexamine the relationship of substitution between middle-aged
and older workers and young workers with consideration of these points. While it would bedesirable to employ long-term data concerning the full-time employee age structure and wage
levels for individual companies, such data is difficult to obtain. This analysis therefore employs
published industry-level data.

3. Empirical Analyses(1) Analysis using Survey of Employment Trends
First, an analysis will be conducted using data from the Survey of Employment Trends
published by the Ministry of Health, Labour and Welfare. This survey contains extensive data
concerning workers entering and leaving employment, and can be considered to provide suitabledata for the analysis of the problems considered here. This analysis uses the number of people
entering employment, the number of people leaving employment, and the number of employees,
classified by industry and age group. The data covers the period from 1994 to 2003. Data from2004 onwards will not be employed because revision of the Japanese standard industry
classifications has made it difficult to ensure data continuity. In addition, because the focus has
been limited to industries for which it was possible to use continuous data, the number ofindustries represented is lower than the number in the normal industrial classifications. As aresult, the sample analyzed is 31 industries

ten years.

The first problem to be considered is the effect of the age structure of an industry on theaccession rate of young people in that industry. Here, the accession rate of young people will bedefined as the number of individuals aged 15-29 hired, divided by the total number of workers.
This provides an indicator of the level of activity of employment of young people in relation to
the total number of employees in the industry, and is the explained variable. The main
explanatory variable was the industry age structure. Four categories were considered: 1) The
92

percentage of workers aged 30 and above in the total number of workers; 2) The percentage ofworkers aged 45 and above in the total number of workers; 3) The percentage of workers aged
55 and above in the total number of workers; and 4) The average age*1. In addition, industry
and year dummies were employed. The analysis was conducted using the least squares method,weighted by the number of workers in each industry category.
Table 1 shows the results of the analysis. Columns (1) to (4) show results obtained byintroducing, as the explanatory variable, the age structure at the same point in time as the
explained variable. The explained variable, the accession rate for young people, was found by
totaling the number of accessions from January to December, and dividing this figure by the
total number of workers on the final day of June; here, the age structure at the same point in
time, the final day of June, is used as the explanatory variable. A significant negative result at
the 1% level was obtained for the ratio of workers aged 30 and above, and significant negative
results were also obtained for the ratio of workers aged 45 and above and for the average age.
This result therefore indicates that the accession rate among young people is low for companies
with older age structures, and thus accords with the “replacement effect theory.” However, whilea negative result was obtained for the ratio of workers aged 55 and above, the result was not
significant.
The most interesting outcome here is the fact that the result for the ratio of workers aged 30
and above is more statistically significant than the result for the ratio of workers aged 45 andabove. One interpretation is that a reverse cause and effect relationship is at work, i.e. that themagnitude of the influx of young workers alters the age structures of the companies.

In orderto deal with this problem, the calculations were conducted again using the age structure for Juneof the previous year. The results are shown in Columns (5) to (8) in Figure 5-1. Overall, theabsolute values of the coefficients are low in comparison to (1) to (4). Significant results wereobtained only for the ratio of workers aged 30 and above and for the average age. In this casealso, the significance of the results for the ratio of workers aged 45 and above was lower thanthat of the results for the ratio of workers aged 30 and above. This analysis therefore does notprovide conclusive evidence that young people are being sacrificed in order to maintainemployment among middle-aged and older workers.
What other factors can then be considered in relation to the results for the ratio of workers
aged 30 and above and the average age? In industries that employ large numbers of young
people, the number of young people leaving employment also increases correspondingly. If thenumber of young people leaving employment is frequently supplemented by the hiring of young93

people, then it is unsurprising that the rate of accession of young people would be high inindustries with a high ratio of young people. In order to test this hypothesis, the ratio of workers
aged 15-29 leaving employment in the previous year (the percentage of the total number ofworkers represented by the separation rate for workers aged 15-29) was added as an explanatory
variable in addition to the age structure in the previous year. The results are shown in Columns(9) to (12). In all cases, results for the ratio of workers aged 15-29 leaving employment werepositive, and the results were within a 5% level of statistical significance, excepting the results
obtained when the ratio of workers aged 30 and above was used as the explanatory age structure
variable. The introduction of the new variable also reduced the coefficient for the ratio ofworkers aged 30 and above by approximately two-thirds, and made the coefficient for the
average age statistically insignificant. A low rate of hiring of young people to supplement
numbers due to a low rate of young people leaving employment can therefore be considered as
one reason for the fact that the rate of hiring of young people is low in industries with older age
structures.

94

Table 5-1 Results for rate of accession of young people(Based on Survey of Employment Trends)(1)
Ratio of workers aged 30 and above(same point in time)-0.304(0.056)

(2)

(3)

(4)

***
-0.165(0.058)

Ratio of workers aged 45 and above(same point in time)
Ratio of workers aged 55 and above***-0.071(0.102)(same point in time)
Average age (same point in time)-0.010Coefficient of determination

0.922

0.888

0.882

(0.002)
0.909

FSample size

75.82
310

58.76
310

62.07
310

57.19
310

(5)
-0.189(0.055)

(6)

(7)

(8)

Ratio of workers aged 30 and above(previous year)***-0.075(0.076)

Ratio of workers aged 45 and above(previous year)-0.046(0.087)

Ratio of workers aged 55 and above(previous year)
Average age(previous year)-0.005(0.002)

Coefficient of determination
F
Sample size

0.895
69.52
310

Ratio of workers aged 30 and above(9)-0.127(previous year)
Ratio of workers aged 45 and above

***

0.883
63.44
310

0.882
62.99
310

0.887
69.01
310

(10)

(11)

(12)

**

*

(0.065)-0.009(0.074)(previous year)
Ratio of workers aged 55 and above(previous year)

0.019(0.077)

Average age (previous year)-0.001(0.002)

Ratio of young people leaving
employment (previous year)

0.226(0.144)0.370(0.134)***0.379(0.129)***0.337(0.143)

Coefficient of determination
F

0.898
69.98

0.894
64.99

0.894
63.94

0.895
67.24

Sample size

310

310

310

310

**

(Notes) Industry and year dummies were added to the explanatory variables. The least squares method
was used, weighted for the number of workers by industry category. Heteroskedasticity-robust standard
error was employed. Figures in parentheses represent standard error. ***,**, and * represent 1%, 5%,
and 10% levels of significance respectively.

95

To conclude this section, I will use the rate of growth of employment of young people(defined as the product of subtracting the rate of separation of young people from the rate ofaccession of young people) as an indicator of growth in the employment of young people, andwill conduct an analysis using this as the explained variable. As indicated in the previous
section, employment opportunities for young people become more stable as young people
become more entrenched, and the net rate of influx of young people into employment should
therefore also be an important factor. The analysis used the age structure for the previous year.
The results are shown in Table 5-2. The interesting point here is that the coefficients for the age
structure are all positive, and are also statistically significant, at a level of 10% for the ratio ofworkers aged 30 and above. A high ratio of workers aged 30 and above means low numbers ofyoung employees. This may be taken as indicating that young people are actively being hired inindustries that have low ratios of young workers. Ota (2009), similarly using data classified byindustry, determined a positive correlation between the age structure of people acceding toemployment and that of people separating from employment. The results obtained here areconsistent with the hypothesis that companies are adjusting their employees, seeking an
optimum age structure.
Figure 5-2 Results for net rate of influx of young people to employment(based on Survey of Employment Trends)(1)
Ratio of workers aged 30 and above(previous year)

0.211(0.123)

(2)

(3)

(4)

*

Ratio of workers aged 45 and above(previous year)
Ratio of workers aged 55 and above

0.130(0.144)0.125(previous year)
Average age (previous year)(0.176)

Coefficient of determination

0.361

0.348

0.346

0.007
(0.005)
0.355

F
Sample size

4.3
310

4.5
310

4.53
310

4.28
310

(Notes) Industry and year dummies were added to the explanatory variables. The least squares method
was used, weighted for the number of workers by industry category. Heteroskedasticity-robust standard
error was employed. Figures in parentheses represent standard error. ***,**, and * represent 1%, 5%,
and 10% levels of significance respectively.

96

(2) Analysis using Data from Basic Survey on Wage Structure
The robustness of results obtained using one data set cannot be guaranteed. In addition, theSurvey of Employment Trends includes data for part-time workers, and it would be desirable toexclude these workers and conduct an analysis exclusively from the perspective of normal
full-time employees. Further, the relationship between employment opportunities for young
people and the wage structure is another important point of consideration, and it is also
therefore desirable to use statistics that include wages by age group. The data that best answer
these requirements are found in the Basic Survey on Wage Structure published by the Ministryof Health, Labour andWelfare. These data will be used in the analysis conducted in this section.
Here also, the data set represents data for industry categories pooled over a time series. The data
covers normal full-time workers in the public and private sectors from 1991 to 2003. 57
industry categories were employed, and the period of 13 years therefore gives a sample size of
741. First, the rate of growth in employment was used as the explained variable. This was
defined as the number of young employees in the focus year minus the number of young
employees in the previous year, divided by the number of young employees in the previous year.
First, as in the previous section, we will consider results obtained using the age structure andindustry and year dummies as the explanatory variables.
The results are shown in Columns (1) to (4) in Table 5-3. The results were all positive, withlevels of statistical significance of 1% for the ratio of workers aged 30 and above, the ratio ofworkers aged 45 and above, and the average age, and of 10% for the ratio of workers aged 55
and above. Here also, the results show that the rate of growth in employment of young people
increases with the aging of the age structure. These results accord with the results obtained in
the previous section for the net influx of young people to employment using data from theSurvey on Employment Trends.
Here, I would like to investigate the effect of the wage structure. The maintenance of theemployment of middle-aged and older employees in companies with seniority-based wage
curves occasions significant personnel costs. It is therefore possible, other conditions being thesame, that employment opportunities for young people will decline in proportion to the extent towhich the wage curve of a company (or industry) is seniority-based. I would therefore like tointroduce the ratio between wages in the 45-50 age group and wages in the 20-24 age group,
considered as an index of the wage gradient, as an explanatory variable. The wage will bedefined here as the monthly fixed cash wage plus one-twelfth of the annual bonus and other97

special payments. The percentage of total wages paid represented by wage payments to workers
aged 45 and above was also calculated and introduced as a variable representing the wage ratioof middle-aged and older workers. The results are shown in Columns (6) to (10) in Figure 5-3.
Figure 5-3 Results for rate of growth in employment of younger workers(Based on data from Basic Survey on Wage Structure)
(1)

(2)

(3)

Ratio of workers aged 30 and 0.785 ***(0.175)above (previous year)
1.119 ***
Ratio of workers aged 45 and(0.264)
above (previous year)
0.728
Ratio of workers aged 55 and(0.389)above (previous year)
Average age (previous year)
Coefficient of determination

0.317

0.318

0.292

F
Sample size

3.69
741
(5)

3.6
741
(6)

3.35
741
(7)

(4)

*
0.036 ***
(0.008)
0.324
3.65
741
(8)

(9)

(10)

Ratio of workers aged 30 and 0.787 ***(0.173)
above (previous year)
1.117 ***
(0.260)

Ratio of workers aged 45 andabove (previous year)
Ratio of workers aged 55 andabove (previous year)
Average age (previous year)

1.192 ***
(0.343)0.724*(0.389)0.036***(0.008)Wage gradient (Wages of 2024 age group against wages -0.001
of 45-50 age group) (previous (0.009)
year)

0.001
(0.009)0.004(0.009)-0.002(0.009)Percentage of total wages
paid to workers aged 45 andabove (previous year)

0.570*** -0.073(0.215)(0.257)

Coefficient of determination

0.317

0.318

0.293

0.324

0.300

0.318

F
Sample size

3.76
741

3.76
741

3.62
741

3.74
741

3.61
741

3.69
741

(Notes) Industry and year dummies were added to the explanatory variables. The least squares method
was used, weighted for the number of workers by industry category. Heteroskedasticity-robust standard
error was employed. Figures in parentheses represent standard error. ***,**, and * represent 1%, 5%,
and 10% levels of significance respectively.

98

Irrespective of the index of the age structure employed, results for the degree to which
wages are seniority-based (i.e., the wage gradient) are all statistically insignificant. In addition,
when the wage ratio of middle-aged and older workers was introduced in isolation, the result
was positive, but when it was introduced in tandem with a variable for the ratio of workers aged
45 and above, the result was negative and lacking in statistical significance. These results
therefore provide no evidence to suggest that a seniority-based wage schedule has a negative
impact on employment of younger workers.

(3) Analysis using Data from the JIP Database
At this point, I wish to examine the relationship between the employment growth rate and theage structure using data from the JIP database 2009, compiled by the Research Institute of
Economy, Trade and Industry (RIETI). The JIP database contains a variety of annual datanecessary for the calculation of sectoral TFP from 1970 to 2006, including labor service input
indices and labor input costs that consider capital service input indices and capital cost quality,
nominal and real values of gross output and intermediate input, and growth accounting results
for the rate of increase in TFP.
The use of this database offers two advantages. First, the industry classifications arecomparatively detailed, and the researcher can therefore expect an increase in the number ofdata. Even if public sector categories and mixed public-private sector categories are excluded, it
is still possible to employ data for 89 sectoral categories. Data concerning the number of
employees is based on the Population Census conducted by the Statistics Bureau of the Ministryof Internal Affairs and Communications. For years in which no Population Census is conducted,
estimates are made based on the Ministry’s Labor Force Survey and other data. The second
advantage of using the database is that the use of data for sectoral capital stocks, the number ofworkers by job type, the number of male and female workers, the number of part-time workers,
etc. makes it possible to control a large number of factors and thus estimate the effect of thewage structure more accurately.
The rate of growth of employment of younger workers was again set as the explained
variable. The age structure was also employed as the explanatory variable, as previously. In
addition, the employee structure by job type for the previous year (five job types), the ratio of
female employees for the previous year, the ratio of part-time workers in the previous year
(because the data in both these latter cases was available only for every fifth year, linear
interpolation was applied), the rate of growth of capital stocks, and industry and time dummies
were introduced as explanatory variables. No changes were made in the method of calculation.
99

The data covered the 16-year period from 1991 to 2006, and the sample size was 1,424.
The calculation results are shown in Figure 5-4. Columns (1) to (4) show results when only
the age structure variables are introduced in addition to the industry and time dummies. Results
for the ratio of workers aged 30 and above and the average age are positive and significant at a
1% level, while results for the ratio of workers aged 45 and above and the ratio of workers aged
55 and above are positive but not significant. Columns (5) to (8) show the results obtained whenthe employee structure by job type for the previous year (five job types), the ratio of female
employees for the previous year, and the ratio of part-time workers for the previous year wereintroduced. The introduction of these variables increased the magnitude of the coefficients forthe ratio of workers aged 30 and above and the average age. In addition, the coefficients for theratio of part-time workers in the previous year was statistically significant and positive
throughout, indicating that employment of younger workers increases in sectors in which there
are numerous part-time workers. The results obtained when the rate of growth in capital stocks
was introduced are shown in Columns (9) to (12). The results show a strong positive correlation
between growth in capital stocks and the rate of growth of employment of younger workers.
The results show that employment of younger workers is increasing in industries in which
there are low numbers of younger employees.

100Figure 5-4 Results for the rate of growth of employment of younger workers(Using data from the JIP database)

Ratio of workers aged 30 and above(previous year)

(1)
0.259
(0.071)

(2)

(3)

(4)

***
0.020
(0.092)

Ratio of workers aged 45 and above(previous year)
Ratio of workers aged 55 and above(previous year)
Average age (previous year)

0.006(0.096)0.008

Coefficient of determination
F
Sample size

0.628
14.16
1424
(5)

Ratio of workers aged 30 and above(previous year)
Ratio of workers aged 45 and above(previous year)

0.561(0.084)

0.618
14.09
1424
(6)

0.618
14.35
1424
(7)

***
0.099
(0.100)0.026(0.097)

Ratio of workers aged 55 and above(previous year)
Average age (previous year)
0.101

0.034

0.022

0.016
(0.003)0.079(0.174)previous year)
1.311
Job type ratio (Managerial; previous(0.313)year)
Job type ratio (Clerical; previous year) 0.155(0.206)(0.190)0.505(0.314)-0.199(0.236)(0.189)0.407(0.289)-0.198(0.239)(0.185)1.010(0.317)-0.061(0.216)-0.122(0.172)0.094(0.174)0.000-0.124(0.174)0.084(0.180)0.000-0.154(0.172)
0.194(0.160)0.001

Job type ratio (Specialized/ technical;-0.162(0.167)
Job type ratio (Service; previous year)
0.411(0.161)
Ratio of female employees (previous ye 0.003***

Job type ratio (Sales; previous year)(0.001)
Ratio of part-time employees (previous 0.002(0.001)
Coefficient of determination
0.656
F
16.3
Sample size***

(0.003)
0.623
14.36
1424
(8)

**
**
***

1424

(0.001)
0.002(0.001)
0.628
14.4
1424

101

**

(0.001)
0.002(0.001)
0.628
14.53
1424

**

(0.001)
0.002(0.001)
0.642
15.48
1424

***

***

***

Figure 5-4 (Continued)(9)
Ratio of workers aged 30 and above

0.540(previous year)(0.091)

(10)

(11)

(12)

***

Ratio of workers aged 45 and above

0.137(previous year)(0.089)Ratio of workers aged 55 and above(previous year)

0.094(0.094)

Average age (previous year)

0.017

***

(0.003)Rate of growth of capital stock
Job type ratio (Specialized/ technical;
previous year)

0.320

***

0.339

***

0.341

***

0.346

(0.059)(0.070)(0.072)(0.065)-0.021(0.167)-0.087(0.183)-0.102(0.182)-0.046(0.177)

Job type ratio (Managerial; previous

1.009

0.256

0.120

0.747

year)

(0.350)(0.336)(0.316)(0.345)0.169-0.172-0.172-0.027(0.201)-0.106(0.241)-0.064(0.247)-0.071(0.217)-0.097(0.162)(0.165)(0.162)

0.030

0.002

0.132

(0.168)(0.173)(0.154)

0.000

0.000

0.001

Job type ratio (Clerical; previous
year)
Job type ratio (Sales; previous year)***(0.157)
Job type ratio (Service; previous year)

0.337

**

(0.157)
Ratio of female employees (previous

0.002

year)

(0.001)

Ratio of part-time employees

0.002(previous year)(0.001)(0.001)(0.001)(0.001)

Coefficient of determination

0.677

0.651

0.651

0.666

F
Sample size

17.45
1424

14.97
1424

15.04
1424

16.69
1424

*

(0.001)***

0.002(0.001)
**

0.002

***

**

(0.001)
**

0.002

***

(Notes) Industry and year dummies were added to the explanatory variables. The least squares method
was used, weighted for the number of workers by industry category. Heteroskedasticity-robust standard
error was employed. Figures in parentheses represent standard error. ***,**, and * represent 1%, 5%,
and 10% levels of significance respectively.

(4) Rate of Growth of Employment of Middle-aged and Older Workers
To continue, we will change our perspective and consider what effect the aging of industries andsectors has on the employment of middle-aged and older workers. The same type of analysis
will be conducted, but this time using the rate of growth of employment of workers aged 45 andabove as the explained variable. If the employment of younger workers is increasing inindustries in which there are low numbers of younger workers, it would be unsurprising to findthat employment of middle-aged and older workers is declining in industries in which there arelarge numbers of such workers. Using data from the Basic Survey on Wage Structure and the JIP
102

database, a restricted regression analysis was conducted using industry and sector dummies,
with the age structure as the explanatory variable.
The results are shown in Figure 5-5. Columns (1) to (3) shows results obtained using datafrom the Basic Survey on Wage Structure. The result for the ratio of workers aged 30 and aboveis negative and not significant, while the result for the ratio of workers aged 45 and above isnegative and displays a 1% significance. The result for the ratio of workers aged 55 and above isnegative with a significance of 5%, and the result for the average age is also negative with asignificance of 5%. Columns (4) to (6) show results obtained using data from the JIP database.
While the result for the ratio of workers aged 30 and above is positive with 10% significance,
the results for the ratio of workers aged 45 and above and the ratio of workers aged 55 andabove are both negative with a significance of 1%, and the result for the average age is negative
but not statistically significant. These results indicate that employment of middle-aged and older
workers is actually declining in industries in which there is a high ratio of these workers.
Figure 5-5 Results for the rate of growth of employment of middle-aged and older workers(45 and above)
Data from Basic Survey on Wage
Structure
Ratio of workers aged 30 and above(previous year)

(1)

(2)

(3)

(4)

-0.167(0.149)Ratio of workers aged 45 and above-0.624(previous year)
Ratio of workers aged 55 and above(0.203)***-0.579**(0.276)(previous year)
Average age (previous year)-0.013(0.007)

Coefficient of determination

0.227

0.240

0.233

0.232

F
Sample size

3.02
741

3.07
741

3.19
741

2.94
741

(6)

(7)

(8)

Data from JIP database(5)

Ratio of workers aged 30 and above

0.085(previous year)
Ratio of workers aged 45 and above(0.050)***-0.186***(0.070)(previous year)-0.223(0.073)

Ratio of workers aged 55 and above(previous year)***

Average age (previous year)-0.001

Coefficient of determination

0.613

0.615

0.617

(0.002)
0.611

F

14.06

14.3

14.91

13.86

Sample size

1424

1424

1424

1424

(Notes) Industry and year dummies were added to the explanatory variables. The least squares method
was used, weighted for the number of workers by industry category. Heteroskedasticity-robust standard
error was employed. Figures in parentheses represent standard error. ***,**, and * represent 1%, 5%,
and 10% levels of significance respectively.

103

4. In Place of a Conclusion
This paper has analyzed the effect of the aging of Japanese society on employment among
young people by estimating the rate of growth of employment among the young. The results
showed that since 1990, the rate of growth of employment of younger workers has been high inindustries in which there are low numbers of young people, while the rate of growth of
employment of middle-aged and older workers has been low in industries in which there arelarge numbers of middle-aged and older workers. We may therefore conclude that Japanesecompanies have adopted a strategy of reducing (or controlling the increase of) the numbers of
employee categories of which they have an excess, and of increasing (or controlling the
reduction of) the numbers of employee categories of which they have a shortage, seeking tomaximize the benefits available from an optimal employee age structure.
This result does not appear to accord with the “replacement effect theory,” but this is not
something that can be stated categorically. Two effects can be seen to be the component
elements of the “replacement effect theory.” The first of these is the effect of the margin for new
employment of young people being reduced when the number of individuals who haveconcluded employment contracts as full-time employees increases. The second is that this effectof impeding new employment is greater in companies with older age structures. The existenceof this second effect is precisely why it can be concluded that an increase in the ratio of
middle-aged and older employees restricts new employment of young people. With regard to thefirst effect, we may assume that companies actually exist which have no margin for theemployment of young people because they seek to maintain employment of their middle-aged
and older employees. However, this paper has not obtained results that accord with the second
hypothesis, that this effect increases in magnitude as the age structure of the company becomesolder.
This analysis has employed different indices and data to those employed by Genda (2004),
and this fact can also be considered to lie behind the differences in the conclusions of theanalyses. To repeat, the main focus of Genda’s analysis was the job accession rate among young
people, while the main focus of this paper has been the employment growth rate among young
people. In addition, while Genda employed workplace-level cross-sectional data, this paper has
employed pooled data formed from industry-level cross-sectional and time series data. It cannot
be considered surprising that these differences have had a significant effect on the outcomes of
the analyses. From this perspective, while the results reported in this paper may not absolutely
support the “replacement effect theory,” caution must be exercised in their interpretation.
104

Assuming that the results of this analysis are accepted, what meaning will this have for theissue of employment among young people in Japan? If Japanese companies are attempting tomaintain optimal age structures, this trend should have had a positive effect on employment
among young people. Despite this fact, the employment environment for young people has
worsened significantly since the 1990s. This indicates the emergence of other disadvantageous
factors for young people (for example, a decline in the rate of company growth, or increased
uncertainty in the business environment).
Again, if the results of this analysis were to be accepted, it may be concluded that there is a low
risk that employment among young people will be adversely affected by the future aging ofJapanese society. Certainly, it is possible that the risk is low that an increase in the average ageof workers will have a significant impact on employment opportunities for young people.
However, it is also highly possible that the active entry of elderly people and married women
into the labor market and their accession to jobs will function to restrict employment of young
people. This is a different effect to the effect of the age structure. In addition, if companies
utilize elderly people further in future, it is possible that this trend will enhance theirrelationship of substitution with young people. It will therefore be necessary in future tocarefully observe the status of substitution of other workers for young people.

[Notes]*1 The median age in each age group was used as the average age in calculations. For example, in thecase of the 20-24 age group, the median age of 22 was employed in calculations. However, for the 65 andabove age group, 67 was used as the average age. The same system is employed throughout this paper.

[References]in Japanese
Genda(2004), Job Creation, Nihonkeizaishinbunsya.
Ohta(2009), "Rodo-juyo-no-nenrei-kozo," Ohashi eds. Rodo-juyo-no-keizaigaku, Chap. 2, pp.74-106,
Minervashobo.
Thurow, Lester C. （1975）, Generating Inequality-Mechanisms of Distribution in the U.S. Economy,
Basic Books.（Japanese edition: Koike and Yakisaka(1984), Fubyodo-wo- umidasumono, Dobunkan)

105

Authors

Hiromichi Shirakawa

Managing Director, Chief Economist,
Credit Suisse Securities (Japan) Limited

Hisakazu Kato

Professor, Meiji University

Kensuke Miyazawa

University of Tokyo

Masahiko Jinno

Junior Research Fellow
National Institute for Research Advancement (NIRA)

Souichi Ohta

Professor, Keio University

106What’s NIRA?
The

National Institute for Research Advancement (NIRA), founded in 1974 under the

National Institute for Research Advancement Act, has conducted comprehensive research inorder to contribute to the resolution of a variety of complex contemporary social, economic andlifestyle issues.

NIRA has changed its juridical status as an incorporated foundation sinceNovember 29, 2007, although NIRA’s aims are unchanged, and NIRA will continue to conduct
its activities for the public interest.
The new NIRA will seek to present bolder policy proposals and make information available
in a timely fashion in order to stimulate policy discussion and contribute more actively to thepolicy-making process. As globalization advanced and Japan’s population ages, Japanesesociety is facing profaned structural changes, a situation that urgently requires the nation’s
research institute to adopt new roles.

NIRA therefore views its change in organizational status

as an opportunity to reform its research system to meet the demands of a new era.
NIRA’s research will address issues facing Japan, with a focus on the three areas of national
economic and social policies, international relations, and regional issues.

National Institute for Research Advancement (NIRA), Japan
Yebisu Garden Place Tower, 34th Floor
4-20-3, Ebisu, Shibuya-ku, Tokyo 150-6034, Japan(URL:http://www.nira.or.jp/english)

107