As one of the fastest-aging economies, Japan provides many lessons on how demographics affect medium- to long-term economic prospects. Among various aspects of aging demographics, prospects for labour participation can help determine overall supply and demand, which helps estimate whether aging is inflationary or deflationary.
In Japan, the working-age population (15-64-year-olds) peaked at 87 million in 1995 and fell to 74 million in 2020. However, the number of workers has continued to increase thanks to rising labour participation. At the same time, it is often overlooked that working hours per capita have been on a declining trend, increasingly dragging down GDP growth from the supply side (Exhibit 1). According to analysis by the Cabinet office, while the number of workers has made a positive yet modest contribution to cumulative GDP growth since 1990, growth has mainly been driven by hourly labour productivity. But with hourly productivity having stagnated since the early 2010s, the increase in the number of workers has been partially offset by the drop in the number of hours worked per employee.
Exhibit 1: Declining working hours have increasingly depressed growth
Background to declining working hours
As discussed in our previous research, the declining trend of working hours per capita reflects the fact that more females and seniors have joined the labour force as part-time workers (Exhibit 2). Although some chose part-time work because regular jobs were not available, the share of such involuntary part-time workers has declined from 19.2% in 2013 to 11.6% in 2019. Government surveys showed that more females and seniors chose part-time status because working hours are more convenient for their lifestyles. Many housewives also limit working hours to keep receiving tax and social security benefits as dependents.
Exhibit 2: The entry of females and seniors as part-time workers has prevented a decline in the labour force
Working hours have decreased due to the rising share of part-time workers because their working hours are shorter than those of regular workers on average. Additionally, the average working hours of part-time workers have been on a declining trend since the mid-1990s, falling by more than 20% in 25 years (Exhibit 3). We believe this reflects the increasing share of females, especially working mothers, and seniors in part-time work.
Exhibit 3: Working hours are on a declining trend
Meanwhile, full-time workers’ working hours per capita have remained almost flat until recently, apart from cyclical fluctuations. However, as the legislation to restore a better work-life balance has been gradually implemented, working hours of full-time workers have started to decline since 2019. The impact of the legislation after 2020 is still not certain because of the noise caused by the pandemic.
The impact on long-term growth
Japan’s experience shows that rising labour participation rates have mitigated the impact of adverse demographics but have not been able to prevent a decline in labour inputs because the pace of decline in working hours has exceeded that of the increase in the working population (Exhibit 1).
The rising share of part-time workers with shorter working hours also raises concerns about labour productivity, which has remained stagnant since the early 2010s. The share of part-time workers is higher in the non-manufacturing sectors dominated by small-sized firms. As discussed, small non-manufacturers have been the major cause of stagnant productivity growth in Japan, as evidenced by limited investment in information technology. Raising productivity through on-the-job training is also more challenging for part-time workers with short working hours.
The damage to economic growth is not limited to the supply side. Decomposing the causes of a continuous decline in nominal earnings per worker (Exhibit 4), hours worked per worker have been the most significant drag, followed by a rising share of part-time workers (the “composition” effect). However, hourly wages have contributed positively to nominal earnings per worker since the mid-2010s, although it was not strong enough to prevent a drop in earnings. As a result, the average total income for families is still below its peak in 1996 even after adjusting for the impact of an aging society, despite increased labour participation among females in their 30s.
Exhibit 4: Less working hours are a major cause of depressed wages
We have argued in the past that Abenomics has failed to revive Japan’s economy because disappointing wage rises have resulted in secular stagnation in household incomes and domestic demand. To explain the stagnant wage increase, we have pointed out the Japanese lifetime employment system, which prioritises long-term job security instead of wage increases. This note also shows that a rising share of part-time workers with short working hours has significantly contributed to stagnant household incomes. A high share of part-time workers with short working hours is engaged in low-paid jobs. It has also affected income distribution changes, as evidenced by the rising number of low-income households and diminishing middle income groups.
This note shows that, when considering the demographic impact on long-term growth prospects, we must take into account not only the labour participation rate but also changes in working style, which affect hours worked per capita and labour productivity in Japan.
