Service Price Divergence and Productivity Differentials among Regions in Japan

Author Name TOKUI Joji (Faculty Fellow, RIETI) / MIZUTA Takeshi (Hitotsubashi University)
Creation Date/NO. March 2017 17-J-012
Research Project Refinement and Analysis of the Regional-Level Japan Industrial Productivity Database: Providing basic information for Japan's regional development policy
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We estimate service price divergence among prefectures in Japan and use it to recalculate productivity differentials of the Regional-Level Japan Industrial Productivity (R-JIP) Database. Productivity level-accounting of the R-JIP database thus far reflects differences in labor input composition and its cost among the regions. On the other hand, we assume the same output price for each industry among all regions. Since most of the service industries operate locally, their costs significantly correlate with local labor costs. This lack of consideration of the service price divergence among regions in productivity accounting may cause some bias. The purpose of this research is to circumvent this possible problem.

To estimate service price divergence among the regions in Japan, we use the Country-Product-Dummy (CPD) Method of Rao and Timmer (2000), which was originally proposed to estimate absolute purchasing power parity in the field of international economics. We apply this method to the raw price data of many service items that are surveyed in each prefecture by Japan's Statistics Bureau. The service industries to which this method is applicable include construction, electricity, gas and water utilities, real estate, transport and communications, and other non-government services. As a result of recalculating productivity differentials reflecting the newly estimated service price divergence, we find some reduction of standard deviation of total factor productivity (TFP)-level differentials among the regions; in 2009 it diminishes by 13%. We also examine whether the Balassa-Samuelson effect holds among the regions in Japan.