Lessons for Japan from the U.S. Growth Resurgence

Date May 28, 2003
Speaker Dale W. JORGENSON(Professor, Department of Economics, Harvard University)
Moderator MOTOHASHI Kazuyuki(Senior Fellow, RIETI / Associate Professor,Institute of Innovation Research,Hitotsubashi University)


The role of IT in the economy is similar in the US and in Japan. But the number of hours worked has been shrinking in Japan; there has been a loss of opportunity. The goals of my presentation today are the following: to analyze the sources of recent US economic growth, to project the potential growth of average labor productivity, and to project the average labor productivity growth for Japan, based on my recent research. The main factor will be demographics: the working age population will decline in Japan. The demographic depression is here.

First, I would like to define a fundamental identity: that is, growth of GDP is the sum of growth of hours worked and growth of labor productivity. My data adjustment was that output, defined as GDP, includes government and household sectors. This measurement is slightly different so that we could analyze information technology's impact on growth. Headline BLS productivity figures are for the non-farm business sector, excluding government, housing, and farm sectors. I will examine the sources of output and labor productivity growth for the periods 1995-2000 and 1973-1995, incorporating new and revised data on output, investment and labor input.

Compared with the first period, 1973-1995, in the second period, 1995-2000, hours and labor productivity accelerated in the US. Hours worked increased because of a drastic decrease in unemployment and an increase in labor force participation. The three sources of productivity growth include capital deepening (or capital per hour), labor productivity growth (the growth of the proportion of productive workers), and total factor productivity growth (TFP, defined as output per unit of capital and labor units).

What changed in the US after 1995? First capital deepening increased: IT capital input accelerated, which led to a deceleration of non-IT capital input (as IT capital became a substitute for non-IT capital). Second, labor quality slowed: as the labor force participation rate increased, unemployment fell, but labor quality also fell. Third, TFP accelerated: productivity in IT production rose, and productivity in non-IT production also rose. IT drove the US productivity revival. The two main sources of which were IT production and capital deepening.

In order to project productivity growth in the US going forward, we must make two assumptions to remove the transitory effects. First, output and reproducible capital (equipment, structures, etc.) grow at the same rate. Second, hours growth matches labor force growth. From these assumptions, we can derive three scenarios: a pessimistic, a base case, and an optimistic one. Common assumptions in all scenarios are that hours and labor quality growth are consistent with demographic projections, and capital, labor, and IT output shares are at historical averages. The base case scenario uses 1990-2000 averages and it assumes a reversion to the 3-year product cycle. The optimistic scenario assumes that the 2-year cycle will continue and 1995-2000 averages will continue.

Putting it all together, demographic assumptions put US hours growth at 1.0 percent per year in all scenarios. Labor quality growth continues to slow---at 0.157 percent in all scenarios. A summary of the US projections is as follows: base case productivity will be below 1995-2000, due to slower capital deepening, and less labor quality growth; there will be slower output growth due to reduced growth in hours and labor productivity; and the future of IT is key, as it will drive IT-related TFP and capital quality growth, so uncertainty remains.

What does the data say about Japan's economy? In our study, we used the same definition that the US uses for IT (it includes software), and prices were measured the same way they are in the US. Demographic assumptions for Japan put hours growth at -0.55 percent per year in all scenarios. And when hours growth slows, capital deepening slows. But labor quality growth will continue to rise at 0.49 percent, the average for 1995-2000, in all scenarios. The base case scenario used 1980-1995 averages, an optimistic one reverts to 1995-2000 averages, and a pessimistic one assumes that 1990-2000 averages will continue.

The conclusions are the following: labor productivity growth for the US will be lower than 1995-2000, but higher than 1973-1995. Labor productivity growth for Japan will also be lower than 1995-2000, and lower 1980-1995. Output growth for the US will be considerably lower than 1995-2000, and about the same as 1973-1995. Output for Japan will be lower than 1995-2000, and lower than 1980-1995.

Questions and Answers

Q: I believe GDP growth per capita is more relevant for Japan. What is your projection of this indicator?

A: You would have to focus on labor productivity projections then. From this perspective, Japan would look to be growing much more rapidly than the US is. During the period of the US growth resurgence, Japan's labor productivity was growing rapidly.

Q: Why did you compare 1973-1995 with 1995-2000, a period of 20 years with a period of five years?

A: In 1995, an event occurred: there was a shift at Intel and then at its rivals from a 3-year cycle to a 2-year cycle. This meant that Moore's Law was 50 percent faster per year, and this was working its way through the industry. The 3-year cycle was during the 20-year period and the 2-year cycle was during the five-year period.

Q: Won't non-IT technology (such as biotechnology) contribute to economic growth?

A: Biotechnology shows up in the non-IT part of the data sets. Non-IT productivity growth has been near zero for 30 years. Productivity growth has been concentrated in IT. The impact of IT on the Japanese economy will be the same as it was in the US. IT companies are multinational corporations, so you would expect the trends to be similar. There is non-IT productivity growth in Japan because there are still some sectors that are catching up. Eventually the catch up will come to an end. Biotechnology, meanwhile, is really a story about IT, and this will be the story in the future.

Q: Are you as optimistic as Intel about the road map?

A: Some say that the 2-year cycle will go until 2007, some say it will go until 2013. These represent the optimistic and pessimistic scenarios.

Q: As for the demography issue, the only solution is to get younger people to have more children. What about pushing back the retirement age?

A: It would help. But what happened after the restructuring of Nissan? The old regime was laid off and these people cannot get the benefits of lifetime employment. Rationality is coming bit by bit. If you have more children, you would actually be reducing female participation. It would be better to increase female participation first.

Q: What are the implications of IT for the Chinese economy?

A: Japan's rapid growth stage was associated with enormous investment. The IT industry will shift to China. This means if China is growing at ten percent per year, one percent will be IT, so it will be less important. Why is catching up so slow in China? China is not operating with full-blown capitalism yet; it is still communist.

*This summary was compiled by RIETI Editorial staff.