Quality of Labor, Capital, and Productivity Growth in Japan: Effects of employee age, seniority, and capital vintage

Author Name SHINADA Naoki  (Development Bank of Japan)
Creation Date/NO. March 2011 11-E-036
Research Project The Japanese Economy under Low Fertility and Aging Population: From the perspectives of economic growth, productivity, labor force, and prices
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An aging population, low fertility rate, and suppressed corporate investment have left Japan with an older workforce and older vintages of fixed capital. To restore economic dynamism, Japan must encourage productivity growth.

Using panel data of listed Japanese firms in FY 1977-2008, this paper demonstrates how both employee age and capital vintage affect the quality of labor and capital that influence productivity. Our research contributes three significant findings. (1) The older the average age of a firm's employees or the longer their seniority, the higher the firm's productivity growth, but it is unclear if the effects peak at specific ages. (2) The positive effects of employees' increasing age and seniority and the negative effect of older capital on Japan's productivity growth have declined since the 1990s. (3) These effects have been larger among manufacturers than non-manufacturers.

Negative effects of increasing non-regular workers should be addressed, and it is further important for Japanese firms to organize and manage labor skills and enhance knowledge, rather than depend on technology accumulated over time.