Sources of Labor Productivity Growth in the Service Sector: An Industry-Level Empirical Analysis Using the JIP Database, 1955-2015

Author Name FUKAO Kyoji (Faculty Fellow, RIETI) / MAKINO Tatsuji (Research Assistant, RIETI)
Creation Date/NO. March 2021 21-J-018
Research Project East Asian Industrial Productivity
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Labor productivity growth in Japan has been sluggish since the 1990s. As a result, average incomes and wages have hardly increased. Looking at the sources of productivity growth from the supply-side of the economy using the newly compiled Japan Industrial Productivity (JIP) Database 2018 and other sources, this paper examines the reasons for this sluggish productivity growth. This paper differs from previous studies on the topic in the following respects.

First, instead of conducting growth accounting for the macroeconomy, we present growth accounting using detailed industry-level data. Second, we examine in detail the sources of labor productivity growth in the past, including which industries led the accumulation of physical and human capital in the economy as a whole, and in what ways the reallocation of labor across industries occurred. Third, we conduct long-term growth accounting based on industry-level data for the period 1955–2015 by extending the JIP Database backward. This allows us to determine why labor productivity slowed down during Japan's lost decades (1990–2015) compared to the high-speed growth era (1955–70) and the period of stable growth (1970–90), and which industries were responsible for this slowdown.

Our main findings are as follows: (1) the tertiary sector has played an important role in labor productivity growth in Japan since the high-speed growth era in terms of capital accumulation, labor quality improvements, and total factor productivity (TFP) growth, and this importance of the tertiary sector has increased further in recent years; (2) more than 80% of the labor productivity growth in the macroeconomy was due to intra-industry effects; and (3) the contribution of labor quality improvements gradually increased, so that during the lost decades from 1990 onward, labor quality improvements became the second largest contributor to overall growth after capital accumulation.