Accounting for Japan's Lost Score

Betts, Caroline (2021): Accounting for Japan's Lost Score.

Abstract

This paper develops a quantitative framework to evaluate the sectoral origins of economic growth. First, I decompose growth in aggregate growth accounting variables–GDP per working age person, a capital factor, an hours’ worked factor, and an implied total factor productivity factor–into sectoral contributions. I decompose the TFP factor growth contribution of a sector into 1) sector-share weighted, within-sector TFP factor growth, and 2) several residual allocative effects. Second, I interpret structurally the observed sectoral contributions by comparing them to those predicted by a multi-sector neoclassical growth model. Using the framework to account for Japan’s economic growth slowdown I find that, empirically, two factors quantitatively dominated Japan’s slowing GDP per working age person in the 1990s. First, a large decline in aggregate TFP growth relative to the 1980s, driven by 1) slower within-industrial sector TFP growth, and 2) negative residual effects due to faster value-added reallocation towards services which mediated a larger impact of the sector for aggregate capital deepening. Second, a large fall in hours worked per working age person, originating mainly in smaller industrial sector contributions. In the 2000s, continued GDP per working age person and aggregate TFP growth decay were due largely to slower within-service sector TFP growth. In the 2010s, anemic aggregate TFP factor growth equal to just 18 percent of its 1980s value was depressed by zero service sector TFP growth; a modest growth rate recovery in GDP per working age person originated in rapid increases in hours worked per working age person, via roughly equal increases in industrial and service sector contributions. A calibrated three-sector growth model absent frictions, featuring sectoral TFP time series as inputs, reproduces closely the time-series from 1980–2018 of a) hours shares of sectors, b) GDP per working age person, and c) the aggregate TFP factor. It captures quite well a) sample-average aggregate TFP growth, b) aggregate TFP growth rate changes across decades, c) the decomposition of aggregate TFP factor growth into total “within-sector” TFP and total residual contributions of sectors, and d) “within-sector” TFP growth contributions of agriculture, industry, and services. The model cannot replicate the sources of, or sectoral contributions to, observed–albeit small–TFP growth residual effects. More importantly, the model’s predicted hours factor (hours per working age person): 1) captures only 46 percent of the decline in industry’s contribution to the fall in aggregate hours factor growth in the 1990s; 2) declines in the 2000s, while hours factor growth is positive in the data; 3) captures only 47 percent of observed average hours factor growth in the 2010s; and 4) allocates too much of the 2010s increase in aggregate hours factor growth to industry. A higher intertemporal elasticity of substitution, a higher Frisch elasticity, and an aggregate labor (policy) wedge resolve some, but exacerbate other, model failures.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Growth, Neoclassical Growth Model, Structural Change, Total Factor Productivity, Japan.
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E13 - Neoclassical; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Betts, C.M. (2021) “How many (more) lost decades? The great productivity growth slowdown in Japan,” mimeo. USC

Chen, K., Imrohoroglu, A. and S. Imrohorglu (2006) “The Japanese Saving Rate,” American Economic Review 96(5) 1850–1858.

Cole, H.L., and L.E. Ohanian (1999) “The Great Depression in the United States from a neoclassical perspective,” Federal Reserve Bank of Minneapolis Quarterly Review 23(1) 2–24.

Coleman, W.J. II (2005) ‘Terms of Trade, Structural Transformation, and Japan’s Growth Slowdown’, Duke University, mimeo.

Diewert, I. (2015) “Decompositions of productivity growth into sectoral effects,” paper prepared for IARIW-UNSW conference on productivity, UNSW.

Dooley, B. and H. Ueno (2020) “Why Japan’s jobless rate is just 2.6 percent while the U.S.’s has soared,” New York Times, June 20th, 2020. https://www.nytimes.com/2020/06/20/business/japan-unemployment.html

Duarte, M. and D. Restuccia (2010) “The Role of Structural Transformation in Aggregate Productivity,” Quarterly Journal of Economics 125(1) 129–173

Fukao, K. (2013) “Explaining Japan’s Unproductive Two Decades,” RIETI Policy Discussion Paper Series 13-P-021

Fukao, K., Ikiuchi, K, Kim, Y., Kwon, H.U., Makino, T., and M. Takazawa (2015) “Lessons from Japan’s Secular Stagnation,” RIETI Policy Discussion Paper 15-E-124.

Fukao, K., Inui, T., Kawai, H., and T. Miyagawa (2004) “Sectoral Productivity and Economic Growth in Japan, 1970-1998: An empirical analysis based on the JIP database,” in Ito, T. and A.K. Rose (eds.) Growth and Productivity in East Asia NBER-East Asia on Economics 13 University of Chicago Press

Fukao, K., Kim, Y., and H. Kwon (2021) “The Causes of Japan’s Economic Slowdown: An Analysis Based on the Japan Industrial Productivity Database,” International Productivity Monitor 40(Spring) 27–55

Havranek, T., Horvath, R., Irsova, Z. and M. Rusnak (2015) “Cross-country heterogeneity in intertemporal substitution,” Journal of International Economics 96 100–118

Hayashi, F. and E.C. Prescott (2002) “The 1990s in Japan: The Lost Decade”, Review of Economic Dynamics 5 206–235.

Herrendorf, B., Rogerson, R. and A. Valentinyi (2013) ‘Two Perspectives on Preferences and Structural Transformation’, American Economic Review 103, 2752–2789.

Herrendorf, B., Rogerson, R. and A. Valentinyi (2014) ‘Growth and structural transformation’, in Handbook of Economic Growth, 2, Chapter 6, eds. Aghion, P.and S. N. Durlauf, Elsevier 855–941.

Hoshi, T. and A. Kashyap (2010) “Why did Japan stop growing?” NIRA working paper.

Jeong, H. (2020) “Productivity growth and efficiency dynamics of Korean Structural Transformation,” Worldbank Policy Research Paper 9285.

Kehoe, T.J. and E.C. Prescott (2002) “Great depressions of the twentieth century”, Review of Economic Dynamics 5 1–18.

_______________________ (eds.) (2007) Great Depressions of the Twentieth Century Federal Reserve Bank of Minneapolis (also published as an edited volume of the Review of Economic Dynamics, (2002) 5).

Kehoe, T.J., Ruhl, K.J. and J.B. Steinberg (2018) ‘Global Imbalances and Structural Change in the United States’, Journal of Political Economy.

Jorgenson, D., Nomura, K. and J.D. Samuels (2018) “Progress on Measuring the Industry Origins of the Japan-U.S. productivity gap”, Harvard University, working paper.

Oulton, N. (2016) “The Mystery of TFP,” LSE working paper.

Restuccia, D. and R. Rogerson (2008) “Policy distortions and aggregate productivity with heterogenous establishments,” Review of Economic Dynamics 11(4) 707–720.

Steinberg, C. and M. Nakane (2011) “To fire or to hoard? Explaining Japan’s labor market response in the great recession,” IMF Working Paper WP11-1