By Sagiri Kitao, Minamo Mikoshiba and Hikaru Takeuchi
The speed and magnitude of ongoing demographic aging in Japan are unprecedented. A rapid decline in the labor force and a rising fiscal burden to finance social security expenditures could hamper growth over a prolonged period. We build a dynamic general equilibrium model populated by overlapping generations of males and females who differ in employment type and labor productivity as well as life expectancy. We study how changes in the labor market over the coming decades will affect the transition path of the economy and fiscal situation of Japan. We find that a rise in the labor supply of females and the elderly of both genders in an extensive margin and in labor productivity can significantly mitigate effects of demographic aging on the macroeconomy and reduce fiscal pressures, despite a decline in wage during the transition. We also quantify effects of alternative demographic scenarios and fiscal policies. The study suggests that a combination of policies that remove obstacles hindering labor supply and that enhance a more efficient allocation of male and female workers of all age groups will be critical to keeping government deficit under control and raising income across the nation.
Japan should be more studied because it is a real-life laboratory of what is going to happen to other industrialized economies. First, it experienced from the 1990s a long period of very low interest rates, which other countries got to experience in the last ten years. Second, it is right now going through a very significant ageing transition of its population, which will soon happen as the Boomers retire in Western Europe and North America. This paper shows what to expect, in particular some endogenous responses of the labor force that we typically assume out of our models.