Where does the Japanese slowdown come from?

Chris Reicher refers me to his recent paper, entitled “A simple decomposition of the variance of output growth across countries”:

This paper outlines a simple regression-based method to decompose the variance of an aggregate time series into the variance of its components, which is then applied to measure the relative contributions of productivity, hours per worker, and employment to cyclical output growth across a panel of countries. Measured productivity contributes more to the cycle in Europe and Japan than in the United States. Employment contributes the largest proportion of the cycle in Europe and the United States (but not Japan), which is inconsistent with the idea that higher levels of employment protection in Europe dampen cyclical employment fluctuations.

On Japan in particular, Chris sums up his results as follows: “I think that Karl Smith is right about Japan’s productivity performance; that seems to be the real long-term issue there.  Shrinking population + no more convergence in productivity + some convergence in hours worked per worker from a very high level = very slow growth, independently from the business cycle.”

Matt Yglesias frequently asks why TGS arrived first in Japan.  Chris’s paper reports:

In the United States, productivity only contributes about 27% of the cycle and labor input four-fifths. Meanwhile, in France and Germany, productivity contributes 43% and 38% of the cycle, respectively. Japan is more European than Europe in this regard; productivity contributes 59% of the cycle there, while Korea looks more like the United States.

That’s hardly an answer, but it suggests the Japanese economy was more dependent on productivity gains in the first place.  As those gains start to slow down or dry up, it bites harder and more quickly.

Here is Japan investment as a share of gdp.  Here are falling real wages in Japan.  Here is Noah on Japanese unemployment.  Another (possible) story is that Japan was hit first by outsourcing to China.


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