By Daniel Gros
Demography is not destiny, at least not entirely. Over centuries, policy can affect fertility decisions, and migration can transform a country, as the experience of the United States shows. Over shorter time horizons, however, demographic trends must be taken as given, and can have a profound impact on growth. Yet demographic factors are often neglected in economic reporting, leading to significant distortions in assessments of countries’ performance. Nowhere is this more apparent than in Japan.
With real output – the key measure of economic performance – having risen by only about 15% since 2000, or less than 1% per year, Japan easily seems the least dynamic of the worlds’ major economies. But given Japan’s demographics – the country’s working-age population has been shrinking by almost 1% per year since the start of this century – this result is remarkable.
In fact, Japan’s growth rate per working-age person was close to 2% – much higher than in the US or in Europe. Though the US economy grew more than 35% since 2000, its working-age population also grew markedly, leaving the annual growth rate per working-age person at only about 1%.
That indicator – growth rate per working-age person – is not widely used by economists, who instead focus on GDP per capita. By that measure, Japan is doing about as well as Europe and the US. But, while per capita indicators are useful for assessing a country’s consumption potential, they do not provide an adequate picture of growth potential, because they include the elderly and the young, who do not contribute to production. Even in Japan, with its high life expectancy, those over the age of 70 do not contribute much to output.
So, given its rapidly declining potential, Japan has been extraordinarily successful. A key reason is that it has put a growing proportion of its working-age population to work: unemployment is today at a record low of less than 3%, and almost 80% of those who could work have a job, compared to about 70% for Europe and the US.
Japan’s achievement of full employment and high job growth over the last two decades is all the more noteworthy in view of near-permanent deflation during this period (most prices are still lower today than they were 15-20 years ago). This should give food for thought to those who maintain that deflation imposes unbearable economic costs.
The Japanese experience holds important lessons for Europe, where the demographic future looks a lot like Japan’s past. The eurozone’s working-age population has not grown at all in recent years, and will soon start to decline at a rate similar to Japan’s over the last generation. It seems unlikely that immigration will alter the trend. In recent years, Europeans, like Japanese, have proven to be highly resistant to large-scale immigration, which is what would be required to offset demographic decline.