Securing a sufficient labor force is an indispensable condition for sustainable economic growth. As Japan’s population falls, the so-called working age population (from 15 to 64) also declines, so it becomes even more important for our economy to secure a sufficient labor force in the future by expanding women’s participation in the labor market, accepting more foreign workers or substituting human labor with artificial intelligence or robots. Many difficult problems await, however.
In 2017, Japan had a labor force of 67.2 million (people 15 or older either employed or seeking jobs). Compared with the peak in 1998, the figure represents only a decline of some 700,000 people. In recent years, the pace of decline in the labor force was mitigated as many potential workers were able to find jobs due to the manpower shortage amid the economy’s recovery. However, government forecast shows that the labor force will shrink to around 58.0 million in 2030 — a decline of 14 percent over the next 13 years. In my calculation assuming that the labor participation rate will remain constant at the 2015 level, the labor force is projected to fall some 40 percent by 2065 due to a decline in the number of young people.
A declining labor force not only makes economic growth stagnant but also weakens consumption, negatively affecting the economy from both the supply and demand sides. To deal with the decline, the nation needs to promote the labor participation of women, the elderly and foreign workers.
The labor participation rate by senior citizens is already high in Japan. The rate among men 65 or older is 31.1 percent, compared with 23.4 percent in the United States, 21.2 percent in Sweden and 8.6 percent in Germany. Participation in the labor market for people up to the age of 65 is almost guaranteed under the law for the employment stability of elderly people.
For those over 65, however, labor participation is somewhat restricted by a provision in the old age pension system that reduces benefits for people with jobs in accordance with their wage income, concerns over physical fitness and unfamiliarity with information technology. Nonetheless, given the advocacy of a “100-year-life,” labor participation by the elderly is valuable and efforts should be made to increase their incentive to work.
Although women’s empowerment is meant to promote the supply of labor by women as well as to expand their social and economic activities, we’ll focus on the labor aspects here. The rate of labor participation for women in Japan is still below that of many other developed economies, so there is potential to fill the manpower shortage by increasing their participation in the workforce. In 2015, labor participation among women age 25-54 in Japan was 75.2 percent, compared with 88.3 in Sweden, 82.7 percent in France and 82.5 percent in Germany. Therefore, a rise of 10 percentage points in the labor participation rate of Japanese women would have added some 2.4 million workers to the labor force that year.
It would, of course, be difficult to fill the gap in the manpower supply by increasing women’s labor participation. We also have a related problem: Systematic support for mothers who want to work is insufficient. In the past, women’s labor participation used to fall sharply as they reach their late 20s due to the lack of such support — and pick up after they have finished raising their children. This phenomenon is deemed to have almost vanished in recent years. The reason why, however, is that women are increasingly taking up irregular jobs such as part-time work. There is still no guarantee of an uninterrupted career path for women who are raising children.
Without improving the environment for women at work, their empowerment in the labor market carries a risk of imposing on them the tough choice between working and having kids, and the difficult choice might persuade some women to forego having children and dampen the fertility rate as a result. If so, women’s empowerment could have a reverse effect on the labor market in the long run.
Recently, the introduction of more foreign workers has been a hot topic in this country. The government has just submitted to the Diet an amendment to the immigration control law that will effectively lift the official ban on foreign workers engaging in simple labor — a major turnaround in the nation’s policy on foreign labor. The government, however, says it has no intention of accepting immigrants. Those foreign workers, with the exception of those who have higher skills and qualifications, would be allowed to work and stay here for up to five years and would not be allowed to bring family members with them — although foreign workers with more professional skills and expertise have already been permitted to settle here.
Japan has not accepted immigrants except for workers of Japanese descent from South America. According to the OECD, the ratio of foreign-born people in the total population in Japan was 1.9 percent in 2017 — compared with the OECD average of 13.1 percent. Due to its monocultural society, the acceptance of large numbers of immigrants in Japan has been a sensitive issue. But in the long term, in response to its declining labor force and the globalization trend, it will be indispensable for Japan to welcome more foreigners into its society. Otherwise, it would be difficult for the country to achieve sustainable economic growth. Of course, there is also the question of whether foreign workers will choose to come and work in Japan.
There are arguments that receiving more foreign workers could adversely affect the labor market. That is, a large-scale influx of foreign labor could increase domestic unemployment or push down the wages of unskilled Japanese workers. However, many empirical studies indicate that the influence of foreign workers on the domestic labor market would be negligible.
More worrying, however, is that Japanese businesses, content with filling the manpower shortage with foreign labor, will neglect investing in improving their productivity. Higher productivity will be the most important factor in maintaining sustainable economic growth.
Researchers at Oxford University published a shocking article in 2013 that stated many jobs will be replaced by artificial intelligence or robots, and many currently common occupations will disappear. Such forecasts may prove true in the future, but it is difficult to predict from the perspective of current technological levels.
A more realistic outcome in Japan is that AI technology will accelerate productivity improvement and we will, at the same time, utilize more foreign workers to compensate for future labor shortages.
Hisakazu Kato is a professor of economics at Meiji University and former senior research fellow at the National Institute of Population and Social Security Research.