What drives differences in GDP growth between US and Japan –labor markets ..

Juan M. Sánchez and Emircan Yurdagul of St Louis Fed have this interesting short article on the topic.

They start with the much known observation that US has grown faster than Japan in 1990s. What are the reasons? As per them main reason is decline in hours of work in Japan:

The growth of total gross domestic product (GDP) in Japan has occurred in two distinct phases. Between 1971 and 1991, Japan’s GDP grew at an average annual rate of 4.4 percent, a pace much higher than the U.S. GDP growth rate of 3 percent.¹ However, between 1991 and 2011, Japan’s GDP growth was 0.7 percent—much slower than the U.S. pace of 2.5 percent (see the table). In this essay, we study the extent to which the total number of hours worked can account for Japan’s poor GDP growth.

Economists often decompose GDP growth into three factors: (i) hours worked, (ii) physical capital, and (iii) total factor productivity. Identifying the role of each factor in a country’s growth is a first step in guiding economic policy. We find that the diverging paths of total hours worked account for most of the difference in GDP growth between Japan and the United States. One simple way of identifying this is to examine the growth rates of GDP per hour worked for each country (column (1) in the table). These rates are very similar for Japan and the United States between 1991 and 2011: 1.7 percent in Japan vs. 1.8 percent in the United States.

The first chart shows total hours worked for Japan and the United States normalized such that both series are 100 in 1971. In Japan, total hours worked grew at an annual rate of 0.5 percent from 1971 to 1991 and shrank at an annual rate of 1 percent from 1991 to 2011. During the same intervals, total hours worked in the United States grew at rates of 1.6 percent and 0.8 percent, respectively.

What drives hours of work? Population, total employment and average hours worked by people. In Japan’s case the first two obviously there is a decline compared to US. However, it is the third factor which has played a role as well:

The last factor, the average weekly hours worked by the employed population, is also important in understanding the differences in total hours worked between Japan and the United States. As thethird chart shows, weekly hours worked in Japan decreased at an annual rate of close to 1 percent over the span of 40 years, while in the United States they declined only slightly.2 Interestingly, Japan’s weekly hours worked was initially much higher than in the United States; recently, however, the levels in the two countries have converged at about 33 hours per week per worker.

In summary, three structural factors seem to account for the difference in GDP growth between Japan and the United States in the post-1990 period: (i) the slow population growth in Japan, (ii) the employment rate, and (iii) the decline of average hours worked in Japan from a very high level to the level in the United States. It seems useful to consider these findings when Japan’s experience is used to draw policy conclusions for the United States.

Just a couple of days ago, I pointed to this insightful piece comparing global labor markets pre and post crisis. There too the role of hours worked was seen as crucial. In Germany, hours of work were lowered keeping unemployment rate low but GDP growth also low (as people worked less). In US and UK, we saw the opposite:

During and since the Great Recession, countries have adjusted all three factors, but have placed different emphasis on them. The U.S. adjustment was largely in line with its pre-recession experience of reduced employment, falling work hours, and increased productivity. By contrast, in the United Kingdom, the declines in employment, hours, and productivity were larger than in the pre-recession period. Compared with the United States, the main difference was that Britain adjusted productivity far more. In Germany, the pre-and-post-crisis responses were notable. Both hours per worker and productivity fell much more following the crisis, explaining why Germany saw big output changes during the crisis and recovery period with relatively little change in the unemployment rate. This partly reflects Germany’s widespread adoption of procedures that permitted employers to adjust worker hours easily (Burda and Hunt 2011). 

Germany, the United Kingdom, and the United States are good examples of three ways businesses in advanced economies responded to the global financial crisis. In Germany, the pattern reflects explicit policy decisions. In other countries, the reasons for the differences are less clear. In all cases, the differences among countries in the methods businesses used to adjust output are directly reflected in the path of each country’s unemployment rate.

How to balance the two – falling GDP vs higher employment?