It's not structural change, but domestic demand: Productivity growth of Japan

This paper examines the role of structural change in productivity growth in Japan, focusing on her recent “lost decades”, with reference to the United States. We decompose labor productivity growth into both intra-industry labor productivity growth and inter-industry reallocation of employment, and then measure their relative contributions to aggregate productivity growth decade by decade.

Rapid economic growth in postwar Japan accompanied large structural change, whose contribution through inter-industry reallocation of labor, we find, amounts to from one third to a half of that of intra-industry growth in the 1960s and 70s. Now, Japan is known to have a sharp slowdown in productivity growth in the 1990s and her growth recovery is very modest even in the 2000s. Then, how does structural change contribute to the recent slowdown in productivity growth in Japan? While a slowdown in intra-industry productivity growth is the main cause of the aggregate productivity slowdown, we find that the contribution of inter-industry reallocation of employment is almost zero in the 1990s and even significantly negative in the 2000s.

Interestingly, inter-industry reallocation is found to negatively contribute to recent productivity growth in the United States, too. Can we reconcile these seemingly contradicting facts with the two economies? We will argue that structural change or the lack of it may not be responsible for the lost decades in Japan, and that these contrasting outcomes come from common factors.