Aging and Economics

Aging and Economics:
A French-Japanese Perspective

Brieuc Monfort

July 1, 2024

Introduction

Japan is confronted to a “slow crisis” with population decline and an aging population. From a peak of 128 million in 2008, the population is expected to continue to decline from its current level of 125 million to reach 106 million by 2050. Meanwhile, the share of the population over 65% has steadily crossed symbolic thresholds of 7%, 14%, and 21% one after another, transforming Japan – using the official semantic – from an “aging society” in 1970 to an “aged society” in 1994 and finally a “super-aged society” since 2007. Currently at 30%, this ratio is expected to stabilize gradually to reach 37% by 2050.

Japan’s case is in no way unique, as many advanced economies are going to experience similar demographic challenges. Many European countries, including Italy, Germany, and France, have already become “super-aged societies”, if one uses the Japanese terminology. What distinguishes Japan is the speed of the aging process and the fact that the bulk of the aging process has already occurred. For example, a study of the impact of aging on the decline of the real interest rate in Japan demonstrates that ¾ of the total decrease is already factored in, with the remaining ¼ to happen during the following decades (Sudo and Takizuka, 2020).

Understanding aging is key in grasping the future prospect of advanced economies. Aging is not just a slow-moving long-term trend in the background but a major change that will influence many aspects of these economies, as it does for Japan (Katz, 2024; Lechevalier, 2019; Schaede, 2020; Whittaker, 2024).

This research statement articulates three research directions, one providing an overview of the aging process and two focusing on specific research topics, namely the relationships between aging and innovation on one side, and between aging and fiscal sustainability on the other side.

Lessons from Aging in Japan

The Japanese public woke up to the aging process three decades ago, with the so-called “1.53 shock” in 1990, a figure referring to the fertility rate which has since declined further to a record low level of 1.20 in 2023. Japanese policymakers and citizens then realized that low fertility might not be a temporary phenomenon.

While population aging was anticipated, the magnitude of the phenomenon was widely undervalued. This is due to a double mistake: the fertility rate was regularly expected to recover gradually towards the replacement level; the progress in life expectancy was also underestimated. As a result, the share of the elderly has turned out significantly higher that not just the baseline forecast but also the most pessimistic scenario. Different vintages of demographic projection show a repeated optimistic bias. For unrelated reasons, GDP growth projections were also overoptimistic over the same period (Lechevalier and Monfort, 2016). The research will investigate whether these forecasting mistakes (both demographic and macroeconomic) were shared by other advanced economies.

A related line of research is to investigate to what extent underestimating the aging process has influenced the design of policies related to aging. Unlike some European countries, Japan did not reduce the retirement age as a short-term fix against the high unemployment rate of the 1970s and 1980s, but some policies might have been implemented in an inconsistent way, preventing them from being effective. For example, parental leave measures designed to encourage child-rearing were poorly implemented, thus being ineffective in raising fertility (Nobuko Nagase, 2015). Drawing lessons from Japan’s experience to address aging over the past thirty years will distinguish why might be specific to Japanese institutions and what might be transposable to other countries facing similar challenges.

A final line of research aiming to derive lessons from an aging Japan will investigate the academic literature on aging using bibliometric techniques and explore the place of Japan in this literature. Preliminary results using the SCOPUS abstract and citation database suggest that the literature on aging has been growing at 13% annually over the past thirty years, a steady increase that might be driven in part by an inflation of academic publications. The focus of the literature has also shifted, from a narrower emphasis on pension and retirement issues, to a broader set of issues including health and long-term care. Japan was the most studied country after the U.S. in the 1990s and 2000s, but the literature on China was twice as large as than on Japan in the 2010s and three times as large in the early 2020s. Part of the literature on China aims also at deriving lessons for China of the experience of Japan. The research will extend the analysis to the Web of Science (WoS) database to derive a better understanding of shifts in the literature on aging and the role of Japan in this literature.

Aging and Innovation

A second strand of research will revisit the relationship between aging and innovation. The question is hotly disputed and has important implications for the future growth rate of aging economies.

The dominant belief is that older workers are less productive and innovative. This belief is vindicated by empirical studies on Japanese data (Fukao, Kim, and Kwon, 2023; Hoshi, Kodama, and Li, 2024), which show an inverted U curve of productivity, with positive learning effects until middle age, when other factors such as organizational rigidity or skill obsolescence contribute to a decline of the productivity of older workers. Older economies also have a lower overall rate of entrepreneurship (Liang et al., 2014). The dramatic decline of patents filed by Japanese inventors (Bergeaud and Verluise, 2022) seems to confirm that older economies innovate less and are less productive.

The question of the relationship between age and productivity is, however, plagued by measurement issues (Börsch-Supan and Weiss, 2023). In particular, French scholars argue that productivity gains related to higher education and better health (Chojnicki and Rabessandratana, 2018; d’Albis, 2023) should lead to a positive relation between age and productivity while some empirical studies on French data show productivity peaking in middle-age before being broadly flat, instead of declining (Aubert and Crépon, 2007).

Some authors even sit on both sides of the fence, arguing on one side that younger managers are more likely to adopt breakthrough innovation (Acemoglu et al., 2014) while finding on the other side no negative association between aging and GDP per capita (Acemoglu and Restrepo, 2017).

Aging and Fiscal Sustainability

A third strand of research will focus on the impact of aging on fiscal sustainability. With the highest gross public debt to GDP ratio among OECD countries, earlier studies highlighted that Japanese’s fiscal situation was not sustainable (Doi, Hoshi, and Okimoto, 2011; Ito and Hoshi, 2014). The crisis related to Covid-19 led to additional fiscal stimulus, pushing further upward the debt ratio. Until now, the reckoning has arguably been delayed by the very low interest rate on public debt. This is just one paradox concerning the nexus between aging and fiscal sustainability.

A related paradox is that, despite Japan’s accelerated aging, social expenditures are also relatively constrained, while the last major pension reform in 2004 allows for an adjustment of pension benefits to account for sustainability issues. The replacement rate is relatively low and the coverage of the self-employed is one of the lowest among OECD countries (Boulhol et al. 2023). Besides, the role of aging as opposed to technological change in driving health expenditures is sometimes disputed.

A final paradox is that in cross-country studies, demographic trends play also a minor role in explaining the timing of pension reforms, as opposed to business cycle indicators (Beetsma et al, 2020). In the wake of the crisis of the euro area, a number of European crisis (Italy, Greece, Spain, France…) have nonetheless led to implementing pension reforms.

The objective of this strand of research is to explore to what extend age-related factors could contribute to a financial crisis in Japan and, learning from the experience of euro area countries, what measures could Japan implement to contain such a crisis. With a less generous pension system and a higher labor force participation rate of seniors, Japan has possibly comparatively less leeway to adjust than comparative OECD countries.

References