Working Paper: CEPR ID: DP16127
Authors: Shigeru Fujita; Ippei Fujiwara
Abstract: This paper explores a causal link between aging of the labor force and declining trends in the real interest rate in Japan. We develop a search/matching model that features heterogeneous workers with respect to their ages and firm-specific skills. Using the model, we examine the long-run implications of the sharp drop in labor force entry in the 1970s. We show that the changes in the demographic structure induce significant low-frequency movements in per capita consumption growth and the real interest rate. The model suggests that aging of the labor force accounts for 40 percent or more of the declines in the real interest rate observed between the 1980s and 2000s in Japan. We also examine the impacts of other long-term developments such as a slowdown of TFP growth and higher shares of female and non-regular workers.
Keywords: aging; real interest rate; Japan
JEL Codes: E24; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aging labor force (J26) | Declining real interest rates (E43) |
| Aging labor force (J26) | Low-frequency movements in per capita consumption growth (F62) |
| Aging labor force (J26) | Changes in labor productivity growth (O49) |
| Changes in labor productivity growth (O49) | Declining real interest rates (E43) |
| Aging labor force (J26) | Changes in total factor productivity (TFP) growth (O49) |
| Changes in labor market composition (J29) | Declining real interest rates (E43) |