Japan's Aging Workforce: Determinants and Outlook

Abstract

This paper examines recent trends in the Japanese labor market, with a particular focus on the elderly workforce. Japan's elderly employment rates are notably high compared to other OECD countries and have increased significantly over the past two decades. To investigate the factors that affect the employment of old individuals, we develop a structural life-cycle model with consumption-saving decisions and endogenous labor supply in both intensive and extensive margins. The model is calibrated to the cohort of men born in 1936–1940. We find that social security reforms to raise the retirement age by 5 years and reduce the replacement rate by 20% would have increased labor force participation among men in their 60s from 58% to 69% and 67%, respectively, while also encouraging greater retirement savings. Furthermore, we find that overall labor productivity growth reduces elderly participation due to an income effect, whereas productivity growth among the elderly, driven by lower skill depreciation, motivates longer labor force participation.