Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How Japan Solved Its Lost Decade Productivity Stagnation
Transcript
- Lucas: If I say 'Japan's lost decade' — actually, lost decades, plural — most people hear stagnation. Deflation. Demographic decline. A zombie economy that never recovered. Luna: Right. Flat GDP, flat wages, flat everything. That's the story. Lucas: It's also wrong — or at least, it's been incomplete for about ten years now. Because starting around 2013, Japanese labour productivity started growing again. Not spectacularly, but steadily. And the conventional narrative missed it entirely. Luna: Define 'steadily.' What are we talking about in numbers? Lucas: Between 2013 and 2023, Japan's output per hour worked grew at a compound annual growth rate of roughly 1.2 percent. That's not China — but it's faster than France, Italy, and the UK over the same period. And it's a massive turnaround from the period between 1991 and 2012, where productivity was essentially flat. Luna: So something changed. Was it Abenomics? The 'three arrows' thing? Lucas: Partially. But I want to focus on one specific mechanism that doesn't get enough attention: the shift away from what economists call 'labour hoarding.' Japan's famous lifetime employment system — where companies essentially guaranteed jobs for core workers — created a perverse incentive. When demand fell, firms didn't fire people. They kept them on payroll, underutilized. That dragged down measured productivity. Luna: So you're saying the productivity numbers were artificially low because companies were hiding unemployment inside their own workforces? Lucas: Exactly. Japan's official unemployment stayed around 3 to 4 percent through the 2000s, which looked stable. But a lot of those 'employed' workers were doing very little. The OECD estimated that in 2010, Japan had roughly 8 percent of its workforce effectively underutilized — people who were technically employed but whose output was negligible. That's deadweight on the productivity calculation. Luna: So fixing that means letting people go — which sounds painful. Did Japan actually do that? Lucas: It happened gradually. The lifetime employment model eroded from the late 1990s onward — younger workers were increasingly hired on non-regular contracts. But the real shift came after 2013, when the government loosened some labour protections and companies became more willing to restructure. The result was a slow reallocation: workers moved from low-productivity sectors like retail and construction into higher-productivity sectors like manufacturing and business services. Luna: Was that a net positive for the workers who moved? I mean, wages? Lucas: Mixed. For the ones who moved into full-time manufacturing or tech services, yes — wages were often higher. For the ones who got pushed into non-regular work, it was a step down. But from a pure productivity standpoint, the arithmetic is clear: if you move a worker from a sector where output per hour is $30 to a sector where it's $60, national productivity goes up even if that worker's individual wage only goes up to $35. Luna: So the aggregate number improves, but the distribution of gains is uneven. That's the tension. Lucas: It always is. But here's the thing — Japan's productivity growth after 2013 wasn't driven by some technology miracle. It was mostly structural. A 2019 paper by the Bank of Japan estimated that about 60 percent of the productivity improvement between 2013 and 2018 came from reallocation between firms and sectors, not from firms becoming more efficient internally. Luna: That's a huge number. It means the old narrative — 'Japan needs to innovate its way out' — was missing the point. Lucas: Exactly. The innovation was already there in some firms. The problem was that labour was trapped in low-productivity firms. Once the labour market became more fluid, those productive firms could hire more workers and expand their share of the economy. That alone lifted the average. Luna: Can you give me a concrete example of a sector that benefited? Lucas: Sure — business services. Things like IT consulting, data processing, professional and technical services. Between 2013 and 2019, employment in business services grew by about 20 percent in Japan, while retail employment barely budged. And business services have much higher value-added per worker — roughly double that of retail. So that shift alone accounted for maybe a quarter of the total productivity gain. Luna: Interesting. So it's not about robots replacing cashiers — it's about cashiers becoming database administrators. Lucas: In an ideal world, yes. In reality, many of those retail workers didn't become database administrators — they were replaced by younger, more educated workers entering the labour force. But the net effect is the same: the mix shifted toward higher-productivity work. Luna: What does this mean for other countries that are also stuck in a productivity rut? The US, maybe? Lucas: The US doesn't have Japan's lifetime employment problem — American labour markets are already very fluid. But there are parallels. In the US, a lot of productivity weakness since 2005 has been concentrated in sectors like health care and construction, where worker mobility is low. If you could reallocate workers from low-productivity firms to high-productivity ones within those sectors, you'd see a similar boost. Luna: But that's easier said than done. Those sectors have licensing, regulation, union rules... Lucas: Right. And that's the lesson from Japan: productivity policy isn't just about R&D tax credits or training subsidies. It's about labour market structure. If workers can't move to where they're more valuable, the economy gets stuck. Luna: Japan also has a demographic problem — shrinking workforce. Does that help or hurt productivity? Lucas: It cuts both ways. A shrinking workforce can mechanically boost productivity per worker if total output doesn't fall as fast. But long term, fewer workers means less innovation capacity. Japan's productivity growth has slowed again since 2020 — partly because the reallocation gains have been exhausted, and partly because the population is aging so fast that the labour force is shrinking even as participation rates rise. Luna: So the easy gains from labour reallocation are mostly done? Lucas: That seems to be the case. From 2019 onward, Japan's productivity growth has been closer to 0.5 percent annually. The structural reforms gave a one-time boost, but without deeper changes — like more immigration, more automation, more competition in protected sectors — the long-term trend may settle back toward stagnation. Luna: But the lesson for everyone else is still clear: if your productivity is stuck, look at how people move between jobs, not just how they work in them. Lucas: Exactly. And that's a lens most productivity discussions miss entirely. We spend all our time talking about software tools and management techniques, but the biggest gains might come from making it easier for workers to switch to a better industry. Luna: Which, by the way, is why we keep this podcast ad-free — we don't want to sell you a productivity tool, we want to help you think about productivity differently. If walking through the economy with us has made something click, and you want to support that kind of thinking, you can find us at buy me a coffee dot com slash fexingo. No pressure, just a way to keep it going. Lucas: Yeah, that's the whole idea. We don't do sponsors, we don't do ads, we just do the research and conversation. And listener support is what makes that sustainable. So if it's valuable to you, that link is there. Luna: Alright, back to Japan. So where does the country go from here? Lucas: The next frontier isn't labour reallocation — it's productivity within firms. Japan has a massive tail of small, family-owned businesses that are extremely inefficient. Getting those firms to adopt digital tools and modern management practices could unlock another wave. Luna: Is that happening? Lucas: Slowly. The government has pushed digitalization subsidies since 2020, but adoption rates are still low. Only about 30 percent of small Japanese firms use cloud-based accounting software, compared to about 60 percent in the US. There's a lot of low-hanging fruit. Luna: So Japan's productivity story isn't over. It's just entering a new chapter. Lucas: Exactly. The first chapter was about breaking the labour hoarding trap. The second chapter will be about dragging small firms into the 21st century. And if they manage that, the conventional narrative may need another rewrite. Luna: Alright, that's a good place to stop. Thanks for listening.