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Japan’s Shrinking Workforce


Intro:

Japan is in a rare situation where it’s population is shrinking and aging population. According to 2014 estimates, 33.0% of the Japanese population is above the age of 60, 25.9% are aged 65 or above, 12.5% are aged 75 or above. The aging population combined with the decrease in the birth rate leaves Japan in a difficult situation, where it sees the workforce shrinking and increased strain on the pension system. I have read articles about the Japanese government restructuring suburbs to make it easier to cater to the elderly, one such neighborhood is adjacent to my school. There are attempts to make it easier for women to have children by setting up more daycare centers. An obvious solution maybe to increase immigration in order to meet the Japanese workforce demand, but that would a favored option in a relatively homogenous country like Japan. This topic is of particular interest to me as a permanent resident of Japan. I also see this as an interesting Game Theory application as the Japanese government is coming up with very creative ways to attempt to deal with these issues.

 

I focused on the economic effects of the decreasing population. The dramatic decrease in population results in a significant decrease in means of production. In addition to hurting the Japan’s present economy, it also limits the Japanese economy’s potential for future growth. The decrease in investors’ current perceptions of Japan’s future economic growth, further hurts the current Japanese economy as it deters them from investing now. This makes the issue all the more pressing for Japan. The two major players in this “game” are the government and companies.

 

VIDEO by Sho Kawano (Co-Head, Japan Equity Research and Business Unit Leader, Asia Consumer Research, Goldman Sachs Research)

 

Shrinking Japanese Workforce Key Players:

-Government

-Companies

 

Main ways of tackling the issue:

-increasing workforce participation

-increasing birth rate

-increasing immigration

-increase productivity

 

Options for the Government:

-do nothing

-increase immigration

-provide more child services, ex: daycares, to incentivise childbirth

-increase retirement age to keep more elderly workers

-attract more housewives by adjusting the tax break for spouses earning less than a certain amount

 

Options for the Companies:

-do nothing

-increase / have maternity leave

-give women more high level jobs to incentivise returning to work

-increase efforts in automation

 

Assigning Payoffs:

 

Method:

First, determine how much the company values each of their own moves, and how they value each of the governments moves. Second, determine how much the government values each of their own moves, and how much they value each of the companies moves. A payoff is the sum of the values assigned by that player to their own move and their opponents move. Players assigned values on a scale of -5 to +5.

 

Companies assigned values:

 

Companies moves:

Doing Nothing is worth 0

Increasing maternity leave is worth 3

Higher level jobs for women is worth 4

Investing in automation is worth 5

 

Government moves:

Doing Nothing is worth -5

Increasing Immigration 3

Increasing child services 5

Increasing retirement age 2

Adjust tax break 5

 

Government assigned values:

 

Companies moves:

Doing Nothing is worth -5

Increasing maternity leave is worth 5

Higher level jobs for women is worth 5

Investing in automation is worth 4

 

Government moves:

Doing Nothing is worth 0

Increasing Immigration 2

Increasing child services 4

Increasing retirement age 3

Adjusting tax break 5

 

Reasoning:

  1. For both companies and the government having nothing being done is not an option.
  2. Increasing immigration is not what the government wants to do, as it rather rely on domestic resources. However, it is still better than doing nothing. Companies don’t necessarily want to rely on foreigners either.
  3. Investing in automation would compensate for the shrinking workforce and stop the economically devastating effects. It could also decrease companies per-unit cost by relying on machines instead of people. However, citizens fear of being replaced by robots may not be popular in society.
  4. Increasing maternity leave is not ideal for companies as their female employees will not be working during that time, but with the workforce shrinking it is important and necessary to make sure women have enough time with their children, in order for them to not need to quit their jobs. It also could increase the moral of female employees and lead to more productivity.
  5. Increasing women’s pay increases companies costs, but it costs them less than when they increase maternity leave and do not having women working for a longer time period.
  6. Increasing the retirement age may not be popular amongst citizens. In addition, older employees may not necessarily as effective and efficient as they use to be.
  7. Adjusting the tax break would increase the workforce by removing the incentive for the stay-at-home partner to stay home. The government would have to distribute the tax burden amongst society.
  8. Increasing child services would allow more women to go back to work increasing the workforce. However, feasibility is sometimes called into question.

Solutions:

Nash Equilibrium: DE (10,9)

Pareto Optimal:

DE (10,9) CE (9,10)

 

Discussion:

Due to the way the game was designed, its solution presents the best combination of a move done by companies  and a move done by the government to tackle the issue. In reality, it is likely that players will only use 1 move. However, in order to simplify the issue down to a game it was done this way. The Nash Equilibrium suggests that Companies should invest in automation and the government should adjust the tax break. The Pareto Equilibrium agrees with the Nash Equilibrium, but provides the addition solution that companies should award qualified women with higher level jobs and the government should adjust the tax break.

 

If both of these solutions are implemented women would be more inclined to work, which would and more machines would be able to supplement workers this could stop Japan’s productivity decline and maybe even increase it, despite the decreasing population. An additional possible implications is with women more prominent in the workforce, household incomes could increase and hence make couples more inclined to have more children. This is assuming that there are sufficient childcare services for women to continue to work and not have to stay home.

 

These are not perfect solutions as values were based on assumptions from reading several articles and previous discussions. In addition, in order to simplify the situation down to a game a lot of nuances may have been overlooked.

 

Looking at how the Japanese economy’s key players can tackle the shrinking Japanese workforce is not only helpful for the Japanese economy, but it can also serve as a model for other economies that may find themselves in a similar situation in the future.

 

https://asia.nikkei.com/Politics-Economy/Economy/Shrinking-workforce-threatens-Japan-s-economy

https://read.oecd-ilibrary.org/economics/japan-boosting-growth-and-well-being-in-an-ageing-society_9789264256507-en#page15

http://www.goldmansachs.com/our-thinking/pages/market-growth-in-an-aging-japan.html

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