Service Sector Productivity in Japan: y pThe Key to Future Economic Growth

Prepared for the KDI Conference, 

“Th S i S t Ad t I d“The Service Sector Advancement: Issues and Implications for the Korean Economy,”

February 4‐5, 2010

Kyoji FukaoKyoji Fukao

(Hitotsubashi University)

1

1. Motivation1. Motivation• As the share of the service sector in the economy i d i i h i hi iincreases, productivity growth in this sector is becoming the key for Japan’s future economic growth. 

• But productivity in this sector has stagnated.

• Using mainly industry level data of factor inputs and g y y pproductivity, I examine why service sector productivity in Japan has stagnated. p y p g

• I also try to answer what Japan needs to do to improve service sector productivity.improve service sector productivity.

2

1. Why is the Service Sector is Important for Japan’s Future Growth?

• Historically labor productivity in the tertiary sector• Historically, labor productivity in the tertiary sector was not much lower than in the secondary sector except during the period of rapid industrialization fromexcept during the period of rapid industrialization from 1947‐1965.

B t TFP ro th in the man fa t rin se tor has been• But TFP growth in the manufacturing sector has been much higher than that in the other sectors. 

• However, the share of the manufacturing sector is declining rapidly.

• Hence, for  Japan, which is now experiencing population decline, productivity growth in the service sector is the key. 

3

6

Comparison of sectoral labor productivity (primary=1)

4

5

3Secondary

T ti

1

2Tertiary

0

Notes:Subsidiary occupations are taken account of for periods before the Second World War.Data before 1965 are on a per worker basis. Data from 1973 are on a man-hour basis.

Sources:

The primary sector consists of agriculture, fishery and forestry. The secondary sector consists of mining,manufacturing and construction. The tertiary sector consists of all other sectors except imputed rent.

Data for periods between 1885-1940 are from Osamu Saito and Tokihiko Settsu (2009), "Unveiling historicaloccupational structures and its implications for sectoral labour productivity analysis in Japan’s economic growth,"

4Data for periods between 1947-65 are from Ohkawa, K. and M. Shinohara, eds., (1979), Patterns of JapaneseEconomic Development: A Quantitative Appraisal (New Haven: Yale University Press), p. 41,Table2.12.Data for periods after 1970 are from the JIP Database 2009.

p p p y y p g ,paper presented at INCHOS 2009, 28-30 July 2009, King’s College, Cambridge, p. 31, table 11.

Figure 5. TFP growth in manufacturing and non-manufacturing (marketeconomy excluding imputed house rent), 1970-2006 (1970=1)

3

2 5

3Manufacturing

2.5

2

1.5

1

0.5

0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6

5

Source: JIP Database 2009.

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Share of the manufacturing sector in the macro-economy: Japan-US Comparison

0.4 Nominal value added of the manufacturing sector/nominal GDP: Japan

0.35

Number of workers in the manufacturing sector/total number of workers in the economy: Japan

Nominal value added of the manufacturing sector/nominal GDP: US

0.3

Number of workers in the manufacturing sector/total number of workers in the economy: US

0 250.25

0.2

0.15

6

Sources: JIP 2006 and Council of Economic Advisers, Economic Report of the President , 2005.

0.1

1960

1965

1970

1975

1980

1985

1990

1995

2000

2. Why does Productivity in Japan’s Service Sector Stagnate?

• Korea and Japan experienced relatively highKorea and Japan experienced relatively high TFP growth in the ICT producing sector. 

• However, the problem for the two countries is that TFP growth in ICT‐using sectors, such as distribution services (retail, wholesale and transportation) and in the rest of thetransportation) and in the rest of the manufacturing sector (i.e., excluding electrical machinery) declined substantially after 1995machinery), declined substantially after 1995. 

• And these ICT‐using sectors have larger shares 

7

in the economy than the ICT‐producing sector.

TFP Growth in the Market Sector: by Sector and by Country

Electrical machinery, post and communication

Manufacturing, excluding electrical machinery Other goods-producing

6 07.0 8.0 9.0

10.0

and communication

2.0

2.5

3.0

electrical machinery

2.0

3.0 industries

1.0 2.0 3.0 4.0 5.0 6.0

1980-95

1995-2005

0.0

0.5

1.0

1.5

n a y e K y S

-1.0

0.0

1.0

Japa

n

Kor

ea

erm

any

Fran

ce UK

Ital

y

US

0.0

Japa

n

Kor

ea

Ger

man

y

Fran

ce

UK

Ital

y

US

2005

-1.5

-1.0

-0.5

Japa

n

Kor

ea

Ger

man

y

Fran

ce UK

Ital

y

US

-3.0

-2.0

Ge F

Other goods producing industries

4.0

Finance and business services

4.0

Distribution services

1.5

Personal and social services

0.0

1.0

2.0

3.0

2.0

3.0

-0.5

0.0

0.5

1.0

pan

orea any

ance UK

taly US

4 0

-3.0

-2.0

-1.0

Japa

n

Kor

ea

Ger

man

y

Fran

ce UK

Ital

y

US

-1.0

0.0

1.0

Japa

n

Kor

ea

erm

any

Fran

ce UK

Ital

y

US

2 5

-2.0

-1.5

-1.0 Jap

Ko

Ger

m

Fra It

8Source: Kyoji Fukao, Tsutomu Miyagawa, Hak K. Pyo and Keun Hee Rhee (2009), “Estimates of Total Factor Productivity, ICT Contributions and Resource Reallocation Effects in Japan and Korea.”

-5.0

-4.0

-2.0

Ge F

-3.0

-2.5

International comparison of labor productivity by sector

• Labor productivity levels in Japan’s non‐manufacturing sectors are less than 50 percent of the U S levelsare less than 50 percent of the U.S. levels. 

• In the case of non‐ICT capital service input per man‐hour, Japan uses much more such input than the United Statesuses much more such input than the United States.

• With regard to labor quality, there is not much difference between the two countries.between the two countries. 

• The differences in labor productivity are mainly caused by Japan’s low level of ICT‐capital service input and low TFP. p p p

• Since ICT investment may contribute to innovation in production processes, the difference in ICT‐capital service input between Japan and the other countries is likely one of the major causes of the stagnation of TFP in Japan. 

9

10

International comparison of labor productivity by sector(contd.)(contd.)

• We should note that it is very difficult to compare differences in the quality of services across countries and to measure PPP forthe quality of services across countries and to measure PPP for services. 

• The quantity of truck transportation is basically measured by aThe quantity of truck transportation is basically measured by a unit of tonnage times kilometers per man‐hour (how much transportation in tonnage and distance was conducted by one man‐hour) and differences in quality, such as just‐in‐time delivery, are not taken account. 

I il i h l h f b i h i k i• In retail services, the length of business hours is not taken into account.  Measured productivity of German shops might be higher than that of Japanese shops because German shops arehigher than that of Japanese shops because German shops are only open until, say, 6 p.m. and customers adjust their lifestyle accordingly. 

11

Accumulation of ICT assets in Japan and Korea was very slow in comparison with other countries.comparison with other countries.

14

Figure 3-2 ICT Investment/GDP Ratio in the Major Developed Countries

10

12Japan

Korea

US

8

10

%

US

UK

France

4

6

%

Germany

Italy

2

4

0

12Source: Kyoji Fukao, Tsutomu Miyagawa, Hak K. Pyo and Keun Hee Rhee (2009), “Estimates of Total Factor Productivity, ICT Contributions and Resource Reallocation Effects in Japan and Korea.”

Why was Japan left behind in ICT investment? 

• The ratio of custom software investment to packaged software investment is much larger in Japan than in g pthe United States. 

• When Japanese firms introduce ICT technology, suchWhen Japanese firms introduce ICT technology, such as an ICT system for customer services or the management of information flows within the firm,management of information flows within the firm, they prefer custom software in order to avoid business reorganisation and the training of workers.business reorganisation and the training of workers. 

• This results in a smaller productivity improvement from ICT investment This example suggests that it isfrom ICT investment. This example suggests that it is important to compare intangible investment in Japan with that in other developed economies

13

with that in other developed economies.

Intangible Investment in Japanh bl /• The intangible investment/output ratio in Japan is smaller than that in the United States. 

• The intangible investment/gross value added ratio in Japan’s non‐manufacturing sector is much lower than that in Japan’s manufacturing sector.†

• The low level of intangible investment probably is one g p yimportant reason for the stagnation of TFP growth and the delay of ICT investment in Japan’s service sector.y p

† Fukao, Kyoji, Tsutomu Miyagawa, Kentaro Mukai, Yukio Shinoda, and Konomi( ) “ bl dTonogi (2009), “Intangible Investment in Japan: Measurement and 

Contribution to Economic Growth,” Review of Income and Wealth 55(3): 717‐736.

14

Japan invests a Intangible investment by category : Japan invests a lot in R&D but very little in 90%

100%

share in total intangible investment

very little in economic competencies 70%

80%

90%

Computerized competencies such as brand equity, firm‐ 50%

60%

70%informationScience and engineering R&Dequity, firm

specific human capital, and 30%

40%Other innovative propertyBrand equitycapital, and 

organizational structure.

10%

20%Firm-specific resources

structure. 0%

Japan, 2000-05

US, 1998-2000

UK, 2004

15

Sources: Japan: Fukao et al. (2009), US: Corrado, Hulten and Sichel (2006), UK: Marrano and Haskel (2006).

Accumulation of ICT assets in Japan and Korea is relatively slow in comparison with other countries.

Figure 10: Business investment (Percentage of business output): Japan-US comparisonFigure 10: Business investment (Percentage of business output): Japan-US comparison

25

% Figure 10-a. Japan

25

%

Figure 10-b. US

21

23

21

23

25

Intangible Investment

Tangible

15

17

19Intangible Investment

Tangible 17

19Tangible Investment

11

13

15 Investment

11

13

15

7

9

7

9

5

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

5

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

16Sources: Fukao, Miyagawa, Mukai, Shinoda, and Tonogi (2009). Original data for the US are taken from Corrado, Hulten andSichel (2005, 2006).

In several non‐manufacturing sectors, we observe large negative reallocation effects and exit effects on industry‐level labor productivity y p ygrowth.  It seems that Japan’s low metabolism also impedes productivity growth in service sectors.

Ind str nameLabor

prod cti it Within effect Reallocation Net entry Entr effect E it effect

Decomposition of labor productivity increase in non-manufacturing sectors: average value of results for 1997－99 and results for 2000-02, annual values, %

Industry name productivitygrowth

Within effecteffect

yeffect

Entry effect Exit effect

a=b+c+d b c d=e+f e fConstruction -4.80% 0.07% -5.03% 0.16% 1.48% -1.32%Wholesale 4 05% 1 59% 0 83% 1 63% 1 33% 0 30%Wholesale 4.05% 1.59% 0.83% 1.63% 1.33% 0.30%Retail 4.74% 2.53% 1.02% 1.19% 0.95% 0.24%Real estate 1.78% 1.85% -0.37% 0.30% -0.66% 0.95%Transportation -4.84% 0.61% -3.91% -1.53% -1.80% 0.27%Warehousing and other transportation related services -3.48% 0.72% -4.37% 0.17% -1.34% 1.50%Communication 36.83% 8.60% 25.56% 2.67% 1.11% 1.56%Electricity -1.11% 6.88% -8.06% 0.07% 0.03% 0.04%Gas, water and heat supply -3.93% 0.56% -5.35% 0.86% 0.98% -0.13%Hotels -0.23% 1.75% -1.03% -0.95% -2.08% 1.13%Broadcasting -10.19% 0.22% -15.38% 4.96% 4.85% 0.11%Broadcasting 10.19% 0.22% 15.38% 4.96% 4.85% 0.11%Personal services 0.19% 0.36% -1.74% 1.58% -0.13% 1.70%Business services -0.32% 1.83% -2.78% 0.63% -1.54% 2.17%Information services -2.62% -0.64% -3.70% 1.72% 0.49% 1.22%Eating and drinking places 0.77% 0.49% -1.15% 1.44% -2.33% 1.74%Oth i 0 30% 0 12% 0 17% 0 59% 0 99% 0 45%

17

Other services -0.30% 0.12% 0.17% -0.59% 0.99% 0.45%Advertisement -6.21% -2.64% -9.85% 6.29% 9.81% -3.52%Amusement 3.69% 3.40% -0.26% 0.56% -1.73% 2.28%Medical and care services and hygiene 0.23% 0.94% -0.06% -0.65% -2.54% 1.89%Source: Kim, Kwon and Fukao (2009).

The start‐up and closure rate of establishments in Japan is much lower than that in the US.

Fi 4 1 S d Cl R f E bli h J US C iFigure 4.1 Start-up and Closure Rate of Establishments: Japan-US Comparison

Figure 4.1.Panel A. Start-up Rate: Japan-US Comparison %

Figure 4.2.Panel B. Closure Rate: Japan-US Comparison %

14

16

14

16

All industries: US

10

12

10

12 All industries: Japan

Wholesale, retail

6

8

6

8Wholesale, retail and restaurants: Japan

Services: Japan

2

4

2

4 Manufacturing: Japan

N t D t b d t ti ti f th l t i f h t

0

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

0

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

18

Note: Data are based on statistics from the employment insurance program of each country. Sources: Small Business Administration, US Government (1998), Small and Medium Enterprise Agency, Ministry ofIndustry, Trade and Industry, Japanese Government (2001), and Study Group on “Industry Hollowing-out” and TariffPolicy, Ministry of Finance, Japanese Government.

Increase in part-time workers in Japan

パート比率の推移

35.0

Percentage of part‐time workers in total workers by sector: 1970‐2005

30.0

35.0

電子計算機・同付属装置

通信機器Computers and related devicesC i ti i t

20 0

25.0

通信機器

自動車

小売業

金融業

Communication equipmentAutomobileRetailFinance

15.0

20.0

％

金融業

電信・電話業

情報サービス業

FinanceTelecommunicationInformation services

5 0

10.0

0.0

5.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

19Source: JIP Database 2008.  

Increase in part‐time workers in Japan (contd.)l l h b d ff h b• Firms invest little in on‐the‐job training and off‐the‐job 

training for part‐time workers. The increase in part‐i k ill l d h i ltime workers will slow down human‐capital accumulation.

• The productivity gap between part‐time workers and regular workers is larger than the wage gap between part‐time workers and regular workers. It seems that firms pay a premium to part‐time workers in order to obtain flexibility of employment.†

• The increase in part‐time workers is not only a problem p y pof inequality but also a problem of productivity.

† Kyoji Fukao, Ryo Kambayashi, Daiji Kawaguchi, Hyeog Ug Kwon, Young Gak Kim, 

20

and Izumi Yokomaya (2007) “Deferred Compensation: Evidence from Employer‐Employee Matched Data from Japan,” Hitotsubashi University.

Size and Internationalization of FirmsIn the case of commerce and other service sectors, US firms are much ,larger than Japanese firms on a consolidated basis.  It seems that Japanese firms are left behind in internationalization and in enjoying 

Number of listed firms and their average size measured by consolidated workers: US-Japan comparison, consolidated Wholesale and retail Other servicesManufacturing

scale economies. 

NumberofJapanesefirms

Averagenumberofworkers

Numberof USfirms

Averagenumberofworkers

NumberofJapanesefirms

Averagenumberofworkers

Numberof USfirms

Averagenumberofworkers

NumberofJapanesefirms

Averagenumberofworkers

Numberof USfirms

Averagenumberofworkers

g

firms workers workers firms workers workers firms workers workers2000 909 7,306 1,451 7,145 262 2,554 363 19,620 148 1,866 655 7,1832001 774 6,611 1,466 6,729 243 1,626 361 20,302 157 1,462 655 7,0962002 1,079 4,799 1,490 6,501 418 1,093 368 19,857 315 906 691 7,7452003 1,291 4,546 1,558 6,314 540 1,207 375 21,841 398 855 690 7,4182004 1,567 4,702 1,575 6,560 630 1,506 390 21,404 496 999 717 7,6582005 1,622 4,960 1,606 6,376 668 1,597 389 23,175 564 981 715 7,736

Communication Other industries2000 17 16,422 96 11,576 234 5,970 763 5,3022001 13 19,438 102 10,938 214 4,343 827 4,9812002 23 11,193 108 10,664 307 2,944 848 5,1112003 32 8 046 121 9 453 367 2 858 894 4 822

Co u cat o Ot e dust es

21

2003 32 8,046 121 9,453 367 2,858 894 4,8222004 44 6,440 122 9,204 466 3,191 963 5,1202005 50 5,881 123 9,281 493 3,052 967 5,195Source: Kwon (2010)

Summary• TFP growth in the manufacturing sector is much higher than that in the 

other sectors. However, the share of the manufacturing sector is declining rapidly. For Japan, which is now experiencing population decline, productivity growth in the service sector is key for economic growth.productivity growth in the service sector is key for economic growth.

• TFP growth in ICT‐using sectors declined substantially after 1995.

• Accumulation of ICT assets in Japan and Korea was very slow in p ycomparison with other countries.

• The low level of intangible investment probably is one important reason f f ffor the stagnation of TFP growth and the delay of ICT investment in Japan’s service sector.

• It seems that Japan’s low metabolism also impedes productivity growth• It seems that Japan s low metabolism also impedes productivity growth.

• Firms invest little in on‐the‐job training and off‐the‐job training for part‐time workers. The increase in part‐time workers will slow down human‐pcapital accumulation.

• It seems that Japanese firms are left behind in internationalization and in j i l i

22

enjoying scale economies.