According to Thomas Klitgaard and Preston Mui of the NY Fed’s Liberty Street Economics, Japan’s population is both shrinking and getting older, with the population falling at a 0.2% rate in 2014 and the working-age population (ages 16 to 64) plummeting at the rate of almost 1.5% a year. Contrast this with the U.S. population, which is is rising at a 0.7% a year with the working-age population increasing at a 0.2% rate.

Japan’s economic miracle

Females Japan

The above statistics beg the question of how has Japan been able to maintain reasonably strong economic growth despite its aging population. Klitgaard and Mui say the answer can be found in the country’s workforce participation rate. They note “supporting the growing share of Japan’s population that is 65 and over has been the substantial increase in the share of working-age women entering the labor force. In contrast, U.S. labor force participation rates have been falling for both men and women.”

Japan’s labor market adjustments help explain the steady, albeit, modest growth in output per person despite the surge in the 65 and over cohort. They note that it is largely because of increased female participation in the workforce that “Japan has been able to match U.S. per capita growth since 2000.”

Details on U.S. and Japan workforce participation rates

Females Japan

The evidence suggests that the improvement in Japan’s female labor force participation and the overall decrease in U.S. participation rates have balanced out the economic impact of very different demographic trends. While there is a 21 point difference in changes in the working-age population since 2000 (+12 percent compared to -9 percent), the difference in labor force growth is just 12 percentage points (+9 percent compared to -3 percent). The difference in employment growth shrinks even more to 9 percentage points (+6 percent compared to -3 percent) as the U.S. unemployment rate is higher now than it was in 2000 and Japan’s current rate is lower.

Klitgaard and Mui highlight that the two distinct trends in labor force participation have helped offset differences in per capita growth since 2000. A nation’s economic growth is dictated by the quantity and quality of its labor and capital, along with improvements in how workers and capital are applied (total factor productivity). They argue the moderation of differences in the labor force has been the primary factor in why the per capita GDP growth for both countries since 2000 is almost the same.

H/T StreetEye