Column  Global Economy  2015.12.10

Guest Workers: Japan's Solution to Aging?

Selahattin Imrohoroglu, Professor of Finance and Business Economics, Marshall School of Business, University of Southern California, and, Senior International Fellow, Canon Institute for Global Studies.

Japan has relied on native-born workers for their superior economic growth performance following World War II. They pretty much "caught up" with United States by the end of 1980s. Since the 1990s, however, two issues have caused Japan to lose economic ground. First, there was a significant slowdown of the Japanese economy, and, second, Japan's competitors and neighbors gained significant ground as a result of globalization and capital deepening.

Meanwhile, Japan is fast approaching crossroads as it seeks to find more workers to mitigate the projected decline in working age population. According to the National Institute of Population and Social Security Research, the population in Japan will fall by more than 40 million by 2060. Over a longer horizon, the decline in the labor force is more striking. The labor force in Japan is projected to fall from about 64 million in 2014 to near 20 million in 2100. In addition, large increases in aging related public expenditures are projected which would require unprecedented fiscal adjustments to achieve sustainability under current policies.

Additional workers would produce additional goods and services and pay more taxes to help achieve fiscal sustainability. With a male labor force participation rate among the highest in the world, additional labor supply in Japan can only come from (i) increases in the fertility rate to produce younger native born workers, (ii) increases in the female participation rates and/or increases in labor in efficiency units, and, (iii) foreign-born workers.

One way to increase the size of the work force is to introduce a foreign worker policy. Indeed, the Japanese government announced early in 2014 that it would consider a guest worker program that would bring 200,000 foreign workers to Japan for a period of 10 years, eventually accumulating a stock of about 2 million guest workers. Can such a guest worker program solve Japan's fiscal problems?