Friday, January 7, 2011

Defining Denominators

Via Mark Thoma, I discovered this very interesting article looking at group of gross domestic product by working age population (WAP):

When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates – more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.

Another indication that Japan has fully used its potential is that the unemployment rate has been constant over the last decade. By contrast, the US unemployment rate has almost doubled, now approaching 10%. One might thus conclude that the US should take Japan as an example not of stagnation, but of how to squeeze maximum growth from limited potential.

This is a very good illustration of how important it can be to understand the structure of a population under study. I don't know if the proposed metric is the most relevant metric for the phenomenon under study but it's sure interesting how it completely changes the interpretation of the result. That could have very profound policy results when we consider questions like "would it be a bad thing to emulate Japan's industrial policy?".

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