Here’s an economics quiz question. Between 2008 and 2019, which G7 countries recorded the slowest and fastest growth in terms of GDP per working-age adult?
No prizes for guessing the laggard. Italy, with its recent economic dysfunction, performed disastrously, with GDP per working-age adult falling by 0.1 per cent a year. The best-performing country is much more surprising. Japan, with a growth rate of 1.5 per cent annually, outpaced not only France, Britain and Canada (all 1.1 per cent), but even the United States (1.3 per cent) and Germany (1.4 per cent). In fact, Japan has been the strongest G7 performer on this measure overall since 1981.
This little tidbit, from The Wealth of Working Nations, a new paper by Jesús Fernández-Villaverde, Gustavo Ventura and Wen Yao, the economists, shocked me. Isn’t it conventional wisdom that Japan has suffered two “lost decades” of growth? Wasn’t “Japanisation” a cautionary tale of how misguided macroeconomic policy causes prolonged downturns? Yes, Japan’s headline GDP growth has been weak, but this data shows it has outgunned its G7 rivals since the financial crisis on age-adjusted productivity growth.
Japan’s growth decline is really a story about demographics. While the UK’s population ballooned by more than 8 per cent between 2008 and 2019, Japan’s dipped modestly and aged earlier. Japan’s prime-age workforce shrank by nearly 10 per cent over that period, in fact, as Britain’s went up by almost 4 per cent. This is why headline GDP has grown at 1.4 per cent per year since 2008 here against Japan’s 0.6 per cent, despite Japan’s stronger age-adjusted productivity performance.
This raises an important question: when Sir Keir Starmer tells us that Labour wants the UK to be the fastest-growing nation in the G7, what growth metric should he adopt? There’s no “correct” answer, because different measures tell us slightly different things about the economy.
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Growth typically refers to the trend of overall GDP. It suits the Conservatives to use that measure. They have shared social media adverts celebrating that headline UK GDP growth has eclipsed those of France, Germany or Italy since 2010.
However, while total GDP serves well as a proxy for a country’s capacity for, say, defence spending or managing its debt obligations, high immigration can simply inflate it. It therefore often ill-reflects the evolution of average living standards. Last year, for example, UK GDP grew by 0.1 per cent, but GDP per capita fell by 0.7 per cent.
By controlling for population, GDP per capita growth obviously can better track average living standards. Its trends indicate the economic rut that Britain is in. Having averaged 2.4 per cent growth per year between 1980 and 2007, it fell to only 0.7 per cent per year after the financial crisis, lagging the performances of Germany and America.
If we’re thinking about how public policy might realistically improve growth with an ageing population, however, then perhaps Starmer should pay more heed to improving GDP per working-age adult. This metric is still affected by taxes, regulations and welfare policies, so thus it can be strengthened through enhancing workforce participation or productivity. And do we need it: strong growth of 2.3 per cent per year between 1981 and 2007 has more than halved to only 1.1 per cent per year post-2008.
Crucially, however, the GDP per working-age adult metric injects a dose of realism about government policies’ limits. By accounting for the largely immutable fact of population ageing and the squeeze it brings to GDP per capita, it helps to avoid magical thinking that rapid per capita growth rates are still possible.
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By zeroing in on living standards that can be affected, in fact, policy is targeted at what matters. We therefore can be spared Japan-like squabbles blaming insufficient monetary or fiscal stimulus for weak per capita GDP growth, when the real culprit was always the tide of demographics.
Ryan Bourne holds the R Evan Scharf chair for the Public Understanding of Economics at the Cato Institute
