What Happened to Japan? Could It Be Labor Supply?

by: Casey Mulligan

Elderly people are less able or willing to work than middle aged persons. When a large chunk of Japan's population changed from middle aged to elderly, Japan had less labor supply and ultimately less output. Professor Krugman explains how labor supply was the major factor in Japan's stagnation, although admittedly not the only one.

Interestingly, when it comes to Japan, Professor Krugman agrees with me that labor supply matters in the usual way, even when the economy is in a liquidity trap. But he says the opposite for the United States.