Human Capital and Growth in Japan: Converging to the Steady State in a 1% World

Annual growth in GDP/adult in Japan has declined from over 10% in 1969 to an average of 1% since the financial crisis in 1991. I show that a dynamic Solow growth model, augmented with human capital, weekly hours worked, and oil prices, explains Japan’s annual growth rates from 1969 to 2007 as conditional convergence to a steady-state rate of 1%/year. Each year of average adult schooling attainment raised GDP/adult directly or indirectly by 20 percent, and weekly hours worked had an output elasticiTY of 0.5. The marginal product of schooling in 2005 is double the marginal product of physical capital.

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