Substitutability between older and younger workers and its implications for Japan

Purpose - This study investigates the impact of the increasing proportion of older workers in the workforce by establishing a theoretical framework and estimating the degree of substitutability between them and their younger counterparts. Design/methodology/approach - The first step is to establish a theoretical framework that combines older and younger workers with imperfect substitutability in the production of final goods within an aggregate production function. The author then derives an equation that relates the relative wage, relative supply and elasticity of substitution between the worker types, for use in estimation. Using data from Japan’s Basic Survey on Wage Structure and Population Census from 2010 to 2019 across 47 prefectures, the author estimates the elasticity of substitution between older and younger workers in Japan. Findings - The author finds that workers aged 55 and over and their younger counterparts are gross substitutes, and the estimated elasticity of substitution is in the range of 2.33–2.86. This implies that a 10% increase in the relative number of workers aged 55 and older leads to a fall in their relative wage in the range of 3.5–4.3%. The study estimations suggest that since 2010, there has been a convergence in the relative wage of older workers across Japan’s prefectures. Originality/value - Understanding the degree of substitutability between older and younger workers is essential for quantitatively assessing the impact of workforce aging, technological advancements and labor policies on the wage distribution. This study estimates the elasticity of substitution between the two worker types based on a theoretical model, and utilizes recent datasets and methodology not adequately addressed in previous literature.