Working hours in Japan limit labour input and income more than headcount suggests

Japan’s average working hours have been declining quickly, offsetting gains in labour force population in terms of worker-hour-based labour input. As a result, labour shortages are becoming more severe than implied by labour market indicators based on headcounts. The decline is also hindering households’ income gains, weighing on consumption.

The decline in average working hours has accelerated since the late 2010s, when labour participation started to improve. The rising share of part-time workers, reflecting increased labour participation among women and the elderly, has depressed average working hours.

Reduced working hours among full-time workers and part-timers themselves have also contributed to the decline. For full-time workers, legislation to promote work-style reform has led to a reduction in overtime hours. For part-timers, income thresholds in the tax and social security system are encouraging non-primary earners to limit hours worked to avoid higher taxes.

We expect working hours to edge down as society aging continues, constraining the economy’s medium-term growth prospects. Even after allowing for productivity gains from AI, we project that Japan’s potential growth rate will fall to near zero by the early 2030s with declining labour input.

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