Macroeconomic and fiscal implications of changes in the labor share under population aging in Japan

This study examines how declining labor share affects macroeconomic outcomes and fiscal sustainability in Japan —the country with the most advanced population aging globally. While previous research has documented the global trend of declining labor share, its implications for fiscal policy in aging societies remain underexplored. Using a life-cycle general equilibrium model in the Auerbach-Kotlikoff tradition, we calibrate parameters to match Japan’s economic and demographic characteristics, incorporating country-specific institutions such as public pension, health insurance, and long-term care systems. Our analysis reveals that when capital share increases by 3 percentage points between 2025-2060, it generates fiscal relief equivalent to approximately 3 percentage points in consumption tax by 2070 through enhanced capital accumulation. More significantly, this declining labor share amplifies the efficacy of pension reforms, potentially yielding savings equivalent to over 12 percentage points in consumption tax. Our findings suggest that declining labor share, when coupled with appropriate policy reforms, may benefit fiscal sustainability in rapidly aging societies with high public debt.