2022 JC2 H2 Prelim Essay Q4 (Suggested Answers)

2022 H2 Prelim Essay Q4RapidpopulationageingandashrinkinglabourforceinJapanaremajorchallengesforachievingfurtherincreasesin its livingstandardsand ensuringthe financialsustainability of its public social expenditures.(a) Explainhow Japan’s rapidageingpopulationaffectsits futureeconomicperformance.[10](b) DiscusstheeconomicpolicieswhichmighthelptheJapanesegovernmenttomitigate the adverse impact of its rapidly ageing population.[15] Part aSuggested AnswerThe 3Cs to Question Interpretation:Command Word Concept Word Context WordExplain how future economic performanceJapan’s rapidageingpopulationElaborate with economicrigour (including graphicalanalysis) Future economic performance● Internal: Potential EconomicGrowth, Unemployment Rate,Inflation Rate● External: Healthy Balance ofPaymentUse of AD/AS analysis Application toJapan context IntroductionPopulationageingin Japanhasprogressedmorerapidlyas comparedto othercountries.Currently, Japanhasthehighestold-agedependencyratioofallcountries,witharatioin2017over50personsaged65andover, forevery100personsaged20to 64andthisratiois projectedto riseto 79perhundredin 2050.Thisessaywillexplainthe impactof Japan’s rapidageingpopulationon its futureeconomicperformance.Japan’s futureeconomicperformanceincludesthekeymacroeconomicobjectivesthataresustainedeconomicgrowth,lowunemploymentrate,lowinflationrate and favourable balance of trade (BOT). Body I: Impact on potential economic growth 1

Japan’s working-agepopulation(personsaged15-64)hasbeendecliningtrendsincethelate1990sandthisdeclineislikelytofeedthrougha considerabledeclineinthetotal labour force over the next few decades. Withhigherretirementfiguresandinsufficientyoungerpeopleenteringtheworkforceto replacetheseworkers,thequantityofworkforcewilldropfurtherfuellingthefallinLRAS from AS0 to AS1 . Coupledwithshrinkinglabourforce,olderworkersmaynotbeabletokeeppacewithtechnological changes and changing work requirementsFalling labour productivity Thus,thefallin bothquantityandqualityoflabourwouldlimitpotentialeconomicgrowth as Yf0 falls to Yf1 Fall in potential economic growth Figure 1: Falling quantity of labour force in Japan Body II: Impact on future balance of payment & potential economic growthHowever, thelongerworkinglivescouldhelplimitthedeclineinJapan’sworkforceandboost social security contributions to finance rising health and pension expenditures.SuccessfulR&Dthatprovideroboticssolutionseggreaterautomationinmanufacturingand services sector that reduce the need for physical workrise in labour productivity and expansion of servicesectorgain comparative advantage in say, robotics designand manufacturingincreases in future trade surplushealthy balanceof payments in future fallingcyclicalunemploymentasfirmsexpandoutputandincreasetheirderiveddemand for labourincreases potential economic growth Body III: Impact on future price stabilityIn the longer run, the fall in labour force > fall in demand for labourrise in nominal wages in future across the variouslabour marketsrise in the unit costs of production of all firmsfirms will pass on the increase in unit cost ofproduction to consumers 2

increase in GPLincrease in cost-push inflation in the future Body IV: Impact on future financial sustabilityRapid ageing populationIncrease in number of retireesincrease pensionexpenditurestrain on financial sustainability of Japan’s socialsecurity system ConclusionOverall,the impactof Japan’s rapidageingpopulationon its futureeconomicperformance is likely to be adverse. Examiners’ Comments: Mark SchemeLevelKnowledge, Understanding, Analysis, Application MarksL3 Knowledge + Application + AnalysisAbalancedandwell-developedansweronJapan’s rapidageingpopulationpositivelyandnegativelyimpactit’s futureeconomicperformance. 8 – 10 L2 Knowledge + ApplicationAn under-developedansweron howJapan’s rapidageingpopulationpositivelyandnegativelyimpactit’s futureeconomicperformance. Max6m– onlyadverseimpactonbothinternalandexternaleconomic performance is considered. 5 – 7 3

Max5m- onlyadverseimpacton eitherinternalor externaleconomic performance is considered.L1 KnowledgeAnundevelopedanswerwherepointsaremerelystatedorlistedwithoutelaborationon themarginalistprincipleusedby bothconsumers and producers. May contain theoretical errors. 1 – 4 4

(b) DiscusstheeconomicpolicieswhichmighthelptheJapanesegovernmenttomitigate the adverse impact of its rapidly ageing population.[15] Part bSuggested AnswerThe 3Cs to Question Interpretation:Command Word Concept Word Context WordDiscuss Economics policies tomitigate the adverse impact Japan’s rapidageingpopulationRequires 2 sidedarguments andeventuallymake areasonedjudgementon the basisof youranalysis. Discussat least2 economicspoliciesthat mighthelp tomitigatetheadverseimpactofits rapidly ageing population. Comment on theappropriateness/effectivenessof the proposedeconomicpolicies. Application toJapan context Introduction▪ Brieflystatetheadverseimpactofrapidlyageingpopulation:shrinkinglabourforce, lower labour productivity growth, reduced potential economic growth▪ Identifytheeconomicpoliciesthatmighthelpmitigatetheadverseimpactofageing population.▪ Policiesthat couldincreaseemploymentlevelsor rise labourproductivity▪ Commentwhetherthe proposedeconomicpoliciescouldsuccessfullymitigate the adverse impact of its ageing population Body I: Economics policies that increase the quantity of labour1. FurtherincreasesinemploymentofolderlabourwouldhelptolimitthesteepfallintotallabourforcethatJapaneseisprojectedtofaceoverthenext20-30years. Proposed economics policy: Extend retirement age▪ Extend retirement ageo In theshortrun,theJapanesegovernmentshouldseekto extendmandataryretirementagewhichcanbephasedinprogressivelyeverytwoyears. Thegovernmentcanalsoincreasethere-hiringofolder 5

workersaboveage70.DonotethattheJapanesegovernmenthasincreased the mandatory retirement age to 70 years old in Apr 2021. Comment:Graduallyincreasethemandatoryretirementageasthiswillreducetheriskthatolderworkersarere-hiredasnon-regularworkers.o In the longerterm,the Japanesegovernmentshouldconsiderabolishingthe mandatoryretirementage altogetheras doneinAustralia,Canada,NewZealandandUnitedStateswherethesecountries set law to ban mandatory retirement age. Comment:Butunlessthewagesystemsarereformed,employerswillcontinuetoresistraisingthemandatoryretirementage.Oneofthebiggestdifficultiesin hiringolderworkersarisesfromtheirhighwagesdue to theseniority-basedwagesystem.Theseniority-basedpaysystemrewardsworkerforeachadditionalyearof service.However, thismakesolderworkersexpensiverelativetotheirproductivitywhichcreatesabarriertotheir continued employment. In termsof employees’perspectives,manyolderworkersfaceasubstantialpaycutfollowingmandatoryretirementandmayendupbeingrehiredinjobsthatdonotfullyutilisedtheirskills,whichunderminestheirjob satisfaction, motivation and well-being. Limitations: Japan already has rates of labour force participation for olderpeople that are among the highest of OECD countries, especially for oldermen. Thus, limited room to increase employment rates for older men. 2. Issues facing Japan currently:▪ Situation of many older women who have been involved innon-regular work at younger ages (Non-regular jobs includepart-time, temporary, dispatched, and contract workers.)▪ Many women leave employment following marriage and child birth. Proposed policy: Rise women labour force participation rate▪ Boostopportunitiestocombineworkandcareforchildrenandelderlyparentsin orderto helpwomento (re-)entrerandstaylongerintheworkforce.▪ Enhancethe availabilityof high-qualitychildcare;reducinglongworkinghoursandincreasingworking-timeflexibility, inpartbybetterenforcing the Childcare and Family Care Leave Law. 6

Comment:▪ Partiallyoffsetthenegativeeffectsofpopulationageingonthesizeofworkforce▪ Helpto bolsterincomesandpensionsat olderages. Thisisparticularlyimportantin Japan,whererelativepovertyrateofpeopleaged over 65 years is 19.6% against 12.5% on overage in the OECD.▪ Contribute signifi