SSRN Id2782708

Effects of Immigration in Japan:
A Computable General Equilibrium Assessment
Muneyuki Saito (Nara Prefectural University)

Shinya Kato (Okayama Shoka University)
Shiro Takeda (Kyoto Sangyo University)
February 28, 2017
Abstract
Due to an aging population and falling birthrates, the labor force in Japan will continue to
decline in the next decades, and per capita income is also likely to decrease. To address this problem,
the Japanese government is considering relaxing restrictions on foreign labor, and there have been
debates regarding accepting foreign workers in Japan. Current Japanese law imposes strong
restrictions on unskilled foreign labor; thus, relaxing these restrictions will lead to an inflow of
unskilled foreign workers into Japan. However, few studies have analyzed the possible quantitative
effects of such measures.
Using a simulation based on a computable general equilibrium model, this paper analyzes the
quantitative impacts of the foreign labor inflow on the Japanese economy. Our model is a recursive
dynamic model from 2010 to 2030 with 32 sectors. We categorize labor into the following two types:
skilled and unskilled. In the main scenario, we assume an inflow of 5.32 million unskilled foreign
workers, which is equal to half of the labor force decrease in Japan.
The results of the main scenario are summarized as follows. First, foreign labor inflow lowers
the wage rate of unskilled labor but raises that of skilled labor and the rental price of capital. Second,
the inflow increases the GDP, income, and consumption, but the increases in income and
consumption are very small compared to the increase in GDP. Third, the inflow has very different
impacts on the different sectors. Fourth, we show that a policy limiting the sectors that accept
foreign labor does not necessarily increase the output of these sectors. Finally, we show that if we
accept not only unskilled but also skilled labor, the impacts on wage rates change significantly.
Keywords: foreign labor inflow, immigration, Japan, computable general equilibrium analysis
JEL classification: D58, F22, F66, J61

Email: saitou@narapu.ac.jp. We would like to acknowledge Kenji Kondo’s (Chukyo University) and Kazushi
Ugami’s (Kobe University) helpful comments and suggestions. We also thank the participants of the JSIE and JEA
annual meetings for fruitful discussions.
Electronic copy available at: https://ssrn.com/abstract=2782708

1. Introduction
Recently, there has been debate regarding whether to accept foreign workers in Japan. This
is because the labor force has been decreasing due to low fertility and a greater number of
retired workers, while the recent economic recovery has increased labor demand. However, this
discussion is not new. In the 1980s, labor demand had increased due to the economic bubble,
and the government implicitly allowed unskilled foreign workers in the construction industry
and others. However, in the 1990s, the bubble burst, and public opinion was against foreign
labor inflow as it reduced the employment opportunities of Japanese workers. Due to
globalization and regional economic integration in the 2000s, this issue was raised in EPA
negotiations once more. The acceptance of foreign workers has often been a primary policy
issue in Japan within the past few decades.
Additionally, from the viewpoints of fiscal deficit and low fertility, the acceptance of
foreign workers has recently attracted attention. As such, Table 1 shows a population projection
estimate by the National Institute of Population and Social Security Research (NIPSSR) in
Japan. In this estimate, the labor force is expected to decrease by 10.19% from 2010 to 2020,
7.74% from 2020 to 2030, and 14.56% from 2030 to 2040. It also predicts that the ratio of the
elderly in the total population will rise from 25.1% in 2013 to 33.4% in 2035. As these estimates
show, Japan has been facing rapid aging because of low birthrates. However, the budget deficit
continues to exist in Japan, and government debt has already exceeded 1,000 trillion yen. It can
be argued that to address these problems, Japan should accept foreign workers. The Japanese
government takes a positive stand regarding the acceptance of highly skilled workers in these
discussions, but there are pros and cons according to public opinion. For these discussions to
yield results, detailed information on the impact of foreign labor acceptance in Japan is
necessary. This issue has been analyzed in numerous countries, and there is theoretical and
empirical literature on immigration or emigration. For example, Berry and Soligo (1969) show
that immigration increases the welfare of natives in the host country in theory. Subsequently,
numerous studies analyzed the effects of immigration on a host country using various models.
In contrast, Borjas (1995) empirically estimates that the economic benefits of immigration in the
United States reach around $7~25 billion per year.1
Nakamura et al. (2009) empirically analyze the effects of immigration in Japan. Using
econometric methods, their research examines the impacts of immigration on Japanese labor
wages, labor allocation across industries and industrial structure, among others. Although their
research offers important suggestions regarding the influence of foreign labor acceptance in
1
For recent empirical research on immigration, see Kerr and Kerr (2010).

Japan, it has several shortcomings. One limitation is that their analysis relies on data from the
1990s to early the 2000s, when there was a limited amount of foreign labor in Japan. However,
Japan, which faces a labor shortage, is likely to accept a large amount of foreign labor in the
future. It seems problematic to evaluate the impacts of large-scale future immigration from
results derived from small-scale past immigration. To analyze European and North American
countries that have already accepted numerous foreign immigrants, it is preferable to use an
econometric approach based on past data. However, to analyze the situation in Japan, which has
so far severely restricted foreign labor and accepted only a limited number of workers, a
simulation approach seems more appropriate. Therefore, we adopt a simulation approach using
a computable general equilibrium (CGE) model.2
Several studies use CGE analysis to examine international labor migration. For example,
Weyerbrock (1995) analyzed impacts of increase in immigrants from Eastern Europe and the
former Soviet Union on EU economy. Walmsley and Winters (2005) and Walmsley et al. (2011)
analyze the effects of bilateral labor flows between countries using the GMig2 model (a
multi-region CGE model).3 Recently, Baas and Brücker (2012) examined consequences of
migration from Germany to the UK caused by the EU’s Eastern Enlargement.
Additionally, there are a few simulation studies that analyze immigration in Japan. Goto
(2010) analyzes the effects of foreign labor inflows and trade liberalization using a CGE model.
He concludes that trade liberalization generates larger positive effects than foreign worker
inflows. Omura (2011) analyzes the effect on GDP of a rapid increase in immigration from 2000
to 2009 using the GMig2 model; the author concludes that immigration increases the GDP
growth rate by 0.16% without capital accumulation and by 0.24% with capital accumulation.
Moreover, Shimasawa and Oguro (2010), who use the dynamic overlapping general model,
analyze the long-term macroeconomic and fiscal impacts of immigration.
In this paper, we construct a multi-sector dynamic CGE model and analyze the effects of
foreign workers’ acceptance in Japan. The model consists of 32 sectors and considers the period
from 2010 to 2030. We analyze the impacts of foreign labor inflow (in particular, unskilled
labor) on factor prices, macroeconomic variables (GDP and income, etc.), and sectoral output.
Our analysis differs from previous studies as follows. Goto (2010) uses an extremely simplified
model, which is a static CGE model with only three sectors and no intermediate goods. In
contrast, we construct the model with 32 sectors to reflect the actual input-output structure as
accurately as possible, and we consider investment and government consumption. This enables
us to analyze sectoral impacts in detail.
Omura (2011) uses the GMig2 provided by the GTAP (Global Trade Analysis Project),
2
See Dixon and Jorgenson (2013) for CGE analysis.
3
See Walmsley et al. (2005) for details on the GMig2 model.

which is a standard CGE model; however, the GTAP data are problematic in terms of accuracy.4
Conversely, our analysis uses a more accurate and detailed Japanese input-output (IO) table and
labor data. Moreover, while he analyzed the effects of past inflows of foreign workers, we
analyze the effects of future inflows. In addition, he analyzes the effect of capital accumulation
using a static model by assuming a steady state. However, we use a recursive dynamic model to
analyze the dynamic impacts. Lastly, Shimasawa and Oguro (2010) use a dynamic one-sector
overlapping generation model, and they focus mainly on the long-run effects. In contrast, we
assume a multi-sector model and analyze the sectoral effects of foreign labor inflow, and our
analysis focuses on short- and medium-term impacts.
In the simulation, we assume that Japan accepts 266,000 foreign workers every year for
two decades, from 2010 to 2030. According to the NIPSSR estimate, the working-age
population decreases by 17.1% over the two decades from 2010 to 2030. The number of foreign
workers in our scenario (266,000 × 20 years = 5.32 million) is equal to half of the working-age
population reduction. In the main scenario, we assume that the foreign workers flowing into
Japan are unskilled workers.
The remainder of the paper is structured as follows: sections 2 and 3 explain the data and
the model used in the simulation; section 4 describes how we treated foreign workers in the
simulation; section 5 presents scenarios for the simulation; section 6 provides an overview of
the benchmark data; section 7 reviews the simulated results; and section 8 concludes the paper.
2. Data
2.1. Benchmark Data
CGE analysis assumes that the economy is at equilibrium under the benchmark data. For
the benchmark data, we use the 2010 IO table of the JIP Database 2013 (Japan Industrial
Productivity Database 2013) provided by the Research Institute of Economy, Trade and Industry
(RIETI). 5 Although the original IO table of the JIP Database 2013 has 108 sectors, we
aggregate it into 32 sectors as shown in Table 2.6 We assume that each sector produces one
good. However, the “MIN” sector produces multiple goods due to by-products obtained.
Furthermore, as primary factors, we assume labor (skilled and unskilled) and capital.7 We
use the “Compensation of Employees” data from the IO table as the payment data for labor in
4
A multi-region model requires a global dataset. However, including multiple regions reduces the accuracy of the
data for individual countries.
5
http://www.rieti.go.jp/jp/database/JIP2013/
6
The correspondence table of the integrated 32 sectors to the original 108 sectors is available on request.
7
We consider the specific factor (resource) in the “MIN” sector.

each sector, and the sum of “Operating Surplus” and “Consumption of Fixed Capital” as the
capital payment. For final demand, we consider “household consumption,” “government
consumption,” “investment,” and “export.” The final demand data are also derived from the IO
table.
2.2. Labor Data
In the analysis of foreign labor inflow, we divide labor into “skilled workers” and
“unskilled workers.” Of course, classifying labor into only two types is not ideal because of its
diversity in many different aspects (e.g., gender, habitation, education level, qualification/ability,
age). However, it is difficult to consider a wide variety of labor categories in a general
equilibrium model. Thus, we divide labor into only the two types.
To consider two types of labor, we need to divide the payments for labor, the number of
laborers, and wage rates in each sector according to the types of labor. In this paper, we divide
skilled and unskilled labor from the viewpoint of job categories. The JIP data provide
information regarding the number of workers according to the following seven job categories:
“Technicians and associate professionals,” “Officials and managers,” “Clerks,” “Sales workers,”
“Services workers,” “Plant and machine operators, and assemblers,” and “Others.” We regard
labor in the first two categories as skilled and labor in other categories as unskilled. The same
classification is adopted by, for example, the GTAP data and Kiyota (2014).
In Japan, there are already foreign workers. Therefore, the labor data will contain not only
Japanese but also foreign workers. Ideally, it is better to distinguish Japanese workers and
foreign workers who were already working in Japan. In simulating a general equilibrium model,
however, it is very difficult to divide workers in the existing data into Japanese and foreign
workers because of the difficulty in constructing the data and the model.8 Consequently, we do
not explicitly separate foreign workers who have already been in Japan (instead, we regard them
as Japanese). Thus, we analyze only the newly accepted inflow of foreign labor.
3. The Model
The model is a multi-sector recursive dynamic model of Japan over 20 years, from 2010
(the benchmark year) to 20309. All markets are considered perfectly competitive, and all
economic agents (firms, households, and governments) act as price takers. Firms maximize their
profits by producing goods using intermediate inputs and primary factors. We assume a
8
For instance, we need to divide sectoral data into Japanese and foreign labor.
9
The appendix provides an algebraic representation of the model.

representative household to be one that supplies primary factors to firms and subsequently uses
income for consumption and savings. The government collects revenue through a variety of
taxes, which funds government consumption.
3.1. Production Side
First, regarding the behavior of firms, they have a “constant returns to scale” technology
with regard to deciding the amount of input and output to maximize profit. Figure 1 shows the
production function, which is a multi-stage CES function. Variables, such as E_KL and E_LL,
represent the elasticity of substitution. Firms use intermediate inputs and primary factors
(capital stock and labor). As previously explained in section 2, we divide labor into skilled and
unskilled.
In the production function in Figure 1, “skilled labor” and “unskilled labor” are first
aggregated into a labor composite, and the labor composite and capital are aggregated into a
primary factor composite. Finally, the output is determined using a fixed coefficient aggregation
of the primary factor composite and other intermediate inputs. When we analyze the impacts of
foreign labor inflow, substitution between “skilled” and “unskilled” labor and substitution
between labor and capital can play an important role. The value of the elasticity of substitution
is provided in section 3.6. Therefore, our model is a standard CGE model, except that labor is
divided into two types (our model is similar to, for example, the GTAP model).10 The produced
goods are allocated to foreign and domestic markets through a constant elasticity of
transformation (CET) function.
In a general equilibrium model, it is often assumed that the allocation of capital and labor
across sectors is determined such that factor prices are equalized in all sectors. In this paper,
however, we consider the differences in wage rates in different sectors that are observed in the
actual economy. Therefore, we assume that the production factors in each sector are imperfect
substitutes, and they are thus allocated through a CET function. This assumption limits the
mobility of primary factors across sectors. A sensitivity analysis of this assumption is performed
subsequently.
3.2. Household
To represent the demand side, we assume a representative household. The household earns
its income by providing production factors to firms and uses its income for consumption and
10
For details on the GTAP model, see Hertel (1999).

savings. We assume the saving rate as constant. To maximize utility, the household determines
its patterns of consumption, and its utility function is a one stage constant elasticity of
substitution (CES) function, as shown in Figure 2 (actually it is a Cobb-Douglas function
because we assume E_CC＝1). Savings are used for investment, which, in turn, is used for
capital stock accumulation.
If we were to divide the households according to the types of labor (skilled and unskilled),
we could evaluate policy effects from a variety of viewpoints. However, it is difficult to divide
the households because of dataset limitations 11 ; therefore, we assume one representative
household. As a result, we can distinguish the income of skilled labor from that of unskilled
labor, but we cannot distinguish their respective utilities (welfare).
3.3. International Trade
We assume that Japan is a small country (terms of trade are fixed). Similar to other CGE
analyses, we use the Armington assumption, which implies that domestically produced and
imported goods are imperfect substitutes. Domestic and imported goods are aggregated through
a CE function.
In this model, the current account is expressed as follows:
Current account = Trade balance – Remittance abroad
In other words, the current account is the trade balance minus remittances made by foreign
workers. If there is no remittance, the current account is equal to the trade balance. We assume
that the exchange rate (the price of foreign currencies) is determined such that the current
account is equal to the benchmark value.
The IO table of the JIP Database does not have tariff data (it has only the sum of imports
and tariffs). Goto (2010) indicates that the existence of tariffs can have an important role when
analyzing the effects of foreign labor inflows.12 Therefore, we introduce tariffs by separating
tariff data from imports that include the tariff. To do so, we use information of the GTAP
database.
3.4. Government
Governments obtain revenues from taxes, which fund government consumption. We
11
To devide the households according to the types of labor, we need to devide consumption of individual goods,
capital income and tax payments according to the types of labor. To do this division with accuracy, we need the
detailed data of consumption, income and tax data which are divided according to labor type. However, there are only
incomplete and insufficient datasets as of now.
12
The effect is called the “Uzawa effect” in Goto (2010).

consider taxes on production, tariffs, and a lump-sum tax on households. The lump-sum tax is
adjusted so that government consumption is constant at the benchmark value.
3.5. Structure of the Dynamics
This model is a recursive dynamic model used to solve a statics model repeatedly. Capital
stock is accumulated through investments made by the household and evolves according to the
following relation:
𝐾𝑡+1 = (1 − 𝛿)𝐾𝑡 + 𝐼𝑡 ,
where 𝐾𝑡 is the capital stock in period 𝑡, 𝐼𝑡 is investment in period 𝑡, and 𝛿 is the capital
depreciation rate. We adjust 𝛿 so that GDP in 2030 in the business as usual (BAU) scenario
with no foreign labor inflow is equal to GDP in 2010.
In the dynamic model, foreign labor inflow affects capital accumulation. That is, foreign
labor inflow increases production and thereby income. The increase in income leads to
investment and promotes capital stock accumulation. This generates further production
increases. To check the size of the capital accumulation effect, we consider the static model in
the sensitivity analysis.
3.6. Elasticity of Substitution
Table 3 presents the exogenously determined elasticity of substitution and transformation.13

E_KA and E_LA are the elasticities of transformation in the CET function that determine the
allocation of capital and labor between sectors. E_DM is determined by the value from the
GTAP data. However, for service goods, we set the value to 1, which is smaller than the value in
the GTAP data because Japan is an island and it is hard to trade service goods. In E_XD, we set
a value of 4 for agriculture, forestry and fishery, and industrial products and a considerably
smaller value of 0.5 for service goods. Similarly, we use the value from the GTAP data for
E_KL. With regard to the elasticity of substitution and transformation of labor, which are E_KL,
E_LL, and E_LA, etc., we conduct a sensitivity analysis and confirm how much influence the
value change has on the calculated result.
4. Assumptions for Foreign Labor
There are various approaches to acceptance of foreign labor. For example, we can assume
13
E_N is the elasticity of substitution between a specific factor and other inputs in the MIN sector.

that the number of foreign workers is determined endogenously in the model. This study,
however, assumes that the number of foreign workers flowing into Japan is exogenously
determined. This is because the Japanese government can control the number of foreign workers
by adjusting the number of working visas.
In addition, we assume that foreign labor flowing to Japan is unskilled. In the current
situation, foreign laborers with high skills and knowledge can already work in Japan because the
Japanese government provides them with working visas. The topic under discussion in Japan is
the liberalization of unskilled foreign labor. Therefore, this paper focuses on the acceptance of
unskilled foreign labor. However, because the assumption that only unskilled labor would
increase is unrealistic, we also analyze the case where not only unskilled but also skilled labor
flows into Japan.
Furthermore, we assume that Japanese labor is a perfect substitute for foreign labor. When
we analyze the impacts of the foreign labor acceptance, the possibility of substitution between
Japanese labor and foreign labor plays a very important role. If Japanese and foreign labor are
highly substitutable, foreign labor inflow means more rivals for Japanese laborers and therefore
deteriorates working conditions (particularly the wage rate) for Japanese labor. In contrast, if
Japanese and foreign labor are complements, foreign labor inflow is likely to have a positive
effect on Japanese labor. The degree of substitution (or complementarity) depends on various
factors and is difficult, although important, to quantify.
We consider foreign workers, but they are more than just a workforce. First, foreign
workers pay taxes on their income (labor income). These taxes include not only income and
local residential tax but also social security payments. The amount of tax they pay depends on
income classes due to the progressive taxation system adopted in Japan. According to Ono et al.
(2013), the tax rate (burden ratio) for the lowest income class is approximately 10%. As the
income of unskilled foreign workers is likely to be low, we assume that their tax rate is 10%.
This means that if the income of foreign workers is, for example, 1 million yen, they pay
100,000 yen as tax. We conduct a sensitivity analysis on the tax rate in a subsequent section.
In our analysis, remittances to foreign countries are important. Foreign workers, who have
family in their home country, may remit most of their income. On the contrary, foreign workers
accompanied by their family for the purpose of a long-term stay may remit only a small amount.
The amount of remittance changes the amount of money spent in Japan and thus affects the
Japanese economy. For example, if the amount of remittances is low, most foreign workers’
incomes will be spent in Japan. In the simulation, we assume the remittance rate to be 20%.
That is, foreign workers remit 20% of after-tax income. A sensitivity analysis of the remittance
rate is then conducted.
We assume that the rest of the income is used for consumption and savings. Furthermore,

foreign workers in this model have a relatively low income; thus, we assume that their saving
rate is 10%. In other words, foreign workers save 10% of their disposable income and use the
rest for consumption.14 Because we assume that foreign workers have a similar utility function
to the Japanese, they share the same consumption pattern as a Japanese household.
5. Policy Scenarios
We analyze the scenarios in Table 4. As the BAU scenario is a reference case in which
there is no foreign labor inflow, we first solve this scenario and derive the dynamic equilibrium
without foreign labor inflow. Subsequently, we solve the other scenarios with foreign labor
inflow and examine how the equilibrium changes from the BAU scenario.Scenario FL assumes
that Japan accepts unskilled foreign workers. As previously explained in section 4, the ongoing
debate about foreign labor relates to the acceptance of labor that does not require high skills and
abilities. Thus, we focus mainly on the inflow of unskilled labor (workers). Additionally, the
number of foreign workers that will flow into Japan is important, but there is no clear number
available. Therefore, we assume that the number of foreign workers flowing into Japan is equal
to half of the decrease in the Japanese labor force during 2010–2030, which is 5.32 million
(266,000 a year). According to the NIPSSR estimate, the working-age population decreases by
17.1% over the two decades from 2010 to 2030. This corresponds to a decrease of 10.62 million
in the labor force in our model. Thus, 5.32 million foreign laborers equal half of the
working-age population reduction. There are no definite criteria for accepting the number of
foreign workers; however, the “Choice for the Future” model developed by the Council on
Economic and Fiscal Policy of the Japanese government argues for the acceptance of 200,000
foreign workers a year, which is sufficiently similar to our scenario.15
The increase in foreign labor in scenario FL is introduced into this model as an increase in
the total labor supply, which is allocated across each sector endogenously (allocated according
to the CET function). However, there is the opinion that we should limit the sectors that accept
foreign workers to sectors with a labor shortage. FL_A and FL_B are scenarios that represent
the acceptance of foreign workers only in certain sectors. In FL_A, we assume that only “AGR,”
“CNS,” and “MED,” which are sectors with serious labor shortages, accept foreign labor.
However, FL_B is a scenario in which “CHM,” “PAC,” “ELC,” “TRN,” “NFM,” “PRE,” and
“GMA,” which are manufacturing sectors with high wage rates, accept foreign labor. In FL_A
and FL_B, foreign labor increases only in specific sectors, which does not necessarily mean that
14
From savings, capital income occurs. However, we assume there is no the capital income as it is difficult to
separate payment to a foreigner from capital income. This issue requires further study.
15
“Choice for the Future” Committee: http://www5.cao.go.jp/keizai-shimon/kaigi/special/future/
10

total employment in these sectors increases. This is because Japanese labor can move among
sectors. If the wage rate of a sector decreases significantly due to the acceptance of foreign labor,
the Japanese labor may move to other sectors. Therefore, total sector employment does not
increase.
Finally, FL_SK is a case in which we accept not only unskilled foreign labor but also
skilled foreign labor. In this scenario, we assume that 20% of foreign labor coming to Japan (in
other words, 5.320.2 million) is skilled labor. We assume 20% because approximately 20% of
the existing labor in Japan is skilled labor.
6. Characteristics of the Benchmark Data
Before examining the simulation results, it is worth noting that the benchmark data reveal
the situation in Japan. Figure 3 shows wage rates in the benchmark year16. Wage rates are
normalized such that the wage rate of unskilled labor in the AGR sector is equal to unity. This
figure shows that there is a large difference in wage rates across sectors. While wage rates in
“PAC,” “EGW,” “PUB,” and “WAW” are high, the wage rate in “AGR” is extremely low.
Figure 4 represents the share (%) of payments to unskilled labor in production costs.17 If
the payment share to unskilled labor is high, the sector is regarded as unskilled labor-intensive.
The shares of unskilled labor payments in service sectors such as “COM,” “OPS,” “TRS,”
“BSE,” “WAW,” and “PUB” are relatively high. Additionally, the values for CNS and some
manufacturing sectors are high as well. According to the Rybczynski theorem, when the
endowment of a factor increases, the production of sectors using the factor intensively increases.
Therefore, we expect that the production of unskilled labor-intensive sectors to increase with
increases in unskilled foreign labor.
7. Simulation Results
In this section, we present the simulation results.18 In the following section, we focus on
the values of the variables in the last time period of the simulation (specifically, the year 2030).
Table 5 reports the values of various variables in 2030, and Table 6 reports the percentage
change from the BAU values in 2030. We explain the simulation results using graphs.
16
Appendix A-1 explains how these wage rates are calculated.
17
For example, it is approximately 20% in sector AGR. This means that the payment to unskilled labor accounts for
20% of the total cost in AGR.
18
We solve the model with GAMS (The General Algebraic Modeling System). All simulation results and the
program for the simulation are available from authors upon request.
11

7.1. Impacts on Foreign Labor
Figure 5 shows income, tax payment, remittance, and consumption of foreign labor (all
values are deflated using a consumer price index). In scenario FL, unskilled foreign labor earns
an income of 24.7 trillion yen, pays income taxes of 2.5 trillion yen, remits 4.9 trillion yen, and
uses the rest for consumption and saving.
In scenario FL_A, only sectors AGR, CNS, and MED accept foreign labor. In this scenario,
the income of foreign labor is much smaller than that in the FL scenario. This is because wage
rates in the three sectors are low and the inflow of foreign labor lowers the wage rates of these
sectors significantly. The smaller income in FL_A leads to smaller tax payments and remittances
and less consumption. Similarly, in scenario FL_B, in which manufacturing sectors with high
wage rates accept foreign labor, the income of foreign labor is smaller than in FL.
Scenario FL_SK assumes that 20% of foreign labor is skilled labor. The number of
unskilled foreign labor decreases; therefore, the incomes, tax payments, and remittances of
unskilled foreign labor decrease as well. However, the consumption of total foreign labor
increases relative to FL because skilled labor receives higher income; thus total income of
foreign labor increases.
7.2. Impacts on Japan
In section 7.1, we examined the impacts of foreign labor inflows specifically on foreign
labor. However, the impacts on Japan are more important to Japanese policy making. Figure 6 is
the percentage change in wage rates and rental prices (2030, %). As explained in Section 3,
wage rates are different in different sectors, and Figure 6 shows averages. Because foreign and
Japanese labor are perfect substitutes, wage rates for foreign labor and Japanese labor are the
same. Additionally, because this model assumes a fixed supply of Japanese labor, the changes in
wage rate and labor income for Japanese labor are the same.
In scenario FL, the wage rate for unskilled labor falls by 4.6% and the wage rate for skilled
labor and the rental price increase by 1.5% and 3.6%, respectively. That is, in this scenario, an
increase in foreign labor generates losses for unskilled Japanese labor and gains for skilled
Japanese labor and capital owners. The direction of impacts in scenario FL_A are the same as
those in FL. However, the size of the impacts becomes smaller. In FL_B, the negative impact on
the wage rate for unskilled labor shrinks and the positive impact on wage rate for skilled labor
expands in comparison to FL. Therefore, Japanese workers receive more favorable results in
scenario FL_B than in scenario FL.
In scenario FL_SK, the wage rate for skilled labor falls substantially as well. This is an
12

expected result because foreign labor coming to Japan includes the skilled labor in FL_SK. The
wage rate for unskilled labor falls, but its magnitude shrinks compared to that of the FL scenario.
The impact on rental prices in FL_SK is similar to the impact in FL. These results show that the
impact of foreign labor on Japanese labor changes according to changes in foreign labor types.
Consequently, the inflow of foreign labor generates losses for Japanese labor of the same
type. In particular, an inflow of unskilled foreign labor decreases the wage rate of unskilled
labor by 0.9%~4.6%, and therefore has non-negligible negative impacts on unskilled Japanese
labor. However, an inflow of unskilled labor has a positive impact on skilled labor because it
raises the wage rate for this type of labor. Additionally, the inflow of unskilled foreign labor
generates gains for capital owners by raising the rental price of capital.
Subsequently, we examine the macroeconomic impacts of foreign labor on Japan. Figure 7
reports percentage changes in GDP and the consumption (utility of the representative
household)19 and income of the Japanese (year 2030, %). In scenario FL, GDP increases by
approximately 6.5%. This shows that the foreign labor inflow in scenario FL has a very large
positive impact on GDP in Japan. Similarly, Japanese income and consumption increases, but
the magnitude of the increase is very small compared to the magnitude of the increase in the
GDP. This is because most of the increase in GDP accrues to foreign labor income. As an
economic indicator, GDP usually attracts considerable attention compared to income. However,
income is a more important indicator of the welfare of Japanese people. According to our
simulation, the positive impact of foreign labor inflow on Japanese income is much smaller than
that on GDP.
Most of the macro variables behave similarly in the other scenarios. However, the
magnitude of change in the variables alters slightly according to the scenario. The rate of
increase in GDP, income, and consumption become smaller in FL_A and larger in FL_B. This is
because foreign labor enters into sectors with low wage rates in FL_A and into sectors with high
wage rates in FL_B. In FL_SK, GDP is slightly larger than in FL, but Japanese incomes become
smaller. This indicates that the additional income in FL_SK flows mainly towards foreign labor.
The impacts of foreign labor inflow change according to the type of labor (only unskilled
or both unskilled and skilled) and the sectors that accept those types of labor. However, GDP
and Japanese incomes and consumption increase in all scenarios. In particular, the rate of
increase in the GDP is very high (6.5% in scenario FL). In this sense, foreign labor inflow has
positive impacts on Japan as a whole. However, note that the magnitude of the increase in
Japanese income and consumption is relatively small because most of the additional income
accrues to foreign labor.
19
“Consumption” here is aggregate consumption that is equivalent to utility of the representative household.
Therefore, change in consumption means change in aggregate welfare.
13

7.3. Impacts on Sectoral Output
Next, we examine the impacts of foreign labor inflow on sectoral output. Table 7 reports
the percentage changes in output by sector (year 2030, %). Figure 8 depicts scenario FL, in
which the sector with the highest rate of increase in output is ELC (12.5% increase), and the
sector with the lowest rate is PUB (1.0%). This shows that rates of increase in output are
different across sectors.
In Figure 4, we see which sectors are relatively unskilled labor-intensive. Figure 8 shows
that the rates of increase in the outputs of unskilled labor-intensive sectors are not necessarily
large. For example, the outputs of ELC and NFM increases substantially; however, the share of
unskilled labor in these sectors is not high. The results reported in Figure 8 include not only the
direct effects of foreign labor inflow but also the indirect effects such as price changes.
Therefore, these results indicate that the indirect effects are strong.
Table 7 reports changes in outputs in the other scenarios. In scenario FL_A, only sectors
AGR, CNS, and MED accept foreign labor. Thus, it is expected that the output of these three
sectors will largely increase. However, the output changes of the three sectors in FL_A are only
slightly larger than those in FL. The foreign labor inflow into these sectors lowers their wage
rates; thus, Japanese labor, which is mobile across sectors, moves to other sectors. Therefore,
the output of these sectors does not increase much. Recently, there has been serious concerns
regarding labor shortages in sectors such as agriculture, construction, and nursing services, and
it has been argued that Japan should accept foreign labor in these sectors. However, our analysis
shows that such a policy will not necessarily have the expected results.
In contrast, in scenario FL_B, the output of sectors that accept foreign labor, with the
exception of CHM and PAC, increases significantly; this differs from scenario FL_A. This
shows that even limiting the sectors that accept foreign labor does not necessarily imply that the
output of these sectors will increase substantially.
7.4. Sensitivity Analysis
7.4.1. Sensitivity Analysis Scenarios
In the previous section, we examined the impacts of foreign labor inflow from various
viewpoints. However, the results of the simulation can vary according to the initial assumptions.
To check for the robustness of simulation results, we conduct a sensitivity analysis. Table 8
describes the scenarios of the sensitivity analysis. The “benchmark” is the scenario analyzed in
14

the previous section. “FLAB” is the scenario in which the number of foreign workers changes.
We consider the following two scenarios: “FLAB (more)” assumes that the number of foreign
workers flowing into Japan is 1.5 times the benchmark value and “FLAB (less)” assumes that it
is 0.5 times. The scenario “Static” assumes a static model without the accumulation of capital
stock. In the benchmark case, foreign labor inflow has effects on investment and capital
accumulation. To assume there is no capital accumulation (constant capital stock), we exclude
the capital accumulation effect.
Scenario “Variable CA” assumes that the foreign exchange rate is fixed, and the current
account is variable. In the benchmark case, we assume that the current account is fixed to the
benchmark value, the current account being the sum of the trade balance and remittances abroad.
Therefore, the constant current account indicates that when we allow foreign labor inflow, the
surplus of the trade balance must increase. In scenario “Variable CA,” we fix the exchange rate
and make the current account variable.
When we analyze the foreign labor inflow, it is likely that substitution between skilled and
unskilled labor and substitution between labor and capital will play important roles. To check
this, we change the values of the elasticity of substitution in the production function. First, in
scenario “EOS_KL,” we change the elasticity of substitution between capital and labor (E_KL
in Figure 1). Second, scenario “EOS_LL” changes the elasticity of substitution between skilled
and unskilled labor (E_LL in Figure 1). In addition, we have one more parameter for labor. In
this model, we assume that labor in different sectors is an imperfect substitute and total labor is
allocated across sectors through the CET function. Therefore, the value of the elasticity of
transformation (E_LA) determines the mobility of labor across sectors. In scenario “EOT_LA,”
we change the value of E_LA.
Remittance is important when analyzing foreign labor inflow. In the scenario “Remittance,”
we change the remittance rate, which is assumed to be 20% in the benchmark case. We consider
the following two cases: a 40% remittance rate and a 0% remittance rate (no remittance). In the
scenario “Tax rate,” we change the foreign labor income tax rate. Even if GDP increases
because of foreign labor inflow, Japanese incomes do not necessarily increase because most of
the additional income may accrue to foreign labor. The tax rate on foreign labor income affects
this outcome. Consequently, we change the tax rate, which is assumed to be 10% in the
benchmark case. Our model also considers import tariffs. While tariffs are not directly related to
foreign labor inflow, Goto (2010) notes that foreign labor inflow can deteriorate the distortion
caused by the tariff. To check this indirect effect, we assume that there is no tariff in the scenario
“No Tariff.”
7.4.2. Results of the Sensitivity Analysis
15

Table 9 reports the results of the sensitivity analysis. All values, except those for “trade
surplus” and “current account,” are the percentage changes from the BAU values (year 2030, %),
and “trade surplus” and “current account” represent level value (2030, trillion yen). Except for
scenario “FLAB,” all scenarios assume the same number of foreign workers as scenario FL.
First, let us examine scenario “FLAB”, which change the number of foreign workers. In
both “FLAB (more)” and “FLAB (less)”, the impacts of foreign labor inflow change
significantly from the benchmark scenario. This shows that the results of the benchmark
scenario depend strongly on the assumption regarding the number of foreign workers (5.32
million for 20 years).
Next, we consider the results from other scenarios. Figure 9 reports the percentage change
in the wage rate of unskilled labor. In all scenarios, the wage rate of unskilled labor falls. This
implies that the impact of unskilled labor on the wage rate is robust against the assumptions of
the model. However, the size of the wage rate decrease changes by scenario. For example, in
scenario “Static,” “EOS_KL (small)” and “EOS_LL (small)”, the decreases in wage rates are
large.
Figure 10 shows the percentage change in the wage rate of skilled labor. The rate of
increase in the wage rate of skilled labor in many cases is similar to that in the benchmark case,
but the rate of increase changes in scenario “Static,” “EOS_KL” and “EOS_LL”. In particular,
the wage rate of skilled labor falls in scenario “EOS_LL (large)”. Figure 11 reports the
percentage change in the rental price of capital, which rises in all scenarios. The rate of increase
in the rental price changes in scenario “Static” and “EOS_KL”. These results imply that the
impacts on factor prices depend strongly on the elasticity parameters in the production function.
Figure 12 reports the percentage change in GDP (year 2030, %). Except for “FLAB”, the
GDP change rate is rather similar (5.6%~7.1%). This means that the model settings do not affect
GDP change. Scenario “Static” generates impacts similar to those of the benchmark case,
indicating that the capital accumulation effect on GDP is small; a different result than that found
by Omura (2011).
Figure 13 reports the percentage change in Japanese incomes. As in the benchmark
scenario, the change in the incomes of the Japanese is generally very small compared to the
change in GDP. The rate of increase in income slightly changes in the “Static” and “Tax rate”
scenarios. In scenario “Static”, the rate of increase in income becomes small. This means that
the capital accumulation effect on income is large. In “Tax rate (high)”, the rate of increase in
the income becomes large. This suggests that if we accept foreign labor, it will be desirable to
impose high tax rates on the incomes of foreign laborers. Figure 14 reports the percentage
change in the consumption of the Japanese, which moves similarly to the income, but with a
16

smaller fluctuation.
7.4.3. Summary of the Sensitivity Analysis
In scenario “FLAB”, the size of the changes in the variables changes significantly. This
means that the impacts of foreign labor inflow depend strongly on the number of foreign
workers flowing into Japan. In all the scenarios, the wage rate of unskilled labor falls and the
rental price of capital rises. In addition, except for in one case, the wage rate of skilled labor
rises. These results indicate that an inflow of (unskilled) foreign labor is likely to generate losses
for unskilled Japanese labor and gains for skilled Japanese labor and capital owners. However,
the size of losses and gains depends strongly on the assumptions regarding the elasticity
parameters. Thus, if we want to analyze the impacts on factor prices, we should pay attention to
the elasticity parameters. In all the scenarios, GDP increases, and its rate of increase does not
change significantly (except for in the “FLAB” scenario). The impacts on the income and
consumption of the Japanese change slightly across scenarios. In particular, the tax rate on the
income of foreign labor affects the income of the Japanese.
8. Concluding Remarks
This paper quantitatively analyzes the effects of foreign labor inflow (mainly unskilled
labor) in Japan. We use a 32-sector CGE model with an analysis period from 2010 to 2030. The
main scenario (scenario FL) assumes that there is an unskilled foreign labor inflow of 5.32
million for 20 years (266,000 per year). In addition, we also consider a scenario that limits the
sectors that accept foreign labor and a scenario where not only unskilled but also skilled labor
come into Japan.
We examined impacts on factor prices, macroeconomic variables, and sectoral output. Our
results are summarized as follows. First, as a result of foreign labor inflow, the wage rate of
unskilled labor falls but the wage rate of skilled labor and the rental price of capital rise. This
means that foreign labor inflow is likely to be detrimental to unskilled Japanese workers and
beneficial to skilled Japanese workers and capital owners. In the main scenario (FL), the rate of
the decrease in the wage rate of unskilled workers is 4.6%, which is a non-negligible negative
impact. When we consider an inflow of skilled labor in addition to unskilled, skilled Japanese
workers also suffer a large loss.
Second, in the main scenario, GDP increases by 6.5%. This means that the foreign labor
inflow assumed in scenario FL has very large positive impacts on GDP. Because of the GDP
increase, Japanese income and consumption increase, too. However, the rates of increase in
17

Japanese income and consumption are not as high. This is because most of the GDP increase
accrues to the income of foreign workers.
Third, an inflow of foreign workers increases the output of all sectors. However, the rates
of output increases are quite different across sectors. For example, the rates of output increases
are generally high in manufacturing sectors, while they are low in sectors such as public
administration, education and research, and medical services, among others. Additionally, the
rates of output increases for unskilled labor-intensive sectors are not necessarily large. If we
limit the sectors that accept foreign workers, the magnitude of the impacts on factor prices and
the macroeconomic variables changes slightly, but their direction is constant. However, the
sectoral impacts change significantly depending on which sectors accept foreign workers.
Recently, there have been concerns regarding labor shortages in sectors such as agriculture,
forestry and fisheries, construction, healthcare and nursing care. We analyze a scenario in which
foreign workers flow into these sectors and show that the output of these sectors increases only
slightly compared to the main scenario. In the scenario in which skilled workers also flow into
Japan, the impacts on macro variables are similar to those in the scenario with only unskilled
workers, but the impacts on factor prices change. This shows that the type of workers has little
impact on Japan as a whole but has a large impact on individual workers.
To check the influence of the model setting and scenarios, we conduct a sensitivity analysis.
The sensitivity analysis shows that if we change the number of foreign workers flowing into
Japan, the size of the impacts of foreign labor acceptance change considerably. In addition, we
find that the impacts on factor prices are affected by the assumptions regarding the elasticity
parameters. Moreover, the sensitivity analysis shows that the impacts on GDP do not change
significantly across scenarios, but that the impacts on Japanese income and consumption depend
on the tax rate applied to the income of foreign labor.
Consequently, we conclude that the acceptance of unskilled foreign workers is beneficial
for Japan as a whole, but it is likely to lead to a large loss of domestic unskilled workers.
Because domestic unskilled workers have relatively low incomes, this outcome would expand
the existing economic disparity, which has recently been recognized as an important policy issue.
Therefore, to generate benefits to as many people as possible, an income redistribution policy
should be implemented with the acceptance of foreign workers.
Finally, we describe the limitations of our analysis and future scope for research. The first
problem of our analysis is data accuracy. For example, we use “Compensation to employee”
from the JIP IO table for the data regarding labor payments. However, the former includes only
payments to employed workers and does not include payments to self-employed workers. Thus,
certain parts of our data could be improved. Second, we consider only the case in which
Japanese and foreign labor are perfect substitutes. However, foreign labor could be
18

complementary to Japanese labor, and thus foreign labor inflows could be beneficial to Japanese
labor of the same type. Additionally, foreign labor inflow in our analysis has the sole effect of
increasing the labor force; we do not consider other effects such as effects on productivity.
Finally, foreign labor inflow has not only an economic impact but also social and cultural
impacts. To argue the foreign labor issue, we need to pay attention to wider points of view. In
this paper, we assume the scenario that 5.32 million foreign workers come to Japan (which is
equal to half of the decrease in the Japanese labor force). However, the acceptance of foreign
labor is an ongoing debate, and it is not yet clear whether the Japanese government would allow
foreign labor inflow. In future studies, we would like to consider more realistic scenarios that
reflect the ongoing debate on the foreign labor issue.
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20

Tables
Table 1：Estimate and transition of the future labor force in Japan (medium mortality variant
projection)
2010 2020 2030 2040
Fertility Working-age Share Working-age Share Working-age Share Working-age Share
population (%) population (%) population (%) population (%)
Low fertility variant 81,735 63.8 73,408 59.7 67,328 59.0 56,056 54.1
Medium fertility variant 81,735 63.8 73,408 59.2 67,730 58.1 57,866 53.9
High fertility variant 81,735 63.8 73,408 58.6 68,073 57.1 59,770 53.7
Data source: NIPSSR, “Population Projection for Japan: 2010–2060 (January 2012)”
Table 2: List of sectors
Symbol Explanation Symbol Explanation

AGR Agriculture, forestry, and fishery PRE Precision instruments
MIN Mining OTH Other manufacturing products
FOO Food products CNS Construction
TEX Textile products EGW Electricity, gas, and heat supply
PPW Pulp, paper, and wooden products WAW Water supply and waste
CHM Chemical products COM Commerce
PAC Petroleum and coal products FAI Financial and insurance
CSC Ceramic, stone, and clay products RES Real estate
IAS Iron and steel TRS Transport
NFM Non-ferrous metal CAB Communication and broadcasting
MET Metal products PUB Public administration
GMA General machinery EDR Education and research
Electrical machinery Medical service, health and social
ELE MED security, and nursing care
Information and communication Other public services
ICE equipment OPS
ELC Electrical equipment BSE Business services
TRN Transportation equipment PSE Personal services
21

Table 3: Elasticity parameter values
Sectors E_DM E_XD E_KL Elasticity Value
AGR 2.4 4.0 0.24 E_KA 4.0
MIN 5.6 4.0 0.20 E_LA 4.0
FOO 2.5 4.0 1.12 E_LL 2.0
TEX 3.8 4.0 1.26 E_N 0.1
PPW 3.4 4.0 1.26 E_CC 1.0
CHM 3.3 4.0 1.26
PAC 2.1 4.0 1.26
CSC 2.9 4.0 1.26
IAS 3.0 4.0 1.26
NFM 4.2 4.0 1.26
MET 3.8 4.0 1.26
GMA, ELE, ICE, ELC, PRE 4.1 4.0 1.26
TRN 3.1 4.0 1.26
OTH 3.2 4.0 1.26
CNS 1.0 0.5 1.40
COM, TRS 1.0 0.5 1.68
EGW, WAW, FAI, RES, CAB, PUB, 1.0 0.5 1.26
EDR, MED, OPS, BSE, PSE
Table 4: Scenarios
Scenarios Explanation
BAU Reference equilibrium (no foreign labor inflow)
FL Increase in unskilled labor
FL_A Increase in unskilled labor only in AGR, CNS, MED sectors.
FL_B Increase in unskilled labor only in CHM, PAC, ELC, TRN, NFM, PRE, GMA.
FL_SK Increase in unskilled and skilled labor (20% is skilled labor).
22

Table 5: Variable values by scenario (year 2030, trillion yen)
BAU FL FL_A FL_B FL_SK

Income of foreign unskilled workers 0.0 24.7 17.0 20.0 20.0
Remittance by foreign unskilled workers 0.0 4.9 3.4 4.0 4.0
Tax paid by foreign unskilled workers 0.0 2.5 1.7 2.0 2.0
Income of foreign skilled workers 0.0 0.0 0.0 0.0 6.7
Remittance by foreign skilled workers 0.0 0.0 0.0 0.0 1.3
Tax paid by foreign skilled workers 0.0 0.0 0.0 0.0 0.7
Income of Japanese skilled workers 63.7 64.6 63.8 65.7 60.2
Income of Japanese unskilled workers 205.8 196.2 198.9 203.9 198.9
Capital income of Japanese 194.5 205.8 202.9 206.0 206.3
Total income of Japanese 498.2 505.8 503.5 514.3 505.0
Capital stock 1651.7 1686.8 1690.9 1710.6 1687.9
GDP 482.7 514.1 507.3 520.2 516.3
Consumption of Japanese 291.3 297.3 296.1 303.6 297.7
Consumption of all foreing workers 0.0 16.0 11.0 12.9 17.3
Consumption (total) 291.3 313.3 307.1 316.6 315.0
Government expenditure 94.8 94.8 94.8 94.8 94.8
Investment 91.4 96.6 97.4 100.2 96.8
Export 72.0 80.2 78.0 88.8 80.7
Import 65.6 69.5 68.6 78.5 69.7
Trade surplus 6.5 10.7 9.3 10.3 11.0
Current account 6.5 6.5 6.5 6.5 6.5
Wage rate for skilled workers 6.7 6.8 6.7 6.9 6.3
Wage rate for unskilled workers 4.9 4.6 4.7 4.8 4.7
Rental price 0.8 0.8 0.8 0.8 0.8
Table 6: Percentage change from BAU value (2030, %)
FL FL_A FL_B FL_SK

Wage rate for unskilled workers -4.64 -3.35 -0.92 -3.34
Wage rate for skilled workers 1.53 0.20 3.15 -5.41
Rental price 3.62 1.92 2.29 3.81
Capital income 5.83 4.34 5.94 6.08
Income of Japanese 1.52 1.05 3.23 1.35
Capital stock 2.13 2.37 3.56 2.19
GDP 6.49 5.08 7.75 6.95
Consumption of Japanese 2.05 1.63 4.23 2.18
Total consumption 7.55 5.40 8.67 8.13
Government expenditure 0.00 0.00 0.00 0.00
Investment 5.70 6.50 9.60 5.89
Export 11.28 8.26 23.25 12.09
Import 5.97 4.69 19.73 6.34
Exchange rate -0.10 0.53 -10.75 0.11
Trade surplus 65.16 44.53 58.98 70.45
Current accdount 0.00 0.00 0.00 0.00
23

Table 7: Output percentage change by sector (2030, %)
FL FL_A FL_B FL_SK FL FL_A FL_B FL_SK
AGR 8.3 8.8 2.5 8.2 PRE 11.6 8.2 64.5 13.1
MIN 11.3 7.9 -29.6 12.0 OTH 9.6 6.9 1.3 9.9
FOO 8.4 6.5 4.9 8.4 CNS 5.7 6.2 9.1 5.9
TEX 10.5 7.2 -20.7 9.8 EGW 7.3 5.5 9.1 7.7
PPW 8.4 6.7 -1.1 8.5 WAW 6.2 4.5 6.4 6.6
CHM 6.7 5.7 6.2 7.7 COM 8.4 6.0 7.1 8.6
PAC 6.7 5.3 8.0 7.1 FAI 7.4 5.4 7.3 7.7
CSC 8.3 7.1 4.6 8.6 RES 4.6 4.0 6.1 4.9
IAS 7.3 6.8 -0.3 7.5 TRS 8.7 6.1 6.4 8.8
NFM 10.4 8.1 32.4 10.8 CAB 6.7 5.3 7.6 7.6
MET 8.6 7.1 5.2 8.8 PUB 1.0 0.7 1.0 1.1
GMA 9.9 8.0 50.6 10.6 EDR 2.4 1.8 2.4 3.9
ELE 10.9 7.9 -5.0 12.2 MED 2.4 2.6 2.9 3.2
ICE 8.2 6.9 -4.6 10.1 OPS 9.1 5.9 7.5 10.6
ELC 12.5 8.8 53.2 14.2 BSE 7.0 5.5 8.1 7.6
TRN 9.9 7.3 38.0 10.5 PSE 8.3 5.7 7.7 8.6
Table 8: Sensitivity analysis scenarios

Scenarios Explanation
Benchmark Benchmark case
FLAB (more) More foreign labor (benchmark case x 1.5)
FLAB (less) Less foreign labor (benchmark case x 0.5)
Static Static model (no change in capital stock)
Variable CA Variable current account (fixed foreign exchange rate)
EOS_KL (large) Large E_KL (benchmark value x 2)
EOS_KL (small) Small E_KL (benchmark value x 0.5)
EOS_LL (large) Large E_LL (benchmark value x 2)
EOS_LL (small) Small E_LL (benchmark value x 0.5)
EOT_LA (large) Large E_LA (benchmark value x 2)
EOT_LA (small) Small E_LA (benchmark value x 0.5)
Remittance (high) High remittance rate (40%)
Remittance (low) No remittance
Tax rate (high) Hign income tax rate for foreign labor (20%)
Tax rate (low) Low income tax rate for foreign labor (5%)
No tariff No tariff
24

Table 9: Sensitivity analysis results
Wa ge ra te Wa ge ra te Cons umpti
Rental Ca pi tal Income of Cons umpti Excha nge Trade Current
(s ki l l ed (uns ki l l ed
pri ce Stock Ja pa nes e
GDP
on
on of
ra te
Export Import
l a bor ) l a bor) Ja pa nes e surplus account
Benchmark 1.53 -4.64 3.62 2.13 1.52 6.49 7.55 2.05 -0.10 10.67 6.46 11.28 5.97
FLAB (more) 2.28 -6.66 5.32 3.19 2.36 9.66 11.24 3.17 -0.18 12.64 6.46 16.75 8.97
FLAB (less) 0.77 -2.43 1.85 1.06 0.73 3.27 3.80 0.99 -0.03 8.61 6.46 5.70 2.98
Static 0.71 -5.52 4.74 0.00 0.50 5.60 6.58 0.87 -0.41 10.23 6.46 10.71 5.30
Variable CA 1.50 -4.66 3.65 2.05 1.49 6.45 7.38 1.89 0.00 11.21 7.00 11.73 5.80
EOS_KL (large) 2.43 -3.45 1.86 1.89 1.54 6.00 7.04 2.00 0.15 10.46 6.46 10.40 5.47
EOS_KL (small) 0.29 -5.97 6.92 2.46 1.41 7.14 8.23 2.08 -0.49 10.94 6.46 12.46 6.62
EOS_LL (large) -0.76 -4.09 3.61 2.11 1.45 6.50 7.57 2.04 -0.05 10.69 6.46 11.30 5.96
EOS_LL (small) 5.76 -5.66 3.64 2.16 1.66 6.47 7.51 2.08 -0.19 10.62 6.46 11.23 5.99
EOT_LA (large) 1.55 -4.60 3.64 2.10 1.54 6.47 7.55 2.06 -0.18 10.67 6.46 11.31 6.01
EOT_LA (small) 1.49 -4.73 3.59 2.18 1.48 6.52 7.54 2.04 0.03 10.67 6.46 11.23 5.91
Remittance (high) 1.51 -4.55 3.61 1.88 1.46 6.35 6.08 1.95 0.91 14.80 6.46 15.86 4.70
Remittance (low) 1.56 -4.73 3.65 2.38 1.59 6.63 9.02 2.16 -1.15 6.46 6.46 6.71 7.37
Tax rate (high) 1.62 -4.55 3.52 2.31 2.11 6.57 7.68 2.80 -0.18 10.21 6.46 10.87 6.22
Tax rate (low) 1.49 -4.69 3.67 2.04 1.23 6.45 7.48 1.68 -0.06 10.90 6.46 11.48 5.84
No tariff 1.53 -4.65 3.63 2.12 1.50 6.48 7.52 2.03 -0.08 9.38 5.17 11.37 5.95
All the values except the trade surplus and current account values indicate the percentage change from BAU values (2030, %).
Trade surplus and current account are level values (2030, trillion yen).

Figures
Goods
Production
Leontief
Intermediate inputs KL
E_KL
Capital stock
E_LL
Unskilled labor Skilled labor
Figure 1: Production function
Utility
E_CC
Consumption goods Consumption goods
Figure 2: Utility function
26

16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
PPW
PUB
CHM
MET
AGR
EGW
COM
EDR
MED
MIN
PAC
NFM
ICE
FAI
PSE
OTH
FOO
TEX
GMA
WAW
BSE
IAS
ELE
ELC
TRN
TRS
CSC
CAB
PRE
CNS
RES
OPS
Skilled Unskilled
Figure 3: Wage rate by sector at the benchmark equilibrium.
45
40
35
30
25
20
15
10
0
PPW
EDR
AGR
CHM
COM
MIN
NFM
MET
ICE
PAC
FAI
MED
EGW
PUB
PSE
FOO
WAW
TEX
CSC
IAS
GMA
ELE
ELC
OTH
CAB
BSE
TRN
RES
TRS
PRE
CNS
OPS
Figure 4: Share of payment to unskilled labor (%).
27

0.0 5.0 10.0 15.0 20.0 25.0 30.0
Income of foreign
unskilled workers
Remittance by foregin
unskilled workers
Tax paid by foregin

unskilled workers
Consumption of
all foreing workers
FL FL_A FL_B FL_SK
Figure 5: Impacts on foreign workers (2030, trillion yen).
6.00
4.00
2.00
0.00
FL FL_A FL_B FL_SK
-2.00
-4.00
-6.00
Wage rate for unskilled workers Wage rate for skilled workers Rental price
Figure 6: Wage rates and rental prices (2030, %).
28

9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
FL FL_A FL_B FL_SK
GDP Income of Japanese Consumption by Japanese
Figure 7: Percentage change in GDP, income, and consumption (2030, %)
14.0
12.5
12.0 11.3 11.6
10.9
10.5 10.4
9.9 9.9 9.6
10.0 9.1
8.4 8.6 8.4 8.7
8.3 8.4 8.3 8.2 8.3
8.0 7.3 7.3 7.4
7.0
6.76.7 6.7
6.2
5.7
6.0
4.6
4.0
2.42.4
2.0
1.0
0.0
PPW
EDR
AGR
CHM
COM
MIN
NFM
MET
ICE
PAC
FAI
MED
EGW
PUB
PSE
FOO
ELC
WAW
OTH
TEX
CSC
IAS
GMA
ELE
CAB
BSE
TRN
RES
TRS
PRE
CNS
OPS
Figure 8: Percentage change in output (2030, %).
29

-2.00
-1.00
-7.00
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
2.00
3.00
4.00
6.00
7.00
0.00
1.00
5.00
Benchmark Benchmark
FLAB (more) FLAB (more)
FLAB (less) FLAB (less)
Static Static
Variable CA Variable CA
EOS_KL (large) EOS_KL (large)
EOS_KL (small) EOS_KL (small)
30
EOS_LL (large) EOS_LL (large)
EOS_LL (small) EOS_LL (small)
EOT_LA (large) EOT_LA (large)
EOT_LA (small) EOT_LA (small)
Remittance (high) Remittance (high)
Remittance (low) Remittance (low)
Tax rate (high) Tax rate (high)
Tax rate (low) Tax rate (low)

No tariff No tariff
Figure 10: Percentage change in the wage rate of skilled labor (2030, %).
Figure 9: Percentage change in the wage rate of unskilled labor (2030, %).
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
10.00
12.00
0.00
2.00
6.00
8.00
4.00
Benchmark Benchmark
Static Static
31

Figure 12: Percentage change in GDP (2030, %)

Figure 11: Percentage change in rental price (2030, %).

No tariff No tariff
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.00
0.50
1.00
1.50
2.00
2.50
Benchmark Benchmark
Static Static
32
Figure 13: Percentage change in Japanese income (2030, %).

Figure 14: Percentage change in Japanese consumption (2030, %).
No tariff No tariff
A Appendix
A-1. Labor Data (the initial wage rates in individual sectors)
In this appendix, we explain how we determined wage rates in the initial equilibrium. JIP data includes
“the number of employees” by occupation and sectors. According to this data, the total number of
employees in all sectors is 62,512,899 and the number of skilled and unskilled workers is 11,495,845 and
51,017,054 respectively.
Let 𝑉𝑖 denote payment to labor in sector 𝑖. The, we have the following relation:
𝑉𝑖 = 𝑤𝑖𝑆 𝐿𝑆𝑖 + 𝑤𝑖𝑈 𝐿𝑈𝑖 (A − 1)
where
𝑤𝑖𝑆 and 𝑤𝑖𝑈 are wage rates for skilled and unskilled workers in sector 𝑖.
𝐿𝑆𝑖 and 𝐿𝑈𝑖 are the number of skilled and unskilled workers in sector 𝑖.
We assume that 𝑉𝑖 is equal to the value of “Compensation of Employees” in JIP data. In addition, we
determine the value of 𝐿𝑆𝑖 and 𝐿𝑈𝑖 by “the number of employees” of JIP data. Then Eq. (A-1) means that
if we give the value of one wage rate (for example, 𝑤𝑖𝑆 ), the other (𝑤𝑖𝑈 ) is determined by Eq. (A-1).
Namely, we cannot determine wage rates of skilled and unskilled workers independently.
To determine wage rates, we assume that “wage rate of skilled worker in sector 𝑖 is 100 × 𝑋𝑖 % higer
than that of unskilled workers”. This means 𝑤𝑖𝑆 = (1 + 𝑋𝑖 )𝑤𝑖𝑈 . Substitute this relation into (A-1), we have
𝑉𝑖 = (1 + 𝑋𝑖 )𝑤𝑖𝑈 𝐿𝑆𝑖 + 𝑤𝑖𝑈 𝐿𝑈𝑖
By rewriting this, we have
𝑉𝑖
𝑤𝑖𝑈 =
(1 + 𝑋𝑖 )𝐿𝑆𝑖 + 𝐿𝑈𝑖
We determine the initial wage rates in each sector by this relation.
To derive the value of 𝑋𝑖 , we use “Basic Survey on Wage Structure (Chingin Kozo Kihon Tokei
Chosa)”20. According to this survey, wage rate for “Plant and machine operators, and assemblers” is
267,400 yen per month and wage rate for “Technicians and associate professionals,” “Officials and
Mangers,” “Clerks” is 387,400 per month. We regard the former as wage rate for unskilled workers and
the latter as wage rate for skilled workers and calculate 𝑋𝑖 as follows
387400
𝑋𝑖 = − 1 = 0.45
267400
Note that we assume 𝑋𝑖 is common for all sectors.
20
http://www.mhlw.go.jp/english/database/db-l/wage-structure.html (accessed May 20th, 2016)
33

A-2. Model Description
 In this appendix, we present algebraic representation of the simulation model.

 All functions are written in calibrated share form. For the details of calibrated share form of CES
function, see the following article:
 Rutherford T. (1995). “Constant Elasticity of Substitution Functions: Some Hints and Useful
Formulae”, Manuscript, University of Colorado.
Available at http://www.gams.com/solvers/mpsge/cesfun.htm
 All reference prices in calibrated share form are omitted for notational simplicity.
A-2.1. Notation
Index
Notation Explanation
𝑖, 𝑗 Index of goods and sectors
𝑙 Index of labor type {SKL, USK}
𝑁𝑆 Set of sectors which do not use specific factors
Activity variables.
𝑄𝑖 Production level
𝑋𝐷𝐴𝑖 Allocation to domestic and export supply
𝐾𝐿𝑖 Aggregation of capital and labor
𝐶 Aggregate consumption (= utility)
𝐼𝑉 Investment
𝐺 Government expenditure
𝐸𝑋𝑖 Export activity
𝐼𝑀𝑖 Import activity
𝐴𝑖 Armington aggregation
𝐾𝐴 Capital allocation activity
𝐿𝐴𝑙 Labor allocation activity
𝐹
𝐶 Consumption by foreign labor
Unit cost, unit revenue and price index.

𝑟𝑖𝑄 Unit revenue for production
34

𝑐𝑖𝑄 Unit cost for production
𝑟𝑖𝑋𝐷𝐴 Unit revenue for domestic and export allocation
𝑐𝑖𝐾𝐿 Unit cost for labor-capital aggregation.
𝑝𝑖𝑁𝑁 Price index for non-specific factor (𝑖 ∉ 𝑁𝑆)
𝑝𝑖𝐿𝐴𝐵 Price index for composite labor.
𝐾𝐴
𝑟 Unit revenue for capital allocation activity.
𝑟𝑙𝐿𝐴 Unit revenue for labor allocation activity.
𝑐𝐶 Unit cost for aggregate consumption (utility)
𝑐𝐺 Unit cost for government expenditure.
𝑐 𝐼𝑉 Unit cost for investment goods production.
𝑐𝑖𝐴 Unit cost for Armington aggregation.
𝑐 𝐶𝐹 Unit cost for consumption (utility) of foreign labor
𝑝𝑖 Price of goods
𝑝𝑖𝐷 Price of domestic goods
𝑝𝑖𝑋 Price of export goods
𝑝𝑖𝐾𝐿 Price index of composite factor
𝑝𝐶 Price index of aggregate consumption (utility)
𝑝𝐺 Price index of government expenditure
𝐼𝑉
𝑝 Price index of investment goods
𝑝𝑖𝐴 Price index of Armington goods
𝑝𝐾 Rental price of capital
𝑝𝑖𝐾𝑆 Rental price of allocated capital
𝑝𝑙𝐿 Wage rate
𝑝𝑙𝑖𝐿𝑆 Wage rate of allocated labor
𝑝𝑖𝑁 Price of sector-specific factor
𝑝𝑖𝑀 Price of import goods
𝐹𝑋
𝑝 Price of foreign exchange (exchange rate)
𝑝𝐶𝐹 Price index of consumption for foreign labor
Unit demand and unit supply

𝑎𝑖𝑁 Unit demand for specific factor (𝑖 ∈ 𝑁𝑆)
𝑎𝑗𝑖𝐼𝑇𝑀 Unit demand for intermediate inputs
𝑎𝑖𝐾𝐿 Unit demand for composite labor-capital.
𝑎𝑖𝐾 Unit demand for capital.
𝑎𝑙𝑖𝐿𝐴𝐵 Unit demand for labor.
35

𝑎𝑖𝐴𝐷 Unit demand for domestic goods.
𝑎𝑖𝐴𝑀 Unit demand for import goods.
𝑎𝑖𝐶𝐷 Unit consumption demand for Armington goods
𝑎𝑖𝐾𝐴 Unit supply of capital.
𝑎𝑙𝑖𝐿𝐴 Unit supply of labor.
𝑎𝑖𝐶𝐷𝐹 Unit consumption demand for Armington goods by foreign labor.
𝑎𝑖𝑋𝑆 Unit supply for domestic market
𝑎𝑖𝐷𝑆 Unit supply for export market
Other endogenous variables

𝐼𝑁𝐶 𝐻𝐻 Income of the domestic household
𝐼𝑁𝐶 𝐺𝑂𝑉 Government income
𝐼𝑁𝐶𝑙𝐹 Income of foreign labor
𝐿𝑈𝑀𝑃𝑇 Lump-sum tax
𝑅𝑙𝐹 Remittance to abroad
Exogenous variables
𝑒𝑛𝑑𝑙𝐿 Endowment of domestic labor.
𝑒𝑛𝑑 𝐾 Endowment of capital
𝑒𝑛𝑑𝑖𝑁 Endowment of specific factors
𝑒𝑛𝑑𝑙𝐿𝐹 Supply of foreign labor
𝐶𝐴 Current account surplus
𝑒𝑛𝑑𝑖𝐻𝐻 Endowment of commodities owned by household
𝑡𝑖𝑄 Tax rate on output
𝑡𝑖𝑀 Tariff rates
𝐿𝐹
𝑡 Tax rate on income of foreign labor.
𝜃𝑅 Remittance rate
𝑠 𝐻𝐻 Saving rate of the Japanese household
𝑠𝐹 Saving rate of the foreign labor
A-2.2. Unit cost, unit revenue and price index
Unit revenue for production
36

𝑄 𝑄
𝑟𝑖 = ∑ 𝜃𝑗𝑖 𝑝𝑗 {𝑟𝑖𝑄 }
𝑗
Unit revenue of domestic and export allocation

1
1+𝜂𝑋𝐷 𝑋𝐷
𝐷𝑆 𝐷 1+𝜂𝑖 1+𝜂𝑖𝑋𝐷 {𝑟𝑖𝑋𝐷𝐴 }
𝑟𝑖𝑋𝐷𝐴 = [𝜃𝑖𝑋𝑆 (𝑝𝑖𝑋 ) 𝑖 + 𝜃𝑖 (𝑝𝑖 ) ]
Price index for non-specific factor input (𝑖 ∈ 𝑁𝑆)
𝑝𝑖𝑁𝑁 = ∑ 𝜃𝑗𝑖𝐼𝑇𝑀 𝑝𝑗𝐴 + 𝜃𝑖𝐾𝐿 𝑝𝑖𝐾𝐿 {𝑝𝑖𝑁𝑁 }

𝑗
Unit cost for production.

𝑄
𝑐𝑖 = ∑ 𝜃𝑗𝑖𝐼𝑇𝑀 𝑝𝑗𝐴 + 𝜃𝑖𝐾𝐿 𝑝𝑖𝐾𝐿 𝑖 ∈ 𝑁𝑆
𝑗
1
{𝑐𝑖𝑄 }
1−𝜎𝑖𝑁 1−𝜎𝑖𝑁 1−𝜎𝑖𝑁
𝑐𝑖𝑄 = [𝜃𝑖𝑁 (𝑝𝑖𝑁 ) + (1 − 𝜃𝑖𝑁 )(𝑝𝑖𝑁𝑁 ) ] 𝑖 ∉ 𝑁𝑆
Price index for composite labor.

1
𝐿𝐴𝐵
𝐿𝐴𝐵 1−𝜎
𝑝𝑖𝐿𝐴𝐵 = [∑ 𝜃𝑙𝑖𝐿𝐴𝐵 (𝑝𝑙𝑖𝐿𝑆 )
1−𝜎
] {𝑝𝑖𝐿𝐴𝐵 }
𝑙
Unit cost for labor-capital aggregation.

1
1−𝜎𝐾𝐿 𝐿𝐴𝐵 1−𝜎
𝐾𝐿
1−𝜎 𝐾𝐿 {𝑐𝑖𝐾𝐿 }
𝑐𝑖𝐾𝐿 = [𝜃𝑖𝐾 (𝑝𝑖𝐾𝑆 ) + (1 − 𝐾
𝜃𝑖 )(𝑝𝑖 ) ]
Unit revenue for capital allocation activity.

1
𝐾𝐴
1+𝜂 𝐾𝐴 1+𝜂
𝑟 𝐾𝐴 = 𝐾𝐴 𝐾𝑆
[∑ 𝜃𝑖 (𝑝𝑖 ) ] {𝑟 𝐾𝐴 }
𝑖
Unit revenue for labor allocation activity.

1
𝐿𝑆
𝐿𝑆 1+𝜂𝑙
𝐿𝐴 𝐿𝑆 1+𝜂 {𝑟𝑙𝐿𝐴 }
𝑟𝑙𝐿𝐴 = [∑ 𝜃𝑙𝑖 (𝑝𝑙𝑖 ) 𝑙
]
𝑖
Unit cost for aggregate consumption (utility)

1
𝐶𝐶
1−𝜎 𝐶𝐶 1−𝜎
𝑐𝐶 = 𝐶𝐷 𝐴
[∑ 𝜃𝑖 (𝑝𝑖 ) ] {𝑐 𝐶 }
𝑖
Unit cost for investment goods production.
𝑐 𝐼𝑉 = ∑ 𝜃𝑖𝐼𝑉 𝑝𝑖𝐴 {𝑐 𝐼𝑉 }
𝑖
Unit cost for government expenditure.
37

𝑐 𝐺 = ∑ 𝜃𝑖𝐺𝐷 𝑝𝑖𝐴 {𝑐 𝐺 }
𝑖
Unit cost for Armington aggregation.

1
1−𝜎𝐷𝑀 𝐷𝑀
𝑀 1−𝜎𝑖 1−𝜎𝑖𝐷𝑀 {𝑐𝑖𝐴 }
𝑐𝑖𝐴 = [𝜃𝑖𝐴𝐷 (𝑝𝑖𝐷 ) 𝑖 + 𝐴𝑀
𝜃𝑖 (𝑝𝑖 ) ]
Unit cost for aggregate consumption (utility) of foreign labor

1
𝐶𝐶
1−𝜎 𝐶𝐶 1−𝜎
𝑐 𝐶𝐹 = [∑ 𝜃𝑖𝐶𝐷 (𝑝𝑖𝐴 ) ] {𝑐 𝐶𝐹 }
𝑖
A-2.3. Zero profit conditions (= profit-maximizing conditions)
Zero profit for production activity.

𝑄 𝑄 𝑄
𝑐𝑖 − (1 − 𝑡𝑖 )𝑟𝑖 = 0 {𝑄𝑖 }
Zero profit for domestic and export allocation
𝑝𝑖 − 𝑟𝑖𝑋𝐷𝐴 = 0 {𝑋𝐷𝐴𝑖 }
Zero profit for labor-capital aggregation activity.
𝑐𝑖𝐾𝐿 − 𝑝𝑖𝐾𝐿 = 0 {𝐾𝐿𝑖 }
Zero profit for aggregate consumption.
𝑐 𝐶 − 𝑝𝐶 = 0 {𝐶}
Zero profit for investment goods production.
𝑐 𝐼𝑉 − 𝑝𝐼𝑉 = 0 {𝐼𝑉}
Zero profit for government expenditure.
𝑐 𝐺 − 𝑝𝐺 = 0 {𝐺}
Zero profit for export activity.
𝑝𝑖𝑋 − 𝑝𝐹𝑋 = 0 {𝐸𝑋𝑖 }
Zero profit for import activity.
(1 + 𝑡𝑖𝑀 )𝑝𝐹𝑋 − 𝑝𝑖𝑀 = 0 {𝐼𝑀𝑖 }
Zero profit for Armington aggregation activity.
𝑐𝑖𝐴 − 𝑝𝑖𝐴 = 0 {𝐴𝑖 }
Zero profit for capital allocation activity.
𝑝𝐾 − 𝑟 𝐾𝐴 = 0 {𝐾𝐴}
Zero profit for labor allocation activity.
𝐿
𝑝𝑙𝑠 − 𝑟𝑙𝐿𝐴 = 0 {𝐿𝐴𝑙 }
Zero profit for aggregate consumption of foreign labor.
𝑐 𝐶𝐹 − 𝑝𝐶 = 0 {𝐶 𝐹 }
38

A-2.4. Unit demand function and unit supply function
Unit demand for specific factor (𝑖 ∈ 𝑁𝑆)

𝜎𝑖𝑁
𝑐𝑖𝑄 {𝑎𝑖𝑁 }
𝑎𝑖𝑁 = 𝑎̅𝑖𝑁 [ 𝑁]
𝑝𝑖
Unit demand for intermediate inputs
𝑎𝑗𝑖𝐼𝑇𝑀 = 𝑎̅𝑗𝑖𝐼𝑇𝑀 𝑖 ∉ 𝑁𝑆
𝑁
𝑐𝑖𝑄
𝜎𝑖 {𝑎𝑗𝑖𝐼𝑇𝑀 }
𝑎𝑗𝑖𝐼𝑇𝑀 = 𝐼𝑇𝑀
𝑎̅𝑗𝑖 [ 𝑁𝑁 ] 𝑖 ∈ 𝑁𝑆
𝑝𝑖
Unit demand for composite labor-capital.
𝑎𝑖𝐾𝐿 = 𝑎̅𝑖𝐾𝐿 𝑖 ∉ 𝑁𝑆
𝜎𝑖𝑁 {𝑎𝑖𝐾𝐿 }
𝑐𝑖𝑄
𝑎𝑖𝐾𝐿 𝐾𝐿
= 𝑎̅𝑖 [ 𝑁𝑁 ] 𝑖 ∈ 𝑁𝑆
𝑝𝑖
Unit demand for capital.
𝜎 𝐾𝐿
𝑐𝑖𝐾𝐿
𝑎𝑖𝐾 = 𝑎̅𝑖𝐾 [ 𝐾𝑆 ] {𝑎𝑖𝐾 }
𝑝𝑖
Unit demand for labor.
𝜎 𝐿𝐴𝐵 𝜎 𝐾𝐿
𝑝𝑖𝐿𝐴𝐵 𝑐𝑖𝐾𝐿
𝑎𝑙𝑖𝐿𝐴𝐵 = 𝑎̅𝑙𝑖𝐿𝐴𝐵 [ 𝐿𝑆 ] [ 𝐿𝐴𝐵 ] {𝑎𝑙𝑖𝐿𝐴𝐵 }
𝑝𝑙𝑖 𝑝𝑖
Unit demand for domestic goods.
𝜎𝑖𝐷𝑀
𝑐𝑖𝐴
𝑎𝑖𝐴𝐷 = 𝑎̅𝑖𝐴𝐷 [ 𝐷 ] {𝑎𝑖𝐴𝐷 }
𝑝𝑖
Unit demand for import goods.
𝜎 𝐷𝑀
𝑐𝑖𝐴 𝑖 {𝑎𝑖𝐴𝑀 }
𝑎𝑖𝐴𝑀 = 𝐴𝑀
𝑎̅𝑖 [ 𝑀 ]
𝑝𝑖
Unit consumption demand for Armington goods
𝜎 𝐶𝐶
𝑐𝐶
𝑎𝑖𝐶𝐷 = 𝐶𝐷
𝑎̅𝑖 [ 𝐴 ] {𝑎𝑖𝐴𝑀 }
𝑝𝑖
Unit supply of capital.
𝜂 𝐾𝐴
𝑝𝑖𝐾𝑆
𝑎𝑖𝐾𝐴 = 𝑎̅𝑖𝐾𝐴 [ 𝐾𝐴 ] {𝑎𝑖𝐾𝐴 }
𝑟
Unit supply of labor.
𝜂𝑙𝐿𝐴
𝑝𝑙𝑖𝐿𝑆 {𝑎𝑙𝑖𝐿𝐴 }
𝑎𝑙𝑖𝐿𝐴 = 𝑎̅𝑙𝑖𝐿𝐴 [ 𝐿𝐴 ]
𝑟
Unit consumption demand for Armington goods by foreign labor.
𝜎 𝐶𝐶
𝑐 𝐶𝐹
𝑎𝑖𝐶𝐷𝐹 = 𝑎̅𝑖𝐶𝐷 [ ] {𝑎𝑖𝐶𝐷𝐹 }
𝑝𝑖𝐴
39

Unit supply to domestic market
𝜂 𝐾𝐴
𝑝𝑖𝐷
𝑎𝑖𝐷𝑆 = 𝐷𝑆
𝑎̅𝑖 [ 𝑋𝐷𝐴 ] {𝑎𝑖𝐷𝑆 }
𝑟𝑖
Unit supply to export market
𝜂 𝐾𝐴
𝑝𝑖𝑋
𝑎𝑖𝑋𝑆 = 𝑎̅𝑖𝑋𝑆 [ 𝑋𝐷𝐴 ] {𝑎𝑖𝑋𝑆 }
𝑟𝑖
A-2.5. Market clearing conditions
Market for outputs.

𝑄
∑ 𝑎𝑖𝑗 𝑄𝑗 + 𝑒𝑛𝑑𝑖𝐻𝐻 = 𝑋𝐷𝐴𝑖 {𝑝𝑖 }
𝑗
Market of domestic supply

𝑎𝑖𝐷𝑆 𝑋𝐷𝐴𝑖 = 𝑎𝑖𝐴𝐷 𝐴𝑖 {𝑝𝑖𝐷 }
Market of export supply
𝑎𝑖𝑋𝑆 𝑋𝐷𝐴𝑖 = 𝐸𝑋𝑖 {𝑝𝑖𝑋 }
Market for composite capital-labor.
𝐾𝐿𝑖 = 𝑎𝑖𝐾𝐿 𝑄𝑖 {𝑝𝑖𝐾𝐿 }
Market for aggregate consumption (utility).
𝐼𝑁𝐶 𝐻𝐻
𝐶 = (1 − 𝑠 𝐻𝐻 ) {𝑝𝐶 }
𝑝𝐶
Market for government expenditure.
𝐼𝑁𝐶 𝐺𝑂𝑉
𝐺= {𝑝𝐺 }
𝑝𝐺
Market for investment goods.
𝐼𝑁𝐶 𝐻𝐻 𝐼𝑁𝐶 𝐹
𝐼𝑉 = 𝑠 𝐻𝐻 + 𝑠 𝐹 {𝑝𝐼𝑉 }
𝑝𝐼𝑉 𝑃𝐼𝑉
Market for Armington goods.
𝐼𝑇𝑀
𝐴𝑖 = ∑ 𝑎𝑖𝑗 𝑄𝑗 + 𝑎𝑖𝐶𝐷 𝐶 + 𝑎̅𝑖𝐺𝐷 𝐺 + 𝑎̅𝑖𝐼𝑉𝐷 𝐼𝑉 + 𝑎𝑖𝐶𝐷𝐹 𝐶 𝐹 {𝑝𝑖𝐴 }
𝑗
Market for capital.

𝑒𝑛𝑑 𝐾 = 𝐾𝐴 {𝑝𝐾 }
Market for allocated capital.
𝑎𝑖𝐾𝐴 𝐾𝐴 = 𝑎𝑖𝐾 𝐾𝐿𝑖 {𝑝𝑖𝐾𝑆 }
Market for labor.
𝑒𝑛𝑑𝑙𝐿 + 𝑒𝑛𝑑𝑙𝐿𝐹 = 𝐿𝐴𝑙 {𝑝𝑙𝐿 }
Market for allocated labor.
40

𝑎𝑙𝐿𝐴 𝐿𝐴𝑙 = 𝑎𝑙𝑖𝐿𝐴𝐵 𝐾𝐿𝑖 {𝑝𝑙𝑖𝐿𝑆 }
Market for sector-specific factor.
𝑒𝑛𝑑𝑖𝑁 = 𝑎𝑖𝑁 𝑄𝑖 {𝑝𝑖𝑁 }
Market for import goods.
𝐼𝑀𝑖 = 𝑎𝑖𝐴𝑀 𝐴𝑖 {𝑝𝑖𝑀 }
Market for foreign exchange.
∑ 𝐸𝑀𝑖 = ∑ 𝐼𝑀𝑖 + 𝐶𝐴 + ∑ 𝑅𝑙𝐹 {𝑝𝐹𝑋 }

𝑖 𝑖 𝑙
Market for aggregate consumption for foreign labor.

𝐶 𝐹 = (1 − 𝑠 𝐹 )𝐼𝑁𝐶 𝐹 /𝑝𝐶𝐹 {𝑝𝐶𝐹 }
A-2.6. Income definitions
Domestic household income.
𝐼𝑁𝐶 𝐻𝐻 = ∑ 𝑝𝑖𝑁 𝑒𝑛𝑑𝑖𝑁 + 𝑝𝐾 𝑒𝑛𝑑 𝐾 + ∑ 𝑝𝑙𝐿 𝑒𝑛𝑑𝑙𝐿 + ∑ 𝑝𝑖 𝑒𝑛𝑑𝑖𝐻𝐻

𝑖 𝑙 𝑖 {𝐼𝑁𝐶 𝐻𝐻 }
−𝑝𝐹𝑋 ̅̅̅̅
𝐶𝐴 − 𝑝𝐶 𝐿𝑈𝑀𝑃𝑇
Income of government.
𝑄 𝑄
𝐼𝑁𝐶 𝐺𝑂𝑉 = 𝑝𝐶 𝐿𝑈𝑀𝑃𝑇 + ∑ 𝑡𝑖 𝑝𝑖 𝑎𝑗𝑖 𝑄𝑖 + ∑ 𝑡𝑖𝑀 𝑝𝐹𝑋 𝐼𝑀𝑖 + ∑ 𝑡 𝐿𝐹 𝑝𝑙𝐿 𝑒𝑛𝑑𝑙𝐿𝐹 {𝐼𝑁𝐶 𝐺𝑂𝑉 }
𝑖,𝑗 𝑖 𝑙
Income of foreign labor.
𝐼𝑁𝐶 𝐹 = ∑(1 − 𝜃 𝑅 )(1 − 𝑡 𝐿𝐹 )𝑝𝑙𝐿 𝑒𝑛𝑑𝑙𝐿𝐹 {𝐼𝑁𝐶 𝐹 }

𝑙
A-2.7. Constraints
The condition for lump-sum tax.

𝐺 = 𝐺̅ {𝐿𝑈𝑀𝑃𝑇}
Remittance.
𝑝𝐹𝑋 𝑅𝑙𝐹 = 𝜃 𝑅 (1 − 𝑡 𝐿𝐹 )𝑝𝑙𝐿 𝑒𝑛𝑑𝑙𝐿𝐹 {𝑅𝑙𝐹 }
A-2.8. Scenario FL_A and FL_B
 𝑒𝑛𝑑𝑙𝐿𝐹 = 0
 𝑒𝑛𝑑𝑙𝑖𝐿𝐹𝑆 ≠ 0
Market for allocated labor.
41

𝑎𝑙𝐿𝐴 𝐿𝐴𝑙 + 𝑒𝑛𝑑𝑙𝑖𝐿𝐹𝑆 = 𝑎𝑙𝑖𝐿𝐴𝐵 𝐾𝐿𝑖 {𝑝𝑙𝑖𝐿𝑆 }
Income of government.
𝑄 𝑄
𝐼𝑁𝐶 𝐺𝑂𝑉 = 𝑝𝐶 𝐿𝑈𝑀𝑃𝑇 + ∑ 𝑡𝑖 𝑝𝑖 𝑎𝑗𝑖 𝑄𝑖 + ∑ 𝑡𝑖𝑀 𝑝𝐹𝑋 𝐼𝑀𝑖 + ∑ 𝑡 𝐿𝐹 𝑝𝑙𝑖𝐿𝑆 𝑒𝑛𝑑𝑙𝑖𝐿𝐹𝑆 {𝐼𝑁𝐶 𝐺𝑂𝑉 }
𝑖,𝑗 𝑖 𝑙,𝑖
Remittance.
𝑝𝐹𝑋 𝑅𝑙𝐹 = ∑ 𝜃 𝑅 (1 − 𝑡 𝐿𝐹 )𝑝𝑙𝑖𝐿𝑆 𝑒𝑛𝑑𝑙𝑖𝐿𝐹𝑆 {𝑅𝑙𝐹 }

𝑖
42

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Effects of Immigration in Japan:

A Computable General Equilibrium Assessment

Muneyuki Saito (Nara Prefectural University)

February 28, 2017

JEL classification: D58, F22, F66, J61

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2.1. Benchmark Data

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2.2. Labor Data

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3.1. Production Side

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3.3. International Trade

Governments obtain revenues from taxes, which fund government consumption. We

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3.5. Structure of the Dynamics

3.6. Elasticity of Substitution

Table 3 presents the exogenously determined elasticity of substitution and transformation.13

4. Assumptions for Foreign Labor

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6. Characteristics of the Benchmark Data

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7.2. Impacts on Japan

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7.4. Sensitivity Analysis

7.4.1. Sensitivity Analysis Scenarios

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7.4.2. Results of the Sensitivity Analysis

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7.4.3. Summary of the Sensitivity Analysis

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 Baas, T. and Brücker, H., (2012). "The macroeconomic consequences of migration

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Fertility Working-age Share Working-age Share Working-age Share Working-age Share

population (%) population (%) population (%) population (%)

Table 2: List of sectors

Symbol Explanation Symbol Explanation

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BAU FL FL_A FL_B FL_SK

Table 6: Percentage change from BAU value (2030, %)

FL FL_A FL_B FL_SK

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Table 8: Sensitivity analysis scenarios

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Unskilled labor Skilled labor

Figure 1: Production function

Consumption goods Consumption goods