Abstract
The high technology miracle in Japan can be attributed to a virtuous cycle between technology and economic development. This virtuous cycle is supported by institutional elasticity for technological innovation and diffusion. Such elasticity has been a typically observed relationship between wage increases and productivity improvement : wage elasticity to productivity improvement under the Japanese employment system. However, under a new paradigm in the 1990s, corresponding to the bursting of the bubble economy along with low or negative economic growth and an aging trend, the foregoing virtuous cycle is feared to succumb to a vicious cycle. This is considered due to a loosening institutional elasticity under the new paradigm. Understanding that this elasticity can be observed typically in the "productivity standard principle" in Japan's employment system which maintains sustainable growth without information by keeping a dynamic balance between wage increase and productivity improvement, this paper attempts to demonstrate this hypothetical view focusing on a comparison between the 1980s and the 1990s. Intensive analysis demonstrated that institutional elasticity for technological innovation and diffusion has been deteriorating. This process was observed by destruction of those factors which enable maintenance of sustainable growth by keeping a dynamic balance between wage increases and productivity improvement. As an additional consequence of the substantial reaction of Japan's employment system to rapid advances in information technology (IT) and the aging trend, it was identified that such lower elasticity is due to a delay of technology, particularly information technology into labor, leading to an increasing mismatch between labor and capital which in decreasing technology substitution for labor.
