Factor analysis of demand growth for information technology input in Japan

The purpose of this article is to decompose demand changes for factor input and explore the factor that information technology (IT) capital stock has largely increased in Japan. The Allen partial elasticities of substitution are calculated and the variations in factor input demand are broken down into two effects—price effect and output effect, using industry-level data. From an estimation of the total cost function, the following conclusions are presented. While IT capital stock and ordinary capital stock are complementary, IT serves as a substitute for labor. The factors influencing the high growth rate in IT capital stock are the decrease in the prices of IT and ordinary capital services, and the increase in the labor price, in addition to the output effect. On the other hand, labor demand declines due to both the downward rigidity of wages and the decrease in prices of two kinds of capital services.