This paper has three parts. First, we compile a new industry-by-industry data set of the Japanese economy in which information and communication technology (ICT) stocks are explicitly estimated and labor inputs are disaggregated with respect to age and education. Second, we investigate the effect of ICT on various labor inputs and discern for which labor inputs ICT is able to substitute. Third, we estimate the contribution of capital stocks, including ICT, and various labor inputs to the value-added growth of the Japanese economy in the 1980s and 1990s and explore the factors that determine technological progress.

We find ICT capital stocks are an important substitute for young workers with low education levels. These results strongly suggest that ICT investment is an effective way to counter the prospective shortage of young workers in Japan. In contrast, we find no compelling evidence of productivity-enhancing ICT externality. On the contrary, our results suggest that ICT has a negative indirect effect on productivity. The past technological and managerial strengths of Japanese firms, which have been based on workers' learning by doing in the workplace, may no longer be advantages as knowledge management systems improve and become easily transferred across international borders.

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