In this blog post, I am continuing my work on examining the constraints in the Japanese infrastructure sector that would reduce the effectiveness of the fiscal expansion that the current government is proposing as a strategy to kickstart the economy and lift productivity. One approach is to decompose employment changes in the sector into the demand-side and supply-side components, which helps us assess whether there is a shortage of spending or a shortage of workers. The data shows two unambiguous patterns. First, construction employment is driven strongly by government spending on infrastructure. When that wanes, activity plummets. Second, in recent years, the overwhelming reason employment in the sector is declining is due to a contraction of labour supply. Taken together, while it is a relatively straightforward path to stimulate the industry – increase public investment spending, the supply constraints make that approach difficult to implement. This will bear on the effectiveness and outcomes of the current fiscal expansion proposed by the Takaichi government in Japan.