What is the demographic dividend?
The demographic dividend refers to the growth of an economy that results from a change in the age structure of a country’s population. The change in age structure is usually caused by lower fertility and death rates.
Understanding the demographic dividend
While most countries have seen improved child survival rates, many still have high birth rates, especially in less developed countries. These countries therefore rarely enjoy an economic advantage known as the demographic dividend.
Demographic dividends occur in a country that is experiencing accelerated economic growth that results from falling fertility and mortality rates. A country with low birth rates in conjunction with low death rates receives an economic dividend or benefits from the resulting increase in productivity of the workforce. As fewer births are registered, the number of young dependents decreases relative to the workforce. With fewer people to support and more people in the workforce, the resources of an economy are released and invested in other areas to accelerate a country’s economic development and the future prosperity of its people.
To receive a demographic dividend, a country must go through a demographic transition from a largely rural agrarian economy with high fertility and mortality rates to an urban industrial society characterized by low fertility and mortality rates. In the early stages of this transition, fertility rates drop, leading to an active population that grows temporarily faster than the population that depends on it. All other things being equal, per capita income grows faster during this period as well. This economic advantage is the first dividend received by a country that has gone through the demographic transition.
A drop in fertility and death rates boosts the productivity of the workforce, resulting in a demographic dividend.
Types of demographic dividends
The first dividend period usually lasts a long time – usually five decades or more. Ultimately, however, the reduced birth rate reduces the growth of the labor force. Meanwhile, improved medicine and better health practices are driving an ever-growing elderly population, undermining additional income and ending the demographic dividend. At this point, all other things being equal, per capita income is growing at a decelerated rate and the first demographic dividend becomes negative.
An older workforce facing a long retirement period is strongly encouraged to accumulate assets to support themselves. These assets are generally invested in national and international investment vehicles, thereby increasing a country’s national income. The increase in national income is called the second dividend which continues to be earned indefinitely.
The benefits of a demographic transition are neither automatic nor guaranteed. Any demographic dividend depends on the government’s implementation of good policies in areas such as education, health, governance and the economy. In addition, the amount of the demographic dividend that a country receives depends on the level of productivity of young adults which, in turn, depends on the level of education, employment practices in a country, when and how often procreation, as well as economics of policies that facilitate the work of young parents. The amount of the dividend is also linked to the productivity of the elderly, which depends on tax incentives, health programs, and retirement and retirement policies.
There are four main areas in which a country can find demographic dividends:
- Savings – During the demographic period, personal savings increase and can be used to stimulate the economy.
- Labor supply – More workers are added to the workforce, including more women.
- Human capital – With fewer births, parents are able to allocate more resources per child, which improves education and health outcomes.
- Economic growth – GDP per capita increases due to a decrease in the dependency ratio.
Key points to remember
- The demographic dividend is economic growth brought about by a change in the population structure of a country, usually the result of lower fertility and mortality rates.
- The demographic dividend comes in while the productivity of the working population increases, which increases per capita income.
- The first period for a demographic dividend can last 50 years or more, then the second period can last indefinitely, as an aging population invests in various investment vehicles.
- Demographic dividends can be found with savings, labor supply, human capital and economic growth.