Demographic dividend

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Overview

In effect a demographic dividend occurs due to a demographic transition whereby falling birth rates change the age distribution of a country so that fewer investments are required to meet the needs of the younger sector of the population. During this period the labour force temporarily grows more rapidly than the population dependent on it, releasing resources for investment in economic development and family welfare and resulting in faster per capita income growth.^[1]

This dividend period is not permanent rather it lasts approximately five decades or more. It is not automatic either and some countries that take advantage of the released resources and use them effectively will receive greater benefits than others. Those that don’t capitalize on the opportunity may in fact be in a weaker position^[2] and faced with the problem of a youth bulge - a demographic trend where the proportion of persons aged 15-24 in the population increases significantly compared to other age groups - which paired with limited employment opportunities may contribute to increased poverty, hunger, malnutrition, poorer health, lower educational outcomes, child labour, unsupervised and abandoned children, and rising rates of domestic violence. ^[3]

Transmission mechanisms of the demographic dividend

Labor supply
The young sector of the population born during periods of high fertility are no longer dependent and can become workers, provided that effective policies have enabled them to be educated and trained. Women relieved of child caring responsibilities are free to enter the labour market; they tend to be better educated than their older cohorts and are consequently more productive.^[4]

Savings
The transition away from a young age distribution tends to result in greater personal and national savings as working age adults have a tendency to earn more and the capacity to save more than the very young. When persons born during periods of high fertility move into their 40s they have a greater ability to save as their own children are more independent and require less support. Growth in personal savings serves as a partial resource for industrial investments that assist economic growth.^[5]

Human capital
Having fewer children enhances the health of women and enables their greater participation in the workforce. Increased financial and personal independence can also improve their general well-being. Having fewer children reduces the pressure on parents to provide. Less children means family income can be spent on better quality food for infants and young children as well as education resources and towards the prolonging of education for children to improve their life prospects.^[6]

A second demographic dividend

The possibility of a second dividend is created as a population with a large proportion of older working aged people who face longer periods of retirement, accumulate assets to support themselves – that is unless they are assured that their needs are taken care of by their families or government. ^[7]

These assets, whether invested domestically or abroad, contribute to increase national income so that in sum, whilst the first dividend produces a transitory bonus, the second dividend converts into greater assets and sustainable development. ^[8]

Managing the demographic dividends

The degree of benefit gained from the first dividend depends greatly on key features of the economic life cycle. The productivity of young people depends not just on the availability of jobs but on their capacity to take up employment opportunities. In this regard experiences, both positive and negative, during Early Childhood, including those related to Early Childhood Care and Development and overall child well-being can have a strong influence on a country's labor supply, their human capital as well as the number of people dependent on government welfare services later on in life.

The timing of childbearing and maternity and paternity policies are also factors which influence individuals degree of participation in the labour force.

Productivity at older ages is influenced by factors of health and disability, tax incentives and disincentives and most importantly, the structure of pension programs and retirement policies.