What Is the Demographic Dividend, and How Does It Work?

What Is Demographic Dividend?

Demographic dividend refers to the growth in an economy that is the result of a change in the age structure of a country’s population. The change in age structure is typically brought on by a decline in fertility and mortality rates.

Understanding Demographic Dividend

While most countries have seen an improvement in child survival rates, birth rates remain high in many of them, particularly in lesser developed countries. These countries, therefore, rarely enjoy an economic benefit known as the demographic dividend.

Demographic dividends are occurrences in a country that enjoys accelerated economic growth that stems from the decline in fertility and mortality rates. A country that experiences low birth rates in conjunction with low death rates receives an economic dividend or benefit from the increase in productivity of the working population that ensues. As fewer births are registered, the number of young dependents grows smaller relative to the working population. With fewer people to support and more people in the labor force, an economy’s resources are freed up and invested in other areas to accelerate a country's economic development and the future prosperity of its populace.

To receive a demographic dividend, a country must go through a demographic transition where it switches 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 initial stages of this transition, fertility rates fall, leading to a labor force that is temporarily growing faster than the population dependent on it. All else being equal, per capita income grows more rapidly during this time too. This economic benefit is the first dividend received by a country that has gone through the demographic transition.

Types of Demographic Dividend

The first dividend period generally lasts for a long time—typically five decades or more. Eventually, however, the reduced birth rate reduces labor force growth. Meanwhile, improvements in medicine and better health practices lead to an ever-expanding elderly population, sapping additional income and putting an end to the demographic dividend. At this stage, all else being equal, per capita income grows at a decelerated rate and the first demographic dividend becomes negative.

An older working population facing an extended retirement period has a powerful incentive to accumulate assets to support themselves. These assets are usually invested in both domestic and international investment vehicles, adding to a country's national income. The increase in national income is referred to as the second dividend which continues to be earned indefinitely.

The benefits gotten from a demographic transition is neither automatic nor guaranteed. Any demographic dividend depends on whether the government implements the right policies in areas such as education, health, governance, and the economy. In addition, the amount of demographic dividend that a country receives depends on the level of productivity of young adults which, in turn, depends on the level of schooling, employment practices in a country, timing, and frequency of childbearing, as well as economic policies that make it easier for young parents to work. The dividend amount is also tied to the productivity of older adults which depends on tax incentives, health programs, and pension and retirement policies.

There are four main areas where a country can find demographic dividends:

1. Savings—During the demographic period, personal savings grow and can be used to stimulate the economy.
2. Labor supply—More workers are added to the labor force, including more women.
3. Human capital—With fewer births, parents are able to allocate more resources per child, leading to better educational and health outcomes.
4. Economic growth—GDP per capita is increased due to a decrease in the dependency ratio.