Demographic Dividend and Dependency Ratio

Demographic dividend is the potential acceleration of economic growth that can occur when the share of the working-age population rises relative to the dependent population. The dependency ratio measures the number of persons conventionally treated as dependants relative to the working-age population. A favourable age structure creates an opportunity for growth, but the dividend materialises only when people are healthy, skilled and productively employed.

Age structure and dependency ratio

Populations are commonly divided into children, working-age persons and the elderly, although the exact age limits vary across statistical conventions.

• Dependency ratio = dependent-age population divided by working-age population, usually expressed per 100 working-age persons.
• The total dependency ratio combines the child dependency ratio and the old-age dependency ratio.
• A falling child dependency ratio can increase the proportion of people available for work, while population ageing eventually raises the old-age dependency ratio.
• Age-based dependency is only an approximation because some working-age persons may not be employed, while some elderly persons may continue to work.

How the demographic dividend can support growth

A larger working-age share can raise output per person through several mutually reinforcing channels.

• A larger effective labour force can expand production when sufficient productive employment is available.
• Lower dependency burdens can enable households to save more and invest more in each child's health and education.
• Higher savings can support capital formation when they are channelled through an effective financial system into productive investment.
• Lower fertility and reduced care burdens can facilitate greater participation of women in education and paid work.
• A healthier and better-educated workforce can raise labour productivity, innovation and adaptability.
• A larger employed population can broaden the tax base and improve the capacity to finance development.

Conditions for converting age structure into a dividend

The demographic dividend is not automatic; without adequate capabilities and jobs, a large young population may instead face unemployment, underemployment and low productivity.

• Quality schooling, vocational education and market-relevant skills must prepare entrants for changing labour demand.
• Accessible nutrition, healthcare, sanitation and reproductive health services must build healthy human capital.
• The economy must generate sufficient productive and reasonably remunerative employment in agriculture, manufacturing and services.
• Labour-intensive growth, entrepreneurship, credit access and infrastructure must help absorb new workers.
• Women's education, safety, mobility, asset ownership and suitable working conditions must enable higher female labour-force participation.
• Labour-market institutions and information systems must improve matching between workers, skills and jobs.
• Macroeconomic stability, effective governance and predictable policies must encourage long-term private and public investment.
• Social protection and pension systems must prepare for the eventual rise in old-age dependency after the demographic window narrows.

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