AKA Demographic bonus,
Demographic dividends are the benefits gained by a society during that period of a demographic transition in which there is a high ratio of working-aged individuals to dependent individuals (i.e., children, elderly). This period is often called the 'demographic window'. This is often accompanied by an economic boom, and many economists suggest that this period may be the best time to give economic aid.
A 'demographic transition' is the change in population make-up as a society passes from a pre-industrial economy to an industrialized economy. Here is a very basic description of the four stages of a demographic transition:
- Pre-industrial: Birth rates are high, death rates are high. The population is stable.
- Improved medical and sanitation methods are supplied, food and water supplies stabilize: Birth rates are still high, but death rates drop. Population grows.
- Birth control is used, higher education and more jobs for women, etc.: Birth rate drops. Death rate remains low. Population begins to stabilize.
- A status quo is reached. Population remains stable, or sometimes even begins to shrink.
The demographic dividend appears in the third stage of the demographic shift. As fewer children are born, this frees more individuals of prime working age into the workforce. This was originally called the 'demographic gift', but it has become clear that not all countries are equally prepared to put this gift to good use. The term 'demographic dividend' was introduced to refer specifically to the level of economic benefits gained through the demographic gift.
The demographic gift is not only a matter of the people who do not have children being able to work full-time jobs. While having children later, or not having children at all, does enhance the demographic dividend, having fewer children in the society also means reduced expenses for the family and for society. Lower health care costs, more money to invest, and more mobility spur economic growth. The lower number of children means that universal education is more affordable to the government, and parents have a higher probability of being able to afford to send all of their children to school. This leads to a more educated population down the road, which increases the dividend.
This surge of workers lasts for thirty or forty years, or even longer, as the baby boom from stage 2 works its way through the population. It can be enhanced and extended through immigration of young adults into the society, as workers from poorer neighboring countries come to take advantage of the newfound wealth. Once this surge of workers exits the workforce and retires it can become an economic burden on the younger generations, and the economic dividend is over.
The length of the demographic window is often measured by calculating the dependency ratio of a society. This is the number of dependents (usually all children under 15 plus all older adults over 60) divided by the number of people of working age (15-59 years). Early on in the demographic transition there are many more children than working aged adults; by the end, the ratio of working aged to dependents approaches 1. During the peak of the economic gift the ratio may approach 0.5. At any point that the ratio is lower than 1 the society can be considered to be in the demographic window.
This demographic dividend effect may be responsible for the economic boom of East Asia in the 1960s to 1990s. Unfortunately, while many countries have entered a demographic window, not all have harvested the demographic dividend. To get maximum benefit from the demographic gift a society needs to have sufficient well-paid and productive work opportunities for all the potential workers. The gift can also be overcome by disease, such as the AIDS epidemic, which can turn working age individuals into economic drains.
A large number of countries are currently going through their demographic windows. The UK and America might still be considered to be in the tail end of theirs, partially boosted by immigration levels. Mexico and
China are coming out of theirs in the next few decades, while India, Thailand, and large parts of Africa are just about to enter their demographic windows.