demographic dividends: past, present, and the future andrew mason university of hawaii and east-west...

Demographic Dividends: Past, Present, and the Future

Andrew Mason

University of Hawaii and

East-West Center

Support: NIA R01-AG025488-01

Key Ideas

• Changes in age structure interact with the economic life cycle to influence per capita income growth

• Two demographic dividends– Share of the productive population– Demand for wealth

Questions

• How large is the dividend? How pervasive?

• How are the magnitude and duration of the dividend influenced by demography?

• Was the dividend important historically? What will be its role in the future?

• What is the role of policy?

Recent Research

• Bloom and Canning (various); Bloom and Williamson (various)

• Kelley and Schmidt (various)

• Lee, Mason, and Miller (various);

• Mason (various); Mason and Lee (forthcoming)

Recent research builds on many important studies conducted during the last 40 years.

Useful Identities

( ) ( ) ( ) is output per effective consumer.

( ) ( ) ( )

( ) ( , )( )

is the support ratio.( ) ( ) ( , )

( ) is labor productivity.

( )

Y(t) L(t) Y(t)gr gr grN(t) N(t) L(t)

a

a

Y t L t Y t

N t N t L t

a P a tL t

N t a P a t

Y t

L t

.

Modeling the First Dividend

• Growth of the support ratio measures growth in the productive share of the population: the first dividend

• Given labor productivity (Y/L), an increase in the growth rate of the support ratio produces an equal increase in the growth rate of output per effective consumer.

Data for constructing the support ratio and the first dividend

Population data

• Various sources for historical series

• UN Population Prospects (2005)

• UN long-term projections (2004)

Economic lifecycle

• US production and consumption age-profiles (Mason et al. forthcoming).

Consumption and Labor Income by Age, US, 2000

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0-4 10-14 20-24 30-34 40-44 50-54 60-64 70-74 80-84 90-94 100+

Consumption

Labor Income

Age Distributions, Three Extremes

0

2

4

6

8

10

12

14

16

US 1850

India 2040

Japan 2070

Figure 2. Support Ratios for India, Japan, and the United States

0.6

0.7

0.8

0.9

1

1.1

1.2

1850 1900 1950 2000 2050 2100 2150

Effective Producers/Effective Consumer

India

Figure 2. Support Ratios for India, Japan, and the United States

0.6

0.7

0.8

0.9

1

1.1

1.2

1850 1900 1950 2000 2050 2100 2150

Effective Producers/Effective Consumer

India

Japan

Figure 2. Support Ratios for India, Japan, and the United States

0.6

0.7

0.8

0.9

1

1.1

1.2

1850 1900 1950 2000 2050 2100 2150

Effective Producers/Effective Consumer

IndiaJapan

US

Figure 3. The First Demographic Dividend, India, Japan, and the United States

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1850 1900 1950 2000 2050Ra

te o

f Gro

wth

of S

up

po

rt R

atio

(%

)

.

India

Figure 3. The First Demographic Dividend, India, Japan, and the United States

-1

-0.5

0

0.5

1

1850 1900 1950 2000 2050Ra

te o

f Gro

wth

of S

up

po

rt R

atio

(%

)

.

Japan

India

Figure 3. The First Demographic Dividend, India, Japan, and the United States

-1.000

-0.500

0.000

0.500

1.000

1850 1900 1950 2000 2050Ra

te o

f Gro

wth

of S

up

po

rt R

atio

(%

)

.

United States Japan

India

1st Dividend Summary

• Varied historical importance– Important in US 1850-1950– Negligible in India and Japan pre-1950

• Baby boom and double dip

• Varied intensity– Japan’s dividend is short and intense

• Negative dividends in the future– Japan (very strong) and the US

The Second Dividend

• Definition: The growth in productivity induced by an increase in the demand for lifecycle wealth.

• Compositional effect: population is concentrated at older, high wealth ages

• Behavioral effect: increase in duration of life and retirement lead to greater accumulation of wealth

Calculation of Second Dividend

• Demand for capital is proportional to lifecycle wealth of those 50+

• Lifecycle wealth of those 50+– W(50+) = PV[C(50+)] – PV[Yl(50+)]– Cross-sectional age profiles of consumption

and production shift proportionately over time– Productivity growth is constant

Implementation

• Data– Same as for first dividend

• Other assumptions– Interest rate: 3%– Productivity growth: 1.5%– Elasticity of output wrt capital: 0.33

Cohort aged 50-54 in 2000, Japan

0

2000

4000

6000

8000

10000

12000

50-54 60-64 70-74 80-84 90-94 100+

Po

pu

latio

n

0

50

100

150

200

250

300

350

400

450

500

Co

nsu

mp

tion

, La

bo

r In

com

e

PopulationLabor Income

Consumption

Calculation of wealth for cohort aged 50-54 in 2000, Japan

Present value of labor income, rest of life $1206 billion

Present value of consumption, rest of life $2231 billion

Current wealth (difference) $1025 billion

Wealth/Current labor income 2.2

Figure 4. Wealth/Income Simulations, India, Japan, and the US

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1850 1900 1950 2000 2050

We

alth

/Inco

me

US

Japan

India

Figure 5. The Second Dividend: Rates of Growth of Output per Worker

-1.5

-1

-0.5

0

0.5

1

1.5

2

1850 1900 1950 2000 2050

An

nu

al r

ate

of g

row

th (

%)

.

India

Figure 5. The Second Dividend: Rates of Growth of Output per Worker

-0.5

0

0.5

1

1.5

2

2.5

1850 1900 1950 2000 2050Ann

ual r

ate

of g

row

th (%

) .

Japan

Figure 5. The Second Dividend: Rates of Growth of Output per Worker

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1850 1900 1950 2000 2050

An

nu

al r

ate

of g

row

th (

%)

.

US

Figure 6. GDP Growth in India, 1890-1995

10000

100000

1000000

10000000

1880 1900 1920 1940 1960 1980 2000 2020

Gro

ss D

omes

tic P

rodu

ct

Actual

Predicted

Figure 7. GDP Growth in Japan, 1920-1995

10000

100000

1000000

10000000

1880 1900 1920 1940 1960 1980 2000

Gro

ss D

om

est

ic P

rod

uct

Actual

Predicted

Figure 8. GDP Growth in the US 1850-1990

10000

100000

1000000

10000000

1840 1860 1880 1900 1920 1940 1960 1980 2000

Gro

ss D

omes

tic P

rodu

ct

Predicted

Actual

Table 3. The First and Second Dividend as Compared with Actual GDP Growth per Effective Consumer, India, Japan, and the United States.

Actual GDP growth per effective

consumer

First dividend: growth of

the support ratio

Second dividend: Effect of growth of lifecycle wealth

First + Second Dividend

First and second

dividend as a percent of

actual

India1880-1955 0.18 -0.01 0.13 0.12 63.71955-1975 1.49 -0.14 0.60 0.47 31.21975-2005 2.98 0.34 1.02 1.37 45.82005-2050 0.20 1.04 1.24

Table 3. The First and Second Dividend as Compared with Actual GDP Growth per Effective Consumer, India, Japan, and the United States.

Actual GDP growth per effective

consumer

First dividend: growth of

the support ratio

Second dividend: Effect of growth of lifecycle wealth

First + Second Dividend

First and second

dividend as a percent of

actual

Japan1900-1940 2.23 -0.06 0.20 0.15 6.61950-1980 6.23 0.61 1.72 2.32 37.31980-2005 1.72 -0.23 1.21 0.98 57.12005-2050 -0.65 0.19 -0.45

Table 3. The First and Second Dividend as Compared with Actual GDP Growth per Effective Consumer, India, Japan, and the United States.

Actual GDP growth per effective

consumer

First dividend: growth of

the support ratio

Second dividend: Effect of growth of lifecycle wealth

First + Second Dividend

First and second

dividend as a percent of

actual

US

1850-1940 1.55 0.27 0.62 0.89 57.61950-1970 2.15 -0.51 0.24 -0.27 -12.61975-2005 2.04 0.40 0.50 0.90 44.02005-2050 -0.20 0.43 0.23

2nd Dividend, Summary

• Demography is leading to an increase in the demand for lifecycle wealth

• Effects are large

• Effects are persistent although becoming small in Japan

Observations

• Importance of policy– Relationship between capital and lifecycle

wealth

• Output per effective consumer is not welfare– Dividends are realized, in part, by shift to

smaller families. – Capital accumulation requires reduced

consumption, i.e., no free lunch.

Unanswered Questions

• How do age profiles of consumption and production vary across countries and over time?

• How importance is capital relative to lifecycle wealth? Is it becoming more important or less?

• What is the role of public policy? The role of family support systems?

THE END