5.4 Age Compositional Shifts and Two Demographic Dividends
5.4.2 Computational Steps for the First and
As extensively discussed elsewhere (Mason 2001, 2007; Mason and Lee 2006), one of the important linkages between demographic transformations and economic growth is the role of demographic dividends in the process of economic development. As a coun- try advances along the stages of demographic transition, it undergoes considerable age structural shift s. When a country’s fertility begins to fall, the fi rst demographic dividend
arises because changes in the population age structure have led to an increase in the working ages relative to non-working ages. In other words, the fi rst demographic divi- dend arises because of an increase in the share of the population at ages during which production exceeds consumption. Th at is, the fi rst demographic dividend is positive when the support ratio, which is defi ned as the ratio of eff ective workers to eff ective con- sumers, increases (Mason 2007).
Using relatively simple mathematical notations, we can provide a short description of how the fi rst demographic dividend is measured. Th e calculus is as follows: income per eff ective consumer ( Y(t )/ N(t )), which is a measure of per capita income adjusted for age-variation in consumption, is the product of the support ratio ( L(t )/ N(t )) and income per worker ( Y(t )/ L(t )):
Y
N L N
Y L ( )t
( )t ( )t ( )t
( )t ( )t
= ( )×
(1)
Furthermore, N(t ), which represents the eff ective number of consumers, and L(t ), which represents the eff ective number of workers, can be expressed as:
N P t
a
( )t =∑α( )a ( ,a )
L P t
a
( )t =∑β( )a ( ,a ) (2) where α( ) and β( ) are the age profi les of consumption and production, and P(a,t ) is the population. Hence, the estimates of the demographic dividends are heavily depen- dent upon the average age profi les of consumption (with both private and public sec- tors combined) and production (in both paid employment and self-employment) of the country under study. However, at the time of the writing, all the necessary data for each of the countries in question could not be obtained, which is why we chose to cre- ate the so-called “per capita age-specifi c profi les for developing Asia,” by combining the following four Asian NTA member countries: India in 2004, Indonesia in 2002, the Philippines in 1999, and Th ailand in 2004, as shown in Figure 5.3 .
To identify the timing and duration of the fi rst demographic dividend for each coun- try, we need to discuss inter-temporal changes in the support ratio. Equation (1) can be expressed in growth terms as follows:
g Y
N g L
N g Y
L ( )t
( )t
( )t ( )t
( )t ( )t
⎛
⎝⎜
⎛⎛
⎝⎝
⎞
⎠⎟
⎞⎞
⎠⎠= ⎛
⎝⎜
⎛⎛
⎝⎝
⎞
⎠⎟
⎞⎞
⎠⎠× ⎛
⎝⎜
⎛⎛
⎝⎝
⎞
⎠⎟
⎞⎞
⎠⎠ (3)
CHANGING INTERGENERATIONAL TRANSFERS 133
Th e fi rst demographic dividend is the rate of growth of the support ratio, which rises or falls, subject to the age compositional transformation in the process of the demographic transition. During the demographic transition when the support ratio is rising, income per eff ective consumer increases, given that there is no change in productivity. As the support ratio declines, however, income per eff ective consumer falls and the fi rst demo- graphic dividend disappears, which means that the increase in income per eff ective con- sumer is transitory. More importantly, the fi rst demographic dividend can be realized only if employment keeps pace with the growth of the working age population.
Now, let us shift our attention to the second demographic dividend. Th is dividend corresponds to the growth rate of productivity or output per eff ective worker, which is induced by the accumulation of wealth as well as physical and human capital deepening.
Th e second demographic dividend arises when individuals at all age groups increase demand for wealth in some form to support their old-age consumption. One possibil- ity is that old-age economic security might heavily rely on transfers from public pen- sion and welfare programs or from adult children and other family members. Th e other possibility is that individuals accumulate capital during their working years, which in turn serves as the source of support in retirement. Both of these forms of wealth can be utilized to support consumption in old age. However, attention should be drawn to the following key point: only capital accumulation will lead to an increase in productivity.
Unlike the fi rst demographic dividend, the second dividend is not transitory, and may lead to a permanent increase in capital deepening and income per eff ective consumer.
0.0 0.2 0.4 0.6 0.8 1.0 1.2
0
Note: This figure was prepared by the author.
*Indonesia (2002), Philippines (1999), Thailand (2004), and India (2004).
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+
Consumption Labor income
Age
Relative to mean annual labor income ages 30 to 49
FIGURE 5.3 A typical Asian economic life cycle: NTA estimates on per capita consumption and labor income for four Asian countries* combined
Th e second dividend, however, does not occur spontaneously, but can be brought about if consumers and policymakers are forward-looking and respond eff ectively to coming demographic changes by encouraging the development of an old-age support system that substitutes capital for transfer wealth.
Th ere are two ways in which demographic factors cause an increase in the demand for life-cycle wealth and the second demographic dividend. First, there is a compositional eff ect, caused by an increase in the share of individuals who have nearly or fully com- pleted their productive years. Second, there is a behavioral eff ect, caused by an increase in life expectancy and the accompanying increase in the duration of retirement, lead- ing to an increase in demand for wealth. Demand for life-cycle wealth is mainly con- centrated among older working adults who are approaching their peak earnings and have completed their childrearing responsibilities. Mason (2007) uses the wealth held by those aged 50 and older to measure the eff ect of demography on life-cycle wealth and the second demographic dividend.
Demand for life-cycle wealth is computed as the diff erence between the present value of lifetime consumption and the present value of lifetime production for adults. Th e present value of the future lifetime consumption of the cohort born in year b or earlier ( b = t-a ) is:
c PVNVV b t t xN b
x a
( )t ( bb,,t) c( ) e(gggc rr)xN( b,t,t x)
=
∑−0 ω
(4)
where N( b tbb,,t+x) is the number of eff ective consumers born in year b or earlier who are alive in year t + x, g c is the rate of growth of the per capita age profi le of consumption, r is the interest rate, and c( )t is consumption per eff ective consumer in year t.
Similarly, if the per capita age profi le of production is shift ed upward at gy , the present value of the future lifetime production of the cohort born in year b or earlier ( b = t-a ) is:
y t PVLl PVLVVV b tt y tl xL b
a
)
tt ( bbbb,,tt yyl( ) e(gggy rr)xL( b,,tt x)
∑− ω
(5)
where L( b tbb,,t+x) is the number of eff ective producers born in year b or earlier who are alive in year t+x, and y tl( )t is production per eff ective producer in year t. Consequently, the ratio of wealth to labor income for those who were born in year b or earlier ( b = t-a ) is:
w( b tbb,,t) [ ( )) c tt /y tyll( )] PVNPVN(( b tb, ) / ( )N t −PVLPVLVVV ( bb,t) / ( )Lt (6) It should be noted that under the Golden Rule, the ratio is assumed to be 1, and the rate of productivity growth and the rate of growth of equivalent consumption, g y and g c , are constant and equal to each other. Mason (2007) assumes that: (1) the growth of con- sumption and labor income are exogenously 1.5 percent per year and the interest rate is 3 percent; (2) age 50 is used as the cut-off age at which wealth accumulation begins;
CHANGING INTERGENERATIONAL TRANSFERS 135
(3) the transfer policy is constant so that the growth rates of the capital and life-cycle wealth are equal; (4) the elasticity of labor income with respect to capital is 0.5 (that is, the elasticity of output with respect to capital is 1/3). Th us, the second demographic divi- dend is calculated as half of the growth rate of the wealth to income ratio.