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