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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
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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
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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?
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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.
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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
.
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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.
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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).
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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
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Age Distributions, Three Extremes
0
2
4
6
8
10
12
14
16
US 1850
India 2040
Japan 2070
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Implementation
• Data– Same as for first dividend
• Other assumptions– Interest rate: 3%– Productivity growth: 1.5%– Elasticity of output wrt capital: 0.33
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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?
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THE END