The demographic transition consists of the shift from a mostly rural society with high birth and mortality rates to an industrial society with low birth and mortality rates.

The process of economic development is associated with major demographic changes, from societies with high mortality and fertility to lower values for both variables, and with this, a gradual process of population ageing. In many developed countries, the decline in fertility was temporarily interrupted by the baby boom that took place after the Second World War. This generated a veritable demographic cycle: the existence of a particularly numerous and long-lived generation, followed by much smaller generations, is giving rise to a deeper population ageing process.

However, it is often forgotten that, in this process, ageing is preceded by an economic boom phase known as the demographic dividend, with vigorous growth of the working-age population in relation to the number of dependents. In the early stages of the demographic transition, families have fewer children to look after. The next effect is a larger proportion of the working-age population over those who are dependent. While this happens, there are more resources to invest in economic development and family welfare. These are the necessary conditions for the so-called first demographic dividend to occur, and they represent an opportunity, not a guarantee, to improve the living conditions of the population. The opportunity becomes a guarantee if the key policies for economic development are implemented. The productivity of young adults is conditioned by their education and access to work experience. And also by benefits and reconciliation policies that make it easier for young parents to work. The first demographic dividend is also related to the productivity of elderly adults. In this regard, tax incentives, health programmes and policies concerning retirement and pensions are of key importance.

Figure 1 illustrates this process by combining historic demographic data with projections. It shows the decrease in dependency of the child population and the gradual increase in dependency of the elderly. As a result of this, there is a long period in which the total dependency ratio is low. For Spain, the minimum dependency ratio occurred around 2010, while for global demography it will occur much later, around 2050.

With a view to measuring the economic impact of the demographic transition on the economy, just before the year 2000 an international project (the NTA) was initiated with the aim of establishing a standardised method to impute national accounts by ages. Specifically, household surveys can be used to estimate an age profile of labour income and consumption (including private and public consumption). This makes it possible to identify the ages at which there is a resource surplus (consumption is less than labour income) or deficit and then go on to analyse how the surpluses finance the deficits through the asset market or private (family) or public (welfare state) transfers.

Figure 2 shows the profiles of consumption and income, grouping the 60 countries represented into high income (18), upper middle income (15), lower middle income (12) and low income countries (15). In order to be able to compare them, the profile of each country is divided by the 30-49 age group. High income countries notably spend more on education and the elderly, and it is these countries that register the largest differences by income level. Regarding labour income, the main difference occurs, firstly, in the earlier age of entry into the labour market of young people in low income countries. Secondly, in high income countries the elderly stop earning labour income earlier, while it is in lower middle income countries that the elderly stay in the labour market longest.

The data presented in figures 1 and 2 yield indicators of dependency with economic content, and these in turn provide the demographic dividend. Specifically, the demographic dividend is measured as the increase in the support ratio, initially a demographic ratio. This demographic indicator can be enriched by combining it with the economic data in figure 2. The demographic dividend occurs when this “economic” support ratio is growing. Figure 3 shows the evolution of the support ratio and the corresponding demographic dividend phases for Europe as a whole and for the selected countries (Germany, Spain, Sweden and the UK). The process of the first dividend develops over several decades. Europe has exhausted the phase of positive demographic dividend, as have the four countries shown, which are already in the zone of negative demographic dividend. The magnitude of the demographic dividend differs depending on the intensity of the demographic transition. Spain shows the largest variation, reflecting the fact that the baby boom and the subsequent drop in fertility were particularly pronounced. In contrast, Sweden has the least variation, indicating a less drastic demographic transition and the fact that in this country fertility bounced back close to the replacement level of 2.1 children per woman.

The experience of developed countries is fundamental for those regions of the planet that still have scope to exploit the benefits generated by the demographic dividend. As happened in most developed countries, the demographic dividend could be used to build a welfare state capable of compensating for the extension of labour market risks. However, contrary to what happened in many countries, the high demographic risk involved in using a pay-as-you-go system should be taken into account and acted on appropriately. Experience of pension systems shows that it is necessary to do early and very long-term monitoring of demographic changes between working-age population (potential contributors) and dependent population (potential transfer recipients) and to implement compensatory mechanisms such as accumulation of funds, or adjustment factors for pensions and contributions.

Regarding developed countries, the demographic dividend literature also points to the possible existence of a second demographic dividend that would help to cope with the transition, assuming that baby boomers save enough to increase capital and productivity. This second demographic dividend need not run dry like the first one and could mitigate the economic impact of the depletion of the working-age population during the ageing phase. The aim is to create incentives to accumulate assets – savings, pension funds, property – and not to entrust one’s future solely to governments. If various ways of savings are encouraged, as the population grows old the burden on families and governments is lighter and resources can be allocated to other areas such as health or education. The educational transition that occurs in parallel with the process of development is another positive factor that offsets the reduction of the workforce, and it is vital in order to ensure productivity in the future. In this context, public managers, in wealthy countries and developing countries alike, should apply clear, accessible and trustworthy measures enabling workers to invest in their education and their financial future, and therefore in the productivity and development of their country.

The results of this study depend on both the method used to analyse the past and the method used to make projections, and on the values adopted for both demographic (fertility, mortality and migrations) and economic variables (productivity trends and profiles of consumption and income). It is necessary to continue investigating the interplay between demographic and economic change, which in turn hinges on changes in family structure.

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LEE, R. and A. MASON (2006): «Back to Basics: What is the Demographic Dividend», Finance & Development, 43(3), 16-17

MASON, A., R. LEE, M. ABRIGO and S.-H. LEE (2017): Support Ratios and Demographic Dividends: Estimates for the World, Population Division, Department of Economic and Social Affairs, Technical Paper 2017/1, Nueva York: United Nations Publications

MEJÍA-GUEVARA, I., E. RENTERÍA, C. PATXOT and G. SOUTO (2016): «The effect of education on the demographic dividend», Population and Development Review, 42(4), 651-671.

Naciones Unidas (2013): National Transfer Accounts Manual. Measuring and Analysing the Generational Economy, Population Division, Department of Economic and Social Affairs, Nueva York: United Nations Publications.

PATXOT, C., E. RENTERÍA, M. SÁNCHEZ-ROMERO and G. SOUTO (2011): «How intergenerational transfers finance the lifecycle deficit in Spain». En: Lee, R., Mason, A. (eds.), Population Aging and the Generational Economy: A Global Perspective, Cheltenham: Edward Elgar Publishing