Week 3 : Ageing, Consumption and Savings

Demographic dividend definition

Growth boost arising from demographic change.

Trigger of demographic dividend

Triggered by falling TFR but requires policies to turn change into growth.

First DD: Human resource investment

Education, health, nutrition investments → more resources per child → higher productivity.

First DD: Employment & productivity growth

New industries, export promotion, stable macro policy, removal of gender barriers → higher LFPR & wages.

First DD: Savings & investment

Rising incomes increased domestic savings → self-financed investment → capital accumulation.

Why dividend is temporary

Occurs in Stage 3; TFR eventually stabilizes → ageing; modern transitions shorten the window.

Exam: Fertility and short vs long run effects

Falling fertility creates DD in short run but ageing long run due to smaller cohorts entering workforce.

What is an optimal pyramid?

High support ratio; large working-age block; historically high TFR, low current TFR, moderate LE, migrant inflows.

Triangular pyramid characteristics

High TFR, short LE, young population; low ageing pressure but high youth dependency.

Scenario 1: Increased longevity only

Base same, LE rises → taller shape, gradual ageing; long run becomes rectangular then top-heavy.

Scenario 2: TFR decline only

Base narrows, LE stable → optimal short-run shape; long run funnel-shaped and severe ageing.

Scenario 3: TFR + longevity decline

Combined TFR drop + LE rise → strong short-run DD but worst long-run ageing; typical modern path.

Key insight: fertility decline

Fertility decline historically the primary driver of population ageing.

Coale (1957) Sweden insight

If TFR did not fall, mortality declines at young ages would NOT cause ageing.

Young vs advanced economies challenges

Young economies: main risk = future TFR decline; Advanced economies: fertility already low & stabilising; biggest challenge: rising longevity.

Longevity transition definition

Mortality improvements increasingly concentrated at older ages.

Infant/child mortality effect

Boosts future LFPR; enlarges future workforce.

Working-age mortality effect

Positively increases labour supply.

Elderly mortality effect

Ambiguous: elderly LFPR (L) often near zero → higher survival (π) doesn't increase labour supply.

XLFP formula meaning

Expected labour participation relative to life expectancy.

US XLFP results

Males XLFP/LE: 62.6%→51.6%; Women rose then peaked in 2000; Total 48.6%→46.3%.

Policy Implication:

1. Encourage older workers to continue working through incentives.

2. Invest in technologies improving elderly health/productivity.

3. Reduce fiscal burden of intergenerational transfers.

4. Increase retirement age gradually and predictably.

5. Remove employer biases against hiring older workers.

Critical insight (Bloom, Canning & Fink)

Longevity gains alone don’t raise GDP/LF; institutional rigidities limit benefits.