Lifecycle-adjusted dependency ratio

1. Lifecycle-adjusteddependency ratio J.M. Ian Salas Indicators WG 8 June 2010

2. Outline • (Population-based) dependency ratio • Lifecycle-adjusted dependency ratio • Simulations using Philippine NTA • Other indicators

3. (Population-based) dependency ratio • = no. of persons belonging to “dependent” group / no. of persons belonging to working group • In a population and for a single year, usually measured as: • = no. of persons aged 0-14 and 65+ / no. of persons aged 15-64

4. Some observations • Implicitly assumes that individuals in the dependent group are not productive, and individuals in the working group are able to support themselves and their dependents. • Thus, members of the dependent group are treated as consumers only, while members of the working group are treated as consumers as well as producers, with their production exceeding own consumption.

5. Some observations (2) • Group assignment solely dependent on age. • Adopts conventions on the determination of the dependent age groups (0-14 and 60+|65+) and the working age group (15-59|64). • Weights each individual in the population equally in the computation.

6. Suggestions • Explicitly consider that any individual may be both a producer and a consumer at the same time. • Shift focus towards counting the no. of net consumers and net producers. • Empirically determine crossover ages, as opposed to being “arbitrarily” set.

7. Suggestions (2) • Use the NTA LCD per capita age profile to weight individual contributions: • the dependent age groups do not impose equal burdens • in most developing countries, the young have higher aggregate LCD than the elderly • the reverse is true for developed countries (?) • the net surplus age groups are not equally productive • countries differ in how their domestic labor markets value seniority and experience in the formal sector and in the nature of opportunities in the informal sector

8. Lifecycle-adjusted dependency ratio • = aggregate deficit of net dependent age groups / aggregate surplus of net surplus age groups • In a population and for a single year, for net dependent age groups i and net surplus age groups j, measured as: • = Σi (no. of persons in i * LCD per capita in i) / Σj (no. of persons in j * LCS per capita in j)

9. Advantages of using lifecycle-adjusted dependency ratio • original (population-based) dependency ratio well-known and widely used • lifecycle-adjustment (crossover ages, weights) derived from basic NTA estimation output • …

10. Disadvantages of using lifecycle-adjusted dependency ratio • having different crossover ages for each country may lead to confusion • relies on assigning all members of a particular age group into one of two mutually exclusive groups • …

11. Simulation exercise for the Philippines • Data items: • 1999 NTA per capita age profile • Population projections (UN), 2000-2050 • Note: uses constant 1999 prices • Individual behaviors with respect to work and consumption are assumed static/constant all throughout • Results entirely driven by population age structure

12. Per capita age profile, 1999

13. Medium vs. Constant-fertility assumption • In the simulations, we use the UN Population Division projections for 2000-2050 from the latest World Population Prospects report. • Medium-fertility assumption: “Total fertility is assumed to converge eventually toward a level of 1.85 children per woman”, but not necessarily during the projection period. • Constant-fertility assumption: “Fertility remains constant at the level estimated for 2000-2005.”

14. TFR and contraceptive usage rate, Philippines 1968-2008 (survey years) TFR

15. Population age structure

16. Aggregate labor income, simulated

17. Aggregate consumption, simulated

18. Aggregate age profile, 1999

19. Simulated aggregate age profile, 2050 medium assumption

20. Simulated aggregate age profile, 2050 constant-fertility assumption

21. Aggregate lifecycle deficitage profile, simulated

22. Aggregate lifecycle deficit, simulated

23. Comparison between (population-based) dependency ratio and lifecycle-adjusted dependency ratio

24. Youth dependency ratio, simulated

25. Elderly dependency ratio, simulated

26. Total dependency ratio, simulated

27. Other indicators • Mean age of production and consumption • Spending and labor earnings per person • Economic support ratio • Annual growth rates in no. of effective producers and consumers

28. Mean age of production and consumption, simulated

29. Spending and labor earnings per person, simulated Spending per person Earnings per person

30. Economic support ratio • No. of effective producers for every effective consumer • “Effective” means corrected for age variation in consumption and productivity • = aggregate labor income / aggregate consumption

31. Economic support ratio (2) • In a population and for a single year, measured as: • = Σi (no. of persons in i * YL per capita in i) / Σi (no. of persons in i * C per capita in i) • no “group assignment” used in computation

32. Economic support ratio (L/N), simulated

33. Annual growth rates in no. of effective producers and consumers, simulated

34. Some issues to consider • Is it worthwhile to develop forecasts for future age profiles of consumption and labor income per capita? (so that results are not driven by changes in population age structure only) • How sensitive are the computed figures to imprecisely-estimated age profiles for consumption and labor income (which jointly determine crossover ages and LCD per capita)?