Lifecycle-adjusted dependency ratio J.M. Ian Salas Indicators WG 8 June 2010

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

(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

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.

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.

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.

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

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: = Σ i (no. of persons in i * LCD per capita in i) / Σ j (no. of persons in j * LCS per capita in j)

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 …

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 …

Simulation exercise for the Philippines Data items: – 1999 NTA per capita age profile – Population projections (UN), – 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

Per capita age profile, 1999

Medium vs. Constant-fertility assumption In the simulations, we use the UN Population Division projections for 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 ”

TFR and contraceptive usage rate, Philippines (survey years) TFR

Population age structure

Aggregate labor income, simulated

Aggregate consumption, simulated

Aggregate age profile, 1999

Simulated aggregate age profile, 2050 medium assumption

Simulated aggregate age profile, 2050 constant-fertility assumption

Aggregate lifecycle deficit age profile, simulated

Aggregate lifecycle deficit, simulated

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

Youth dependency ratio, simulated

Elderly dependency ratio, simulated

Total dependency ratio, simulated

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

Mean age of production and consumption, simulated

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

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

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

Economic support ratio (L/N), simulated

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

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)?