What is demographic economics?

Demographic economy is a field of study which assesses the determinants and consequences of change in the demographics. Demographic indicators include mortality, fertility, location, divorce, marriage, ethnicity, age, gender, size of the population, and the rate of population growth.

A study in the field draws upon applied economics and theoretical economics. For example, a study on the consequences of a change in the population growth draws upon macroeconomics.

Frequently Asked Questions (FAQs)

What are the existing models in the field of demographic economics?

• One-sector growth model – This model states that the labour productivity is dependent upon the factors of production, that is, human resources, natural resources, physical capital, land, and technology. If it is assumed that labour is constant, then any changes in the population will directly affect productivity.

When the production function is constant and the population growth increases significantly, then the resources required for production will be shared with the increasing population. In result the productivity will diminish along with diminishing returns.

• Savings model – It is assumed in the model that savings have a significant impact on the linkage between economic and population growth. For example, in case the population growth is slow, then the population of elderly adults will increase. The elderly population has higher consumption but the contribution to the household income is nil or limited. There is a negative relation between the savings and the population growth, and ultimately the economic growth is affected.

There is another theory about savings and population growth. During the working age, people set aside their savings for their children and for retirement age. The savings is affected by the size of the family. For example, if the family size is 10 members, then the family plans to save more, in comparison to a family of four.

• Government spending is population sensitive - Population sensitive activities comprise health facilities for the elderly people and schooling for the young people. The population change has a direct and significant impact on government spending. The government must accommodate the population pressure, however, government spending on the educational infrastructure is uncertain.

• Technological change – Technological change is a part of the new investments therefore it has a direct impact on the economic growth, but it is not affected by the population growth. However, recent research has shown a linkage between the demographics and technological growth. To illustrate, the research and development department utilises resources for creating knowledge. With the increase in the population size, the resources available for R&D will be limited and affect economic growth (as investment in technology will be limited). Another example can be taken from the agricultural sector. With the increase in the population size, the per person cost will be reduced and the efficiency of irrigation, transport, and communication will be leveraged.

What are the implications of demographic economics?

• Implication on the labour market which further impacts the economy – The supply of labour is affected by the demographics. For example, a decline in the mortality rate results in an increase in the supply of labour as people live longer. Moreover, the change in the age distribution of the population affects the labour growth and the unemployment rate from the long term perspective. For example, for an increase in older population, the work force availability will be affected and the population of dependent people will also increase. However, the applicability of this relation can be questioned as the unemployment rate and availability of workforce is dependent upon numerous factors such as retirement age, policies related to the retirement benefits and the increase in skills with the experience.

• Implication on economic growth – The economic growth is affected by the combination of the productivity and labour force growth. A slowdown in the population growth will have a direct impact on the economic growth as the labour participation will be affected and consequently, the productivity would be impacted too. Moreover, the age demographics shapes the savings, investment decision and the aggregate consumption, therefore the growth trend is affected. To illustrate, for an increase in the population of aging people, the demand for the healthcare facilities will rise, the demand for the properties will rise, and the demand for rental property will also rise.
• Implication on the monetary policies – The demographics can shape how monetary policies work as demographic factors impact the income and the wealth within the economy. To illustrate, the older population have ownership of more assets and are creditors to fund their retirement. Whereas the younger population does not own much assets and looks for the credits to fund their present needs. With the shift in the population on either side, the monetary policies tend to change.
• Implication on the government policies – with the increase in the older people population, a significant amount of pressure will be put on the pension related policies and the healthcare infrastructure. To fund the policies for different age groups, the government borrowing might increase, the tax rates might increase and the benefits for the other age group might be reduced.

What is the importance of demographics economics?

The past population trend can play a significant role in preparing and structuring future policies and developments. Moreover, the demographics can explain the social and economic trends in the long run. The demographic economics is a critical component for analysing the public policies.

The factors like the population size and the age composition of the population plays a significant role as the fiscal arrangements are dependent upon them.

An economy can ignore the demographic trends once but ignoring it for many years can have a negative impact on the economy from a long term perspective.