Dependency Ratio

Ever heard of the Baby Boomers? If not, this is the generation of people born in the decades following the Second World War and, in many developed countries, the largest generation of the population. Maybe you know some people of this generation, and maybe your own parents or relatives were born during this time. This generation is entering retirement age, and the generations behind them make up a smaller workforce. What could this mean for society, economics, and the future? A good measurement to give us some insight into this issue is the dependency ratio. Keep reading for examples, the formula, and more.

Dependency Ratio Definition Geography

The dependency ratio is how many people in a county are not of working age compared with those of working age. There are three main population groups we take into account to determine the dependency ratio: the youth population, old-age population, and dependency ratio.

Some countries classify adults and retirement age at slightly different ages, but for the purpose of consistency, we will use the World Bank's classification of youth ages 0-14, adults 15-64, and old age above 64.¹

Fig. 1 - Age dependency ratio by country

The dependency ratio can say a lot about where a country is heading demographically. This is important because it can be a strong indicator of economic growth as it allows us to see the workforce available to support the elderly and youth. Exponential population growth in the last few centuries has slowed down in developed economies meaning that in many places in Europe, East Asia, and North America, there is a large aging population that will be supported by a smaller and smaller workforce.

A couple of principles help to lay the groundwork for the concept of dependency ratios.

• People in developed countries choose to have fewer kids. This is the main trend that we must have in mind when looking at demographics and dependency ratios.

• A replacement rate of 2.1 births per couple is known as the replacement rate, a high enough birth rate to keep a population constant.

Dependency Ratio Formula

To get the dependency ratio, we add up the number of youth and the number of people over 64 and divide it by the working-age population.

Youth+Old-Age/Working Age=Dependency Ratio

For example, if the total number of youth in a country is 1,000, the number of elderly adults that do not work is 500, and the number of working-age adults is 2,000, then we would use the following formula to determine the dependency ratio.

1,000 (Youth) + 500 (Old-Age)/2,000 Working Age = 0.75 Dependency Ratio.

This means that there are three dependents for every four working-aged people. This figure is able to show the workforce relative to those not of working age.

This metric does not take into account things such as unemployment which could be classified as dependent people also because they are not contributing to the workforce.

To get just the ratio of youths compared to the working-age population, we add up the total number of youth and divide it by the total number of working-aged people to get the youth dependency ratio.

Youth / Working Age = Youth Dependency Ratio

To get just the ratio of the old-age population, we add up the total number of people over 64 and divide it by the total number of working-aged people to get the old-age dependency ratio.

Old-Age / Working Age = Old-Age Dependency Ratio

Dependency Ratio Example

Let us look at Japan. Japan is famous for its demographic issue as it has experienced an overall aging population for decades now, with a median age of around 48.6 years old, making Japan the oldest country in the world by median age.² This poses problems to the country. The fertility rate has been declining for several decades. Japan is a largely homogenous society with little immigration and much cultural resistance to opening up to more immigration. These factors, combined with a highly industrious culture, have left Japan facing some major demographic challenges.

Japan's youth dependency ratio is 0.30. In other words, for every 100 working-aged adults (15-64), there are 30 youths (0-14) in Japan. Japan's Old-Age Dependency Ratio is 0.53, meaning there are 53 people over the age of 64 for every 100 working-aged adults in Japan. The difference between the youth dependency ratio and the old-age dependency ratio is very large and reflects the demographic issues. There are far more elderly people than youths in Japan, around 15 million more. The total dependency ratio in Japan in 2022 is 0.83.³

The high dependency ratio in Japan puts strain on the working-age population for several reasons. There are not as many youths coming into the workforce each year. The working-age population may be expected to keep up with the productivity and economic activity of the larger and now-retiring population. This stress could contribute to why many working-aged adults won't have kids; they may feel pressure to be career-focused, or finding the time for dating can be difficult. Not having kids further lessens the number of people entering the workforce in the future, becoming a vicious cycle of demographic decline. This can be observed in Japan's declining fertility rate. 1973 was the last year that Japan's fertility rate was at the replacement rate of 2.1 births per woman.⁶ There has been a steady decline in the fertility rate since then, leading to a rate of just 1.3 in 2020.3 Japan's population is thought to have peaked at around 128 million in the mid-2000s.³

Fig. 2 - Japan Population Pyramid, 2019

In the graph above, we can see how there is a much smaller population at the bottom of the pyramid than towards the middle and top. The widest section of this pyramid is either retired or soon will in the coming decades.

Importance of Dependency Ratio

So why is any of this important? You may be saying, "There may be fewer people in Japan in the future, so what?"

The Dependency Ratio can show economic potential. It can also provide useful information for governments, health care services, and educational institutions as to the number of people they may need to take care of or prepare to have in the country. With more aging people or more youth relative to the workforce, the government might create programs to help ease the stress on the workforce and guide society toward a healthy future.

Population decline can cause a lot of issues. There is a larger amount of older age people that a smaller workforce and governments need to take care of or support either directly or indirectly. A lower population of youth entering the workforce can, in many ways, lead to a strained workforce, not enough employees for jobs and services, and economic stagnation as markets and consumer bases shrink, making it difficult to build businesses and innovate. Aging populations can slow down economic activity as more people keep wealth by saving more and living longer. The ability to build wealth in capitalist markets based on economic growth becomes more difficult, leading to financial and generational stagnation as it becomes difficult to provide for future generations. However, knowing indicators such as dependency ratios can help governments, policymakers, businesses, and ordinary people prepare and adapt to these stressors of an ever-changing world.

Countries with High Youth Dependency Ratio

Countries with a high dependency ratio may fall into two major categories with some exceptions. The categories are developed countries with a high old-age dependency ratio and developing countries with a high youth dependency ratio.

We discussed a high old-age dependency ratio in the example of Japan; now we discuss the opposite. A high youth dependency ratio is typically found in a developing country. The higher a person's standard of living goes, typically, the fewer kids they will have.

There are several factors that contribute to higher birth rates. In non-industrialized countries, the mortality rate is also often higher than it is in industrialized countries. Therefore, not only are people not living as long but it is also expected that some children will not live past the age of one, as infant mortality rates are highest in less developed countries. Fertility rates are high due to mortality rates also being high, and a larger number of children are desired or needed to help do things such as helping to grow crops and helping to take care of relatives in old age. In more developed countries, people choose to have fewer children and put more resources into each. This is often due to a much lower mortality rate, higher cost to raise children, and more access to developed industries that provide goods and services. When a country develops more, the mortality rates start to drop, and the population starts to increase rapidly as fertility rates are still high, yet mortality rates are low. This is the beginning stage of what is known as the Demographic Transition Model.

A high youth dependency ratio will put stress on the workforce to provide and develop jobs, infrastructure, and industries for future generations. A high youth dependency ratio can mean that the country has a bright future with a lot of room to grow economically and a likely increase in living standards.

Let's look at the population of one of the largest countries in Africa, the Democratic Republic of the Congo.

Fig. 3 - The Democratic Republic of the Congo Population Pyramid, 2020

The population pyramid can show the level of development in a country as well as visualize the dependency ratio.

The youth dependency ratio in the Democratic Republic of the Congo is 0.88, therefore for every 100 working-aged adults (15-64) there are 88 youths (0-14). The old-age dependency ratio in the Democratic Republic of the Congo is just 0.06, meaning there are only six people older than 64 for every 100 working-age adults, bringing the total dependency ratio to 0.93.⁸ We can see a massive contrast to Japan here as there are nearly as many youths as working-aged people in the Democratic Republic of the Congo. In this situation, the challenge for governments, policymakers, and society moving forward is how to build sustainably and prosperously to accommodate such a population increase.