Dependency Ratio Definition Formula Example Of Dependency Ratio

Dependency Ratio Definition

Working-age: 15 to 64 yearsNonworking age: Zero to 14 years and 65 years and above

Depending upon the data sample, these age groups can vary. For example, it is possible that people below the age of 18 years are not allowed to work in a country. In that case, the age group of 15 to 18 will also be considered a non-working age.

Types

Depending upon the age groups, this ratio can be classified into two parts, the Youth and Elderly ratio. The youth ratio focuses on those under 15 only, while the elderly dependency ratio includes only those aged 65 years or above.

Dependency Ratio Formula

Following is the formula of the dependency ratio.

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As the age of the population rises, the needs of the population as a whole increase, and pressure over the working-age group population increases.

High Dependency (Say above ‘1’): It indicates that people belonging to the working-age group and the whole economy are under burden as they need to support the aging population.Low Dependency (Say below ‘1’): It is beneficial for the economy as the population in the working-age group is in the majority.

Example of Dependency Ratio

Assume that a country has a population of 1,000 people, which are classified by age as follows:

Under the age of 15 years: 250 people15-64 years: 500 people65 years and above: 250 people

So, the dependency ratio will be –

= (250 + 250) / 500= 1

Interpretation

Here’s the graph from the website of the World Bank describing the global trend of dependency ratio.

Source: World Bank

It shows how the ratio has reduced over the years till 2015, which indicates that the age classification of the global population has been supplemental to global economic growth. However, the trend seems to be changing from 2015 onwards as the graph starts to move upwards. It indicates that the proportion of the working-age group will reduce, and the burden on this group will increase.

Similarly, here’s the table describing the dependency ratios of different countries (best and worst):

Both the tables indicate how the proportion of the working-age group’s population in the country’s total population can impact its economy.

All the top 5 (Lowest dependency ratio) countries: Qatar, Bahrain, UAE, Maldives, and Singapore, are either economically developed or are the emerging economies of the world. While on the other side, when we consider the bottom 5 (Highest dependency ratio) countries as per ratio, all the five countries are not doing economically well except Nigeria.

Uses

It classifies the population into working and non-working age, making it easier to account for those who can earn their income and those who don’t have or are ‘likely’ to be non-earning.

For economical analysis:

It helps in analyzing the shift in populationIt also helps to understand employment trends as if we have to calculate the employment rate of the country, and we should consider the working-age group population only

For public policy management by the governments:

It helps the government in policy management because if the dependency ratio is increasing, then the government may need to increase the taxes that are subjected to the working-age group, like income taxThe government may need to provide subsidies for the daily needs to compensate for the non-earning age group’s expenses.The dependency ratio can help develop policies for the environment and infrastructure because the working-age group will have a more significant impact on the environment, and demand for better infrastructure will be higher.

Limitations

The comparison of dependency ratio between the countries may not provide an accurate overview because different countries have different regulations related to the minimum age that individuals need to attain before they start working and the regulation regarding the retirement age as per different jobs.Depending upon the country’s culture, individuals may start earning earlier to get independent. Also, some individuals may delay their retirement in a few years.A proportion of the working-age population may not be employed because of other factors like studying or having illness or disability.

Conclusion

After considering the advantages and limitations of the dependency ratio, we can conclude that it is a useful indicator to understand the economic situationIndicator To Understand The Economic SituationSome economic indicators are GDP, Exchange Rate Stability, Risk Premiums, Crude Oil Prices etc. read more. However, it involves multiple assumptions:

· First, only people aged 15-64 years earn. And, every individual in that age group is earning and contributing to the economy

· Second, nobody in the age group less than 15 years or above 65 years is earning

Both the assumptions are very unrealistic. Hence, it is important that while making any inference from the dependency ratio, we also consider the labor participation ratesParticipation RatesThe participation rate refers to the total number of people or individuals who are currently employed or searching for a job. read more of these age groups.

Thus, this ratio should not be used as a stand-alone tool to analyze the country’s economic situation. It should be complemented with other metrics that provide an overview of the economic dependency of the population.