Dependency Ratio

Dependency Ratio Definition

Dependency ratio is defined as the ratio of the population comprising of the age group that consists of people in non-working age to the population that comprises of the working-age group. At times it is also called the total dependency ratio. The age group mentioned in the definition of dependency ratio is generally considered as:

  • Working-age: 15 to 64 years
  • Nonworking 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 in a country, people below the age of 18 years are not allowed to work. In that case, the age group of 15 to 18 years will also be considered as non-working age.

Types

Depending upon the age groups, this ratio can be classified into two parts, 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.

Dependency Ratio Formula = (Number of Dependents or Non-Working Age Group)/(Population aged between 15 to 64 Years) 
Dependency-Ratio-Formula

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For eg:
Source: Dependency Ratio (wallstreetmojo.com)

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 as well as 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.
Dependency Ratio = Youth Dependency Ratio + Elderly Dependency Ratio

Example of Dependency Ratio

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

  • Under the age of 15 years: 250 people
  • 15-64 year: 500 people
  • 65 years and above: 250 people

So, the dependency ratio will be –

Dependency Ratio Calculation
  • = (250 + 250) / 500
  • = 1

Interpretation

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

World Bank Data

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 seems to be starting to move upwards. It indicates that the proportion of the working-age group is going to reduce and the burden on this group will increase.

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

Best 5 CountriesYearRatio
Qatar201818
United Arab Emirates201819
Bahrain201828
Maldives201831
Singapore201831
Worst 5 CountriesYearRatio
Nigeria2018111
Mali2018100
Chad201898
Somalia201898
Congo, Dem. Rep.201897

Both the tables clearly indicate how the proportion of the working-age group’s population in the total population of the country 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 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 which makes it easier to account for those who have the ability to earn their income and those who don’t have or are ‘likely’ to be non-earning.

Dependency-Ratio-Condition

For economical analysis:

  • It helps in analyzing the shift in population
  • It also helps to understand employment trends as if we have to calculate the employment rate of the country, 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 tax
  • The government may need to provide subsidies for the daily needs as well to compensate for the non-earning age group’s expenses
  • Dependency ratio can help in developing policies for environment and infrastructure as well because the working-age group will have a more significant impact over the environment and demand for better infrastructure will be higher as well

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 individual needs to attain before he/she starts working and also the regulation regarding the retirement age as per different jobs
  • Depending upon the culture of the country, individuals may tend to start earning earlier in order to get independent. Also, some individuals may delay their retirement in a few years.
  • A proportion of the working-age population may not actually be employed because of other factors like they are still studying, or have illness or disability

Conclusion

After considering the advantages and limitations of the dependency ratio, it can be concluded 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 of the country. However, it involves multiple assumptions:

  • First, only people of the age group 15-64 years are the ones earning. 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 and hence it is important that while making any inference from the dependency ratio we also consider the labor participation ratesParticipation RatesA participation rate determines the population interested in working with the not working population, indicating the country's unemployment and the active economic workforce. Participation rate formula = employed people + unemployed people/working age non-institutionalized populationread more of these age groups.

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

This has been a guide to the dependency ratio and its definition. Here we discuss the formula to calculate the dependency ratio with example and its uses. You can learn more from the following articles in economics –

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