The determinants of macroeconomic performance have been evolving, particularly concerning the demographic factors. New economic theories deposed the focus on population growth and included age-structure-related demographic variables for assessing the impact on savings and economic growth. Population categories based on age group, that is, young population (0–14 years), working-age segment (15–64 years) and old-age population (65+ years), became significant demographic variables. The United Nations (UN) highlights the shifting demographics and indicates the youth (15–24 years) bulge being witnessed in most countries of Asia, Latin America and the Caribbean. At the same time, in the European and East Asian countries, the older population (over 65 years) is outnumbering the youth population (15–24 years). India too is witnessing a population shift towards the working-age segment, which has reached 66 per cent of the total population. It is this age factor that led to the crafting of two important theories: the life-cycle hypothesis (LCH) theory and the demographic dividend theory.
The LCH theory on consumption focuses on the life-cycle phases of the population, that is, the young dependent population, working-age population and aged dependent population. It expounded that savings decline slowly in old age. This has a deep implication on economic growth, especially when there is a transition of the population into such age groups. By extending the LCH theory of Modigliani, several studies presented the empirical analysis that examined the implication of the changing economic needs of people across their lifetime and changing population growth patterns across periods. Theories based on life expectancy, mortality and fertility rates, dependent population and working-age populationhave evolved.
Longer life expectancy forces people to save more in order to take care of greater retirement needs. Likewise, low fertility rates combined with a large working-age population will have a positive impact on an economy. Earlier studies also found that a low fertility rate reduces family size, thereby increasing the savings of the family. This makes fertility rate and household size key determinants of savings. A declining fertility rate is also observed to lead to a fall in the dependent youth population and a rise in the working-age population. Such a fall-and-rise phenomenon may lead the population to skew towards a specific age segment. Analysis of the demographic transitioning phenomena to specific age cohorts of the population and the effects brought about by the same led to the evolution of the significant theory of demographic dividend.
When the working-age population increases more than the dependent population, it opens up an opportunity window for reaping the demographic dividend. Schultz’ study on the demographic dividend phenomenon indicated that an increase in the working-age cohort increases savings rate for nearly two decades, which can steer the economy towards a dividend. This is attributed to the reason that the labour force will increase with an increase in the working-age population and a simultaneous decrease in the dependent population.