Does the youth dependency ratio drive economic growth?
Jane Galt and Malcolm Gladwell have a tiff.
Gladwell, citing David Bloom and David Canning, suggested that changes in the "youth dependency ratio," account for a big chunk of Irish economic growth. The youth dependency ratio refers to how many young-uns require support, relative to the broader population. The Irish legalized contraception in 1979, birth rates continued to fall, and later the economy boomed. But is the connection a causal one?
Here is a basic argument and model that the youth dependency ratio can matter.
I can see three possible mechanisms. 1) Fewer babies mean that more women work. 2) Fewer babies mean that each baby gets more parental investment; in the long run those people are smarter. 3) Fewer babies raises the savings rate.
Which of these might have operated in Ireland?
On Mechanism #1, Irish women still work much less than the OECD average, yet Ireland is wealthier than almost anywhere else in Europe. If a theory of growth first postulates a big or dominant effect, and then predicts rates but fails when it comes to predicting levels, I worry.
If we look at "rates of growth" only, this estimate suggests that more Irish female labor accounts for 1.5 percent Irish growth a year. That hardly covers the growth gap between Ireland and the rest of Europe. One estimate of elasticities suggests that an extra kid lowers an Irish woman’s chance of working full-time by 11.3 percent, but raises her chance of part-time work by 7.7 percent. How far does that get us? Bloom is a renowned labor economist but his article is far from state of the art macroeconomics. Do note that increases in "total factor productivity" — often driven by foreign investment — seem to be more important than "growth in labor inputs" by a three to two ratio.
It ought to be easy to show evidence that the Irish boom has been strongest in the sectors where women work the most, such as services and not manufacturing. I can’t find that evidence, can my readers?
Mechanism #2 is for the long run and it cannot explain the Irish boom of recent times or the timing of its possible connection to contraception. Higher skills are a big part of the Irish story, but the trend started in about 1967.
Mechanism #3: In Ireland, since the mid 1970s, gross private savings rates have been falling, more or less. More generally, time series models for a single country, including demographic ones, don’t predict savings rates very well.
These studies I am citing have their defects, but they do show that the overall question is not so simple.
Notes:
1. These graphs show that, for developing countries, the change in the youth dependency ratio has "eyeball power" for 1975-1990, but not for 1960-1975.
2. This study of Asia suggests that the youth dependency ratio matters, often through the savings rate (not the Irish scenario); the entire story is conditioned by "institutional factors."
3. Latin America has had falling birth rates but has failed to cash in. As Bloom stresses, favorable birth rates help only if the country has good policies for putting the new female workers into productive positions. In this regard Galt and Gladwell may not be so far apart.
The bottom line: How much of the Irish boom is caused by the change in the youth dependency ratio? I don’t know. If I had to offer a "I’m just a poor lil’ ol’ blogger but I’ve read lots of real business cycles macroeconomics simulation papers" seat of the pants sort of estimate, I would opt for a maximum of 15 to 20 percent. That’s certainly worth writing about, but it is not the major story either. I’d like to see a sectoral decomposition analysis, and I suspect that would point our attention toward FDI, education, and a favorable tax regime as bigger factors.
Addendum: Malcolm adds more.