The latest employment data for 2011-12 show that India’s much-hyped demographic dividend has not yet arrived. The proportion of workers in the population rose slightly from 40% in 1980 to 43% in 2004-05, but is now down again to 40%.
This is actually good news. It means that the record GDP growth of the 2000s was due to higher productivity, not rising worker participation.
Second, the demographic dividend has not vanished. It’s merely been postponed, and mainly for an excellent reason. Over 300 million youngsters above the age of 15, above all females, are studying in school and college rather than working. When these youngsters eventually join the workforce, they will be far better skilled than earlier expected.
What exactly is the demographic dividend? When a developing country reduces child mortality, it experiences a population explosion in which the proportion of dependants to workers rises. This is a sort of negative dividend – workers have to support a much higher proportion of dependants, depressing per capita income. But in the next phase the birth rate falls sharply, even as the original baby boomers enter the workforce. So, the proportion of workers rises sharply, even as the proportion of dependants falls. In many countries, the ratio of workers to dependents goes from 40:60 to 60:40, giving a huge boost to per capita income. Something like this happened in all the Asian miracle economies from the 1960s onwards. They all experienced a demographic dividend that added a whopping 2% to their annual growth of per capita income. Their economic miracle was in large part a demographic miracle.
India hopes for a similar bonanza. It has been undergoing substantial demographic change since the 1970s. An IMF study (Aiyar and Mody 2011) shows that between 1981 and 2001, the proportion of the population in the age group 15-59 rose in Tamil Nadu from 58.6% to 64.4% and in Karnataka from 53.9% to 60.4%. This facilitated faster growth in these states. By contrast, the proportion stayed almost unchanged in Bihar and UP (from 51.5% to 52.1% and from 51.5% to 52.3% respectively), one reason why these states were laggards. Overall, the study estimated that the demographic dividend added 1-1.5% to annual GDP growth in the 1980s and 1990s, and could add 1.5-2% from 2001 onward.
However, this assumes that a bigger working-age group will translate into higher worker participation. That has not happened. Worker participation is still stuck at the 1980 level of 40%. The rise in numbers of the 15-64 age group has been offset by a greater number opting out of work. The proportion of females interested in working has crashed from 30% in 2004-05 to just 23% today. This is dismayingly low: in rich countries, it can be up to 60%. Over 35 million Indian women have opted out of working.
The sharpest withdrawal has been in the 15-25 age group, denoting more girls studying. But withdrawal has occurred in all higher age groups too. I suspect the main reason is social. As families move from working class to lower middle-class, they get social status by saying that their women do not go out to work. Thus the rise of the middle-class has exacerbated female withdrawal.
This will be temporary. Studies show that once girls complete college, they enter the workforce in large numbers (as is evident in elite families). So, as girls increasingly go to college, we will get a female demographic dividend, but this will take time.
We must examine why urban female participation is as low as 15% today. It could be related to lack of safety (which overlaps with middle-class values). Better urban working conditions for women are a must. Besides, the share of casual jobs is rising, showing how badly our labour laws discourage regular employment. Literacy rose 9.7% in 2001-11 led by Bihar (16.8%), Jharkhand (16.1%) and UP (11.45%). Female literacy shot up even faster in Bihar (20.2%), UP (17.1%) and Jharkhand (15.3%). These are positive signs for the quality of the future female demographic dividend, and indeed for growth in backward states.
Education, vocational training and specialized training are all growing explosively, although standards leave much to be desired. Corporations (like Infosys) are starting their own universities and training centres to cope with the severe skills crunch. Vocational training institutes are growing rapidly, financed by the new National Skills Development Corporation.
UN estimates suggest that changing demographics will give India an additional 300 million people in the working-age group (15-64 years) between 2010 and 2040. Rising college education should improve female participation sharply. There’s no dividend today, but tomorrow’s dividend will be pretty good, the more so if labour policies improve.