Since 1960, Latin America and the Caribbean have seen a growing working-age population and a shrinking share of children, two factors that have contributed to the growth of income per capita, which more than doubled from $3,336 to just over $9,000 last year. As AQ’s recent special report illustrated, that lift is running out, and in some countries, it is even starting to reverse. New research underscores the importance of planning for this.
Economists explaining the region’s growth normally point to productivity, investment, institutions, and commodity cycles. Age structure rarely makes the list. However, as fertility fell across the region since the 1960s, the share of the working-age population rose steadily, propelling income per capita as well: More workers supported relatively fewer children and retirees, with no change in how productively anyone worked.
Experts have studied this demographic bonus extensively, but its economic effects are seldom measured. The bonus emerges as countries move through the demographic transition: Fertility and mortality decline, the share of children falls, and the working-age population grows relative to the total. Eventually, it fades as smaller cohorts reach adulthood and the elderly population expands.
All things being equal, a larger working-age population raises a nation’s GDP per capita. Most analysts consider it the “first dividend” of the demographic bonus. While potentially significant, it is inherently temporary. Here is an example: If labor force participation and productivity remain unchanged, a 10% increase in the share of working-age people translates into a 10% increase in GDP per capita. Cross-country evidence supports treating the demographic effect as close to one-for-one. Using a panel of 145 countries from 1950 to 2015, economists Rainer Kotschy and David E. Bloom found in 2023 that a 1% rise in the working-age share raises income per capita by roughly 0.8% to 1%. A more durable “second dividend” may arise if some of the extra resources generated by the first are invested in ways that raise productivity.
Applied to Latin America since 2000, this tailwind appears almost everywhere, though its onset, duration, and magnitude vary widely with fertility trends. Some countries began seeing the working-age share of the population rise as early as the mid-1960s, while in others it started only after 1990. The length of the bonus also differs sharply: In some cases, the “positive slope”—the period when the working-age share is rising—is expected to last about 40 years; in others, nearly twice as long. Its magnitude varies as well, from an 11% increase in the working-age population in Uruguay to more than 45% in Colombia, the Dominican Republic, and Honduras.
A fading factor
That trend does not last indefinitely. A demographic dividend begins when fertility falls, and the share of children shrinks; it ends when the small cohorts it created become the working adults. Japan illustrates the far side of the cycle: From 2000 to last year, demography subtracted about 0.57 percentage points per year from growth, meaning GDP per working-age person grew faster than headline GDP per capita suggests. China has passed its peak working-age share, and South Korea is quickly moving into the same drag.
Latin American countries are at different points on the curve: Brazil, Chile, Colombia, and Costa Rica’s tailwinds have already peaked and will gradually decline. Others—including Argentina, Ecuador, Mexico, Panama, Peru, and Uruguay—still have about a decade of a growing first dividend, while countries further behind in the demographic transition have even more time to benefit from this effect.
That calls attention to the second dividend, which is not automatic; it requires reinvesting at least part of the extra income generated by the first dividend to raise productivity. This creates a serious political challenge in a region marked by high poverty and inequality. Higher consumption is essential to improve welfare today, but higher saving and investment are essential to support welfare tomorrow.
If anything, Latin America’s demographic tailwind was, and will continue to be, larger than this conservative accounting suggests—which makes its future exhaustion a bigger adjustment to absorb, not a smaller one.
Scarcity’s own dividend
In a brand new paper, economists Daron Acemoglu, David Autor, Keelan Beirne, and Andrew Scott suggest a rosier outlook. Drawing on a global cross-country panel running back to 1950 and on data for 722 U.S. commuting zones, they find that lower birth rates were tied to faster growth in GDP per working-age adult, with no clear loss in total output, as countries and regions where the young grew scarce exhibited labor-saving patents and high-tech investment. Scarcity, they claim, can summon an offsetting productivity response.
If their claim holds, a fading demographic dividend may not be a drag on growth: Inasmuch as output per worker accelerates because the ratio of workers to dependents declines, the loss due to thescarcity of labor may be recovered by the labor productivity this very scarcity generates—an automatic stabilizer, as it were. Latin America’s transition, like China’s or Korea’s, is compressing into decades what took a century in much of the paper’s historical sample.
Studying the U.S., Maestas, Mullen, and Powell found aging associated with slower productivity growth. The disagreement is less a contradiction than a reminder that the scarcity-to-innovation channel is conditional: It runs through patents, high-tech investment, and capital deepening, and presupposes the capital markets and R&D infrastructure needed to convert scarce labor into automation. Scarcity may pay a dividend of its own. Whether Latin America is built to collect it is a separate question, and one the arithmetic above cannot answer.
The appropriate policy response follows from the arithmetic either way. Higher female labor-force participation, longer working lives, and—where politically feasible—migration can all soften the mechanical drag. Productivity remains the durable answer: education, capital allocation, competition, infrastructure, and the diffusion of new technology. This list applies to both compensating for a fading tailwind and building the capacity to convert scarcity into a dividend of its own. Latin American countries have fared poorly on most of these in recent decades: poor learning outcomes, failing infrastructure, and low savings and investment have been common across the region. Reversing this is critical to increase economic growth and start reducing the gap with more developed economies.
The tailwind generated by the demographic bonus will continue to help in the near term. But the recent past shows this is not enough. Investing wisely in human capital and embracing technological change could be the spark to start a period of faster economic growth. Generative AI is the live test of that bet. It is a new potential engine arriving just as the old one fades. Unlike the demographic dividend, it will have to be built, with the understanding that it could bring more disruption than social dividends if mismanaged. This is yet more reason for countries in the region to embrace technological change more proactively.
Once fertility fell, the demographic bonus arrived automatically. Whatever replaces it will have to be built intentionally.
ABOUT THE AUTHORS
Eduardo Levy Yeyati
Reading Time: 4 minutesLevy Yeyati is a professor at Torcuato di Tella University in Buenos Aires, a non-resident senior scholar at the Brookings Institution, and a member of AQ’s editorial board. He is a former chief economist at Argentina’s central bank.
Rafael Rofman
Reading Time: 4 minutesRofman is a Principal Researcher at CIPPEC in Buenos Aires, working on demography and social policies. He recently published (with Carola della Paolera) La revolución demográfica, a book about recent trends in population, their consequences and public policy options, in Argentina and the world.
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