The Demographic Dividend — A Window of Economic Opportunity for El Salvador

I. Introduction

Demographic Dividend: A period of rapid economic growth potential resulting from a low dependency ratio.
El Salvador’s demographics are currently favorable for economic growth.

Characterized by:

• Decreasing fertility rates
• Increasing labor force
• Decreasing dependency ratio

Dependency ratio is defined as the number of dependents aged 0-14 and 65+ per 100 working-age people.
This decrease in dependency ratio presents an economic opportunity for El Salvador to:

• Achieve rapid economic growth
• Increase productivity
• Raise the standard of living of El Salvadoran citizens, if conditions are right

II. Dive into the Demographics

What is the Demographic Dividend?

The demographic dividend is the economic growth potential that can result from changes to the population’s age distribution.
Typically, when the working-age population (ages 15–64) grows larger relative to the non-working-age population (children age 0–14 and adults 65+), there exists the potential for rapid economic growth.

The Dependency Ratio:

• Working-Age Population (WAP): Ages 15-64
• Dependent Population (DP): ages 0-14 and ages 65+
• Dependency Ratio (DR)=DP/WAP*100

Dependency Ratio of El Salvador:

1965: 97.4

Today: ~48

What does a falling dependency ratio mean?

• Fewer resources are needed for taking care of non-production members of society.
• Higher propensity to save.
• Higher level of investment into businesses and education, creating more economic opportunity for El Salvador
• Increase in consumption.
• Increase in the labor force.

The country has experienced a decrease in the dependency ratio, thus creating a significant economic opportunity for El Salvador. HOWEVER, this is not guaranteed. For El Salvador to reap the benefits of this dividend, there are several boxes that need to be checked.

• Ability to absorb new workers into the labor force.
• Continue to improve Human Capital.
• Attract domestic and foreign investment.

III. What The 2024 Census Tells Us

With the recent release of the 2024 Population and Housing Census, there is no denying that El Salvador is in the midst of their demographic dividend.
Look at the growth of the Labor force alone:

• EAP or Economically Active Population in 2007: 45.4% of the total population
• EAP in 2024: 52.5% of the total population

The sweet spot for economic productivity is typically between the ages of 20 and 65.
Conclusion: The Bulk of economic output, innovation, and consumption comes from the 20-65-year-old age group.

Notice how the labor force has been absorbed:

• Unemployment in 2007: 11.4%
• Unemployment today: 4.5%

Summary:

• Growing Labor Supply
• Labor Force being absorbed
• Growing Participation in the Economy

IV. Government Policy and Dependency

The Bukele administration has made human capital and job creation a major focus of its policy agenda. In doing so, it has attempted to prepare the economy for an expanding labor force and improve living standards for El Salvadorans.

Policies:

• Growing access to education and improving education.
• Improve workforce readiness with vocational and technical programs
• Promote entrepreneurship and innovation, economic opportunity for El Salvador
• Increase access to digital literacy
• Encourage domestic and foreign investment.

Investing in Public Goods:

• Build a strong infrastructure
• Increase access to public services
• Promote Public Safety
• Improve Institutions to create more economic opportunities for El Salvador

V. The Big Picture: Risks and Responsibilities

Unfortunately, the demographic dividend is not a perpetual phenomenon. Eventually, the dependency ratio will begin to rise as the large working-age population ages out of the demographic.

What can El Salvador do to leverage its demographic?

• Continue to create quality jobs for Salvadorans.
• Grow highly productive sectors of the economy.
• Formalize the economy.
• Invest in education.
• Continue to improve workforce readiness.
• Invest in improving the quality of labor to meet the demands of the international marketplace.
• Improve the investment climate in El Salvador.

Conclusion:
• Act now or risk missing an economic opportunity for El Salvador
• Higher unemployment or underemployment
• A less productive workforce
• Slow growth
• Demographic Dividend -> Demographic Dependent
• Large Tax Burden
• Loss of competitiveness

VI. Wrap Up

El Salvador’s dependency ratio has decreased from 97.4 to 48!

What does this mean?

This means that the working-age population has expanded while the dependent population has contracted.

What economic opportunity in El Salvador does this create?

When done correctly, this creates the opportunity for El Salvador to experience long-run sustainable economic growth.

This will not happen overnight.

Policy consistency and continuity will be needed to see true results.

If Bukele’s administration and future administrations can properly capitalize on this demographic bonus, El Salvador can shape its economic future for generations to come.

If policymakers do not act while the conditions are ripe, they may miss the opportunity to capture El Salvador’s demographic dividend.