Sri Lanka has been going through ademographic transition triggered by decreasing fertility andincreasing life expectancy. The demographic transition ismarked by two stages. During the first stage, the drop innew births reduces the under-age dependency ratio, while theproportion of working age population expands. This reductionin dependency ratio due to declining fertility, frequentlyreferred to as the demographic bonus, is associated with anincreased pace of economic development due to the largershare of working age population relative to the totalpopulation, and the smaller pool of dependents that workershave to support. In the second stage of the demographictransition, the consistently low fertility rates incombination with increased life expectancy for the elderly,lead to the relative expansion of the old-age dependencyratio. As the demographic transition enters the secondstage, the demographic bonus deteriorates. As Sri Lanka isgoing through a demographic transition, it is important totake stock of the ways labor income is produced and consumedby different age groups. Similarly, when a deficit or a gapbetween consumption and labor income emerges, it isimportant to know what type of expenditures drive it and howit is financed. This paper documents labor income andconsumption patterns by age group in Sri Lanka, in a mannerthat is comparable to work carried out for other countriesthat participate in the National Transfer Accounts Project.
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