We address the demographic transition in Ethiopia and the possibilities of capturing the demographic dividend observed in some East Asian countries. We also suggest mechanisms to facilitate this possible opportunity. The youthful age structure of the Ethiopian population has not declined much over the 13-year period 1994–2007, but now with the incipient fertility decline expected to accelerate, projections indicate that there would be significant decline in age dependency ratio in the coming four decades. Key education and employment trends show a striking improvement in primary enrollment and modest decline in urban unemployment. However, there is still low secondary enrollment rate and a large gender gap in secondary education as well as wide gender gap in formal employment. The dividend is not automatic and would last for about two generations. Thus it can be reaped only if policies and programs, in countries at the incipient stages of the demographic transition, focus on the needs, aspirations and opportunities for a growing bulge of youth and young adults. Preconditions include: training and job creation, agricultural intensification, labor intensive production technology, improved quality and efficiency of the educational system, healthier lifestyles, stronger aspirations of the youth towards an achievement-oriented society and overall institutional development. If the above preconditions are met, the future could be promising and the youth would turn out to be a societal dividend rather than being a burden.