Child-rearing: no longer a luxury for the rich?

This is a follow-up to a previous entry to this blog in which I posed the question, Is child rearing a luxury for the rich? The evidence cited back then showed that providing a baby bonus creates a rise in fertility across all social classes and not just disadvantaged ones.

The long-held belief in the economic community is that as countries get to be more affluent, their preference for large families declines. This has historically been the case, and the phenomenon has been labelled the demographic shift. Poorer countries aspire to reach it, richer ones dread it. It now appears to tell only half the story.

A recent study published by Dr Mikko Myrskyla from the University of Pennsylvania and his colleagues using repeated cross-country data shows that as countries breach a level of affluence, their ability to have more offspring returns, reversing the demographic shift. This is depicted in the graph below taken from the study.

This graph plots the fertility rate of countries against their HDI or human development index, a measure used by the United Nations which is a composite of per capita income, life expectancy and level of education. The highest value of the index is 1. Back in 1975 Canada scored the highest on this index with 0.89. The kink in the demographic J-curve seems to be around 0.95. Since 1975, more and more countries have breached this threshold, and as a result fertility rates in these countries are now approaching 2 per woman.

This is good news for policy makers in these countries, who previously were forced to project declines in fertility in their indigenous populations and recommend high levels of inmigration just to balance the workforce demands of an aging population. What this study does is point out that with the right set of policies, like the baby bonnus and family friendly work practices, that the fertility decline may be reversed.

Is child-rearing a luxury for the rich?

Should the baby bonus be income or means tested? The answer may not be so straight-forward.

If we use the lense of a redistributive social democrat, then any bonus paid to the rich is a form of fiscal leakage and middle class welfare. They are misallocations of resources better spent elsewhere particularly in this season of budget shortfalls, when the government will have to borrow to fund social programs.

There is an apparent logic to this which nobody with a shred of common sense can deny. However, before we throw the baby (bonus) out with bathwater, it would behoove us as policy advisers to look at the empirical evidence first.

The baby bonus first introduced in 2004 was a means to lift the birth rate of Australia. It was a bold social experiment which lends itself to evaluation four years down the track. This is what researchers at the University of Sydney at Royal North Shore Hospital have done with respect to the rise of birth rates in New South Wales. Their findings have been featured in the Medical Journal of Australia. As reported in the media, these findings reveal that

Women who showed a "significant increase in first births" after the baby bonus were teenagers of average socio-economic status, but also those in rural areas in their teens or early 20s, and "average or advantaged" women aged 30-44 who lived in city areas.

For women who already had one child but then had another the increase "occurred predominantly among younger women of low and average socio-economic status", the authors write. The increase in third or subsequent births occurred across all ages.

Contrary to popular criticism of the baby bonus scheme, the authors "did not find ... the increase in births only occurred in low socio-economic or disadvantaged groups (emphasis mine)".

Based on this analysis, it would seem that even the income-rich are sensitive to the bonus in deciding to have kids. Why is this so, and how do we put it all into perspective?

Enter Gary S Becker. The famous Nobel Laureate economist who literally wrote the book (on) Human Capital is generally regarded as the first of the “economic imperialists”, whose work extended beyond the traditional confines of economics (to demography in this case). Becker introduced the whole notion of time as a commodity. Edward P Lazear explains how Becker’s analysis has affected the discourse on fertility as follows:

Since child services (the commodity produced with children) is a time intensive commodity, high wage women face a higher price of children than do low wage women (emphasis mine). Also, as labor force opportunities improve for women, in part because of more equal distribution of education, women find it more costly to have children.

This explains why fertility rates in poor countries are higher and why rich countries are ageing as a result of low birth rates to begin with. If we are to take Becker’s principles to heart, this would mean that the baby bonus, rather than being “capped” should actually be set as a proportion of the woman’s wages for it to deliver the biggest (fertility) boom for each buck spent. Politically of course this would be a non-starter, but perhaps there is a workable alternative.

For example, the rise in teenage pregnancies particularly from disadvantaged youth lies on the opposite side of the continuum to career women. The evidence supports the theory that child-rearing would be more attractive to them particularly with the bonus. What is at stake here is not just the well-being of these mothers but of their children, since future educational and health conditions of children have been found to correlate well with the educational levels of parents, particularly that of moms.

A pragmatic Solomonic solution to the policy dilemma would be to provide an age, as well as incomes/means test for the bonus. This way, the government can say it has been both fiscally and socially responsible by correcting some of the unintended consequences of the previous government’s policy of encouraging teenage pregnancy while attending to the wishes of those who believe that the rich can fend for themselves in these troubled economic times.