Economics Of Childbearing Research Paper

1. ‘Child Quality’ And Fertility

Economic theories of fertility have been around for over 200 years. The ones advanced by Thomas Malthus are the best known. In a few words, Malthus’ view was that fertility was determined by the age at marriage and frequency of coition during marriage. He argued that an increase in people’s income would encourage them to marry earlier and have sexual intercourse more often. Modern economic theories of fertility date from a paper by Becker (1960), which generalized and developed the Malthusian theory. Until Sect. 4, it is assumed that fertility decisions are made in a stable marriage.

Becker’s point of departure is that children are usually a source of psychic satisfaction for parents. An important aspect of his seminal contribution was to point out that this satisfaction is likely to depend on the amount that parents spend on children as well as the number of children that they have. For instance, parents are likely to receive higher satisfaction if their children obtain a university degree than if they leave school as teenagers. For short, he calls children who have more spent on them ‘higher quality’ children, hastening to add ‘that ‘‘higher quality’’ does not mean morally better’ (Becker 1960, p. 211). The basic idea is that if parents voluntarily spend more on a child, it is because they obtain additional satisfaction from the additional expenditure. It is this additional satisfaction that is called ‘higher quality.’

The concept of ‘child quality’ continues to be an important element in the economic analysis of fertility today. The characterization of ‘child quality’ has moved in the direction of identifying child quality with the lifetime well-being of the child, which can be increased by investing more in the child’s ‘human capital’ (i.e., his or her ability to earn income as an adult) or by the direct transfer of wealth to the child. That is, the parents receive more satisfaction from having children who are better off throughout their lives, and they make monetary transfers and human capital investments to influence their child’s lifetime standard of living. Thus, child quality could be thought of as the child’s future ‘quality of life.’

Having incorporated the quality dimension of reproduction decisions, the well-developed model of consumer choice is applied to them. Parents are assumed to choose the best combination of the number of children, their quality and the parents’ own standard of living subject to parents’ lifetime income and the prices that they face in markets. An increase in parents’ income is expected to increase both the quantity and quality of children. In light of the tendency for people to increase the quality of most consumer durable goods proportionately much more than the quantity of such goods when their income increases, Becker argued that this is also likely to be the case for children. In economics, the ‘income elasticity’ of a good is defined as the percentage increase in the demand for that good in response to a 1 percent increase in income. Thus, using this terminology, Becker’s contention is that the income elasticity of the number of children (‘quantity’) is small compared to the income elasticity of child quality. Put somewhat differently, an increase in parents’ income may increase the amount spent on children substantially, but this would mainly take the form of higher quality rather than more children. The introduction of the child quality concept generalizes the Malthusian theory, which only allows responses to income along the quantity dimension.

1.1 Quantity–Quality Interaction

A new twist to the quantity–quality model was added in the influential papers by Willis (1973) and Becker and Lewis (1973). They assumed that parents view child quantity and quality as substitutes and that parents treat all their children equally, in the sense that child quality is the same for each child. The parents’ lifetime budget constraint is that the sum of expenditures on their own consumption, expenditures on their children’s human capital acquisition, and monetary transfers to their children equals the parents’ lifetime income. The latter two elements of spending represent expenditure on child quality, which is the product of the number of children, quality per child and the full cost per unit of child quality (which is discussed later). This model can be generalized to incorporate costs of the number of children that do not depend on child quality and costs of quality that do not depend on the number of children. As an example of the former, a decline in the cost of averting births, say because of the introduction of the oral contraceptive pill, would increase the marginal cost of a birth without affecting the marginal cost of child quality.

This product in the budget constraint implies that the cost (or ‘shadow price’) of an additional child is proportional to the level of child quality, and the cost (‘shadow price’) of raising child quality is proportional to the number of children the parents have. As a consequence, there is an important interaction between family size and child quality. Suppose, for example, that there is a small exogenous decrease in fertility, say because of lower contraception costs. This lowers the shadow price of child quality, which in turn raises child quality, which raises the shadow price of children, which lowers family size further, and so on. Thus, a cumulative process favoring child quality and reducing fertility ensues. Similarly, a small exogenous increase in desired child quality could produce a large decrease in family size and a much larger increase in child quality.

This interaction between child quality and fertility does not derive from assuming that child quality and quantity are close substitutes for one another. Indeed, just the opposite must be the case, because if both fertility and child quality are to be nonzero, then they cannot be close substitutes. Thus, family size can be highly responsive to changes in prices and incomes, even though children have no close substitutes.

Another consequence of this interaction is that it may appear that the income elasticity of fertility is negative, even though children are ‘normal goods,’ in the sense that parents want more of them when parental income increases. The reason is that the true income elasticity is defined with prices constant, but, because of the interaction, it is not possible to hold the shadow prices of an additional child and of child quality constant when measuring the elasticity. The measured income elasticity of family size is more likely to be negative (even though the true elasticity is positive), the more responsive is child quality to changes in income relative to the responsiveness of fertility (i.e., the higher is the quality elasticity relative to the quantity elasticity), and the better substitute is family size for child quality or parental consumption.

1.2 Child Mortality And Fertility

The ultimate manifestation of low child quality is a child not surviving to adulthood. In light of the ‘demographic transition’ (i.e., the change from a high fertility–high child mortality environment to a low fertility–low mortality one), an interesting question is how fertility responds to changes in the ‘risk’ of child mortality. Because parents may know the risk, but not exactly how many of their children will die for any given number of births, this is a problem of choice under uncertainty. Sah (1991) assumed that parents choose the number of births to maximize their ‘expected utility.’ This is the weighted sum of the utilities of having particular numbers of surviving children (inclusive of all benefits and costs), with the weights being the probabilities of obtaining that number of surviving children from given numbers of births.

Suppose first that only surviving children bring costs and benefits. Sah (1991) showed that the number of births cannot increase with an increase in the probability that the child survives to adulthood. While the parents may wish to have more births when survival chances are low, because some may die before adulthood and they will not have enough time to replace them in their fecund period, their incentive to practice such ‘hoarding’ is less when survival chances are better. Thus, their fertility will not be higher when child survival is more likely.

A cost may, however, be incurred by a birth regardless of whether or not the child survives. In this case, a higher probability of child survival reduces the effective price of a surviving birth, thereby encouraging higher fertility. Sah finds that this effect will be smaller than the ‘hoarding effect’ above if parents are sufficiently ‘risk averse,’ or there is a ‘target fertility level,’ in the sense that the marginal utility of the last child is nonpositive if all the children from an optimally chosen number of births were to survive. If either of these conditions hold, better survival chances for children tend to reduce fertility.

In the analysis by Cigno (1998), parents can influence the chances that their child survives (an element of ‘child quality’) by spending more on him her. In his model, an exogenous reduction in child mortality may either raise or lower fertility. When the level of child mortality is high, reductions in it are likely to raise both fertility and survival-enhancing expenditures on children, because it lowers the price of a surviving child. When, however, the level of child mortality is already low, further reductions in it are likely to reduce both fertility and survival-enhancing expenditures on children.

2. The Cost Of Children

Consumer theory tells us that, like any other price, a higher full cost of child quality per unit ought to reduce both fertility and child quality. Elucidation of the factors affecting this cost was another important contribution to the literature on the economics of fertility. In particular, it acknowledged the key role of parental time, especially the mother’s, in the rearing of and investment in children. The foundations for this analysis were laid in a paper by Mincer (1963) and in Becker’s (1965) theory of time allocation, and Willis (1973) built on them in his analysis.

The concept of ‘household production’ is important in understanding what influences the cost of child quality. Following Becker (1965), the parents’ standard of living, the number of children and quality per child yield satisfaction to the parents, but these cannot be purchased directly in the market. Rather, the parents’ standard of living and child quality are both produced within the household by combining parents’ own time and purchased goods and services. It is the costs of these inputs that determine the cost of child quality relative to the cost of the parents’ living standard. Parental time in the production of child quality is primarily the mother’s time, and the rearing of children is assumed to be time-intensive relative to other home production activities. That is, the proportion of the total cost of producing children represented by the value of the mother’s time input to children is larger than the proportion of the total cost of producing the parents’ standard of living represented by the value of her time input to that production. Thus, the unit cost of child quality relative to the cost of the parents’ living standard is directly related to the mother’s cost of time. If she has ever been in paid employment, her cost of time is the wage she could earn in employment (i.e., her forgone earnings). The higher her wage, the higher the cost of an additional child and of additional quality per child.

This analysis suggests, therefore, that men’s and women’s wages should have different effects on fertility. Higher wages mean higher income for the parents, encouraging them to have more children and to invest more in the human capital of each child or to make larger monetary transfers to them (i.e., higher quality). But higher wages also mean more income lost by those caring for children and investing in their human capital. Because most child-rearing is done by the mother, higher women’s wages raise the opportunity cost of a child as well as increasing family income, while higher men’s wages mainly affect childbearing through their effect on the couple’s income. If the opportunity cost effect of women’s wages is larger than their effect on fertility through higher family income, then higher women’s wages reduce family size and child quality. It then follows that an increase in the ratio of women’s to men’s wages would reduce fertility.

In this model, the fraction of the woman’s time supplied to the labor market is also a choice variable, which depends on the wage that the woman can earn and her partner’s wage. Women who can earn high wages, or whose partners have low earnings, tend to devote a high proportion of their time to the labor market and remain childless. At the other extreme, women who could only earn low wages, or who have partners whose earnings are high, do not work in the labor market at all and have large families. For this latter group, women’s wages have no impact on their fertility and higher men’s wages increase the opportunity cost of children, because home production time is scarce for these women (they cannot increase it by reducing time in paid employment) and the production of child quality is assumed to be time-intensive relative to other household production activities. Thus, higher husband’s wages have a smaller effect on fertility among this group of couples than among couples in which the woman spends some time in paid employment.

In between these two extremes are the bulk of the population of women, who combine childbearing with paid employment. Within this group, there would tend to be a negative correlation between family size and the fraction of their life they spend in paid employment. This is a correlation between two choice variables. Variations in each partner’s wages and in tastes drive both variables.

Purchased childcare can weaken the link between a woman’s wage and the cost of an additional child. In Ermisch (1989) it is treated as an increasingly imperfect substitute for the mother’s time in child-rearing as the amount of it increases. Mothers with high wages tend to purchase a much larger proportion of childcare time. For them, higher wages have little effect on the cost of children, making it more likely that they increase fertility by raising family income. Similarly, in countries with heavily subsidized childcare, mothers contribute much less of childcare themselves, making it more likely that women earning higher pay have larger families. At low to moderate levels of wages, a higher mother’s wage reduces fertility, but its negative impact attenuates as her wage rises, or the price of childcare falls, because mothers purchase a larger proportion of childcare time under these conditions. The impact of the price of childcare on fertility displays a similar interaction, becoming more negative as the mother’s wage rises.

Nevertheless, when examining changes in fertility over time, the cost of purchased childcare and women’s wages tend to move together, because women’s labor is such an important input to the provision of childcare services. Thus, over time women’s pay relative to men’s and fertility should be negatively related, because higher women’s pay raises the cost of children.

3. Dynamic Fertility Models

The theories discussed so far are ‘static’ in nature, the relevant time unit being the parents’ lifetime. In order to consider decisions about the timing of births, imperfect fertility control, or the consequences of unexpected outcomes like birth-control failure or child mortality, a dynamic model is needed. First, some features of dynamic life-cycle theories are discussed, and then a model of fertility dynamics across generations is introduced.

3.1 Life-Cycle Dynamics

Dynamic models incorporating a sequence of decisions and imperfect, costly fertility control are more realistic than the static theories discussed above. Their predictions often depend on what is assumed about parents’ ability to borrow and save. One of two polar assumptions has been made in the literature: either parents can borrow and save as they choose (‘perfect capital markets’) or they cannot do so at all (i.e., they must consume all of their current income).

In one of the earliest dynamic fertility models (Heckman and Willis 1976), a couple’s fertility is controllable by the contraceptive strategies they adopt, but control is not perfect. Because it is assumed that couples start obtaining satisfaction from children as soon as they are born, they wish to have their children early. Couples may, however, find it best to adopt a ‘precautionary’ contraceptive strategy early in their partnership in order to reduce the risk of having more children than they would have chosen to have if fertility control were perfect and free. Such a strategy would result in postponing the age at first birth. If people cannot borrow or save, and their incomes rise with age, they would also wish to practice contraception in order to try to postpone childbearing to a time when the marginal benefit of income for parental consumption is lower (when they can ‘better afford’ children). Subsequent spacing of births (rather than having children as quickly as possible) would also be a response to this tension between their desire to have children early and the economic incentive to have them later, when parents’ income is higher. The more rapid the increase in income with age, the greater the incentive to postpone the start of childbearing and to space births. In other words, births are timed in order to ‘smooth’ parental consumption over time.

Another common (but not universal) feature of dynamic models is allowance for the possibility that a woman’s current participation in paid employment improves her future earning capacity, and that absence from employment may reduce her pay when she returns to employment. Thus, a mother’s absence from paid employment because of a birth has two costs: a loss of current earnings and a loss of future earning potential. An early example of such a model is that of Moffitt (1984).

Even when there are perfect capital markets, couples may choose to postpone childbearing because these opportunity costs of childbearing are high when the woman is younger and on the steep part of her career earnings profile. Women in jobs in which work experience has little effect on earnings have less incentive to postpone. In addition, if the care of young children is particularly intensive in the mother’s time, then a birth produces a temporary increase in the value of her time in the home to a level above the value of her time in the labor market, causing her to leave paid employment. It also increases the cost of an additional child, encouraging her to postpone the next birth until the value of her time declines sufficiently through the aging of the child. Thus, even with perfect capital markets, there is an economic incentive to space births. An unexpected birth, because of contraceptive failure, would generate similar incentives for the mother to leave paid employment temporarily and postpone having another child.

The death of a child encourages its replacement, because the marginal benefit of an additional child is likely to increase substantially when a child dies. Replacement makes a woman’s number of births increase with the experience of child mortality. Unless child mortality is expected when the mother is older, replacement is a better response to child mortality risk than ‘hoarding,’ because the latter involves a larger deviation from what the parents would have done in the absence of child mortality. Wolpin (1984) was the first to incorporate uncertainty about child survival into a sequential, dynamic fertility model, which permits analysis of replacement in response to child deaths and of the effect of infant mortality risk on fertility.

Recent detailed surveys by Hotz et al. (1997) and Schultz (1997) discuss the empirical strategies for applying the theories discussed above and the results of many empirical studies.

3.2 Easterlin’s Relative Income Hypothesis

In Easterlin’s (1980) view, an important factor affecting a young couple’s willingness to marry and have children is their outlook for supporting their material aspirations. If they expect their earning potential to be high relative to their aspirations, they will be more optimistic and will feel freer to marry and have children. If they expect that they will find it difficult to achieve the standard of living to which they aspire, they will hesitate to marry and have children. The ratio of the couple’s potential earning power to their material aspirations is called their ‘relative income.’

A person’s material aspirations are formed through experience; for a young person, the primary relevant experience is the standard of living experienced in his her parents’ home. Young people’s expectations concerning their earning potential are largely shaped by their experience of working.

A person’s relative income may be related to the size of his/her generation relative to the size of previous generations. There are important differences between the characteristics of new labor force entrants and experienced workers. The former have not yet acquired a high level of skills and are engaged in a considerable amount of job search with consequent high job turnover. Older workers are more skilled and occupy career jobs with relatively low job turnover. As a consequence of these differences, the ability to substitute between young and older workers is limited. Thus, when young workers are scarce relative to older workers, their wages are higher relative to older workers and their chances of upward mobility improve. When they are in relative abundance, their relative wage declines and their promotion chances deteriorate. If there is a steady growth in labor demand, the earnings of young people (say, aged 15–29) relative to older people (say, aged 30–64) tends to be inversely related to the number of young people relative to older people (‘relative generation size’), which suggests that their relative income also moves inversely with relative generation size.

The relative income theory of fertility would then lead us to expect that people from smaller birth cohorts would have higher fertility than people from larger cohorts. If couples feel constrained to choose family size within certain limits, say two to four children, then ‘scarce’ generations, who start childbearing earlier because of their favorable economic prospects relative to their material aspirations, would cut back later as they reach their upper limits, and people from ‘surplus’ generations would catch up later to attain their lower limits. Such behavior tends to make the fertility rates of women of different ages (different generations) move together. The period total fertility rate would then also move inversely with relative generation size, and it would fluctuate much more than completed family size.

4. Non-Marital Fertility

Since 1990 there has been a shift away from the paradigm of the married couple making fertility decisions as a single entity. This reflects in part the fact that births outside marriage now represent a substantial proportion of births in many countries, which suggests that men and women should be treated as individual agents in fertility decisions. Higher divorce rates would reinforce such a treatment.

This is clearest considering births outside a live-in partnership, drawing on the analysis of Willis (1999). Child quality is a ‘collective good’ to the parents (i.e., both the mother’s and father’s satisfaction depend on child quality). As a consequence, men fathering children outside a live-in partnership may choose to make transfers to the mother. Assume that the amount of transfer is determined in a noncooperative way: the mother has custody and chooses child quality and her own consumption taking transfer payments from the father as given. Fathers choose transfers and their own consumption, taking into account how the mother reacts to such a transfer. Then a father would voluntarily make a transfer if his income is high relative to the mother’s income and he cares sufficiently for the well-being of his child. The higher is his income relative to hers, the larger is the transfer. But the mother, father, and child could be even better off if the couple cooperated in their decisions. Because of difficulties in monitoring expenditures on children, cooperation is facilitated by the parents forming a live-in partnership. Thus, these relatively affluent fathers would usually not want to father children outside a live-in partnership.

In a frictionless ‘marriage market,’ the collective good nature of child quality encourages the highest income man to live with and have a child with the highest income woman, the next highest income couple would live together and have a child, and so on. If there are more men than women, then the men with the lowest incomes remain without a partner and all childbearing would be within live-in partnerships. If the number of women exceeds the number of men and if women at the lower end of the income distribution have incomes which are sufficient for them to want to raise children with their own resources, then fatherhood outside a live-in partnership would be free. If low-income men can father children by more than one woman, out-of-partnership fatherhood may be more advantageous for them than forming a union with a low-income woman, even though the mother and child would be better off in the union. This is more likely if the man’s income is not much higher than the woman’s, in which case he would not want to make transfers to her. The single low-income mothers gain by becoming mothers rather than remaining childless.

Thus, there may be what Willis (1999) calls an ‘out-of-wedlock equilibrium’ in which men with low incomes seek to father children outside live-in partnerships and women oblige them in preference to remaining childless. This outcome is more likely when there is an excess of unmarried women relative to unmarried men, men’s incomes are not much higher than women’s in the lower portion of the income distribution, and the combination of women’s earnings and government transfer programs are adequate to raise children without the father’s help. Thus, this theory explains fertility outside live-in partnerships as a rational choice by low-income men and women, while at the same time higher income couples choose to have children within live-in partnerships.

In the world described by this model, people either form live-in partnerships or remain single forever. A simple model of time-consuming search for a partner, in which a woman may have a birth before entering a live-in partnership but still partner subsequently, yields a few similar predictions. Pre-partnership childbearing is more likely when the incomes of single mothers are higher relative to the incomes of single women (perhaps because of welfare benefits to single mothers), both because more partnership offers are rejected and because the value of becoming a single mother increases relative to the value of remaining single and childless. It is also more likely when single motherhood does not substantially reduce the chances of subsequent live-in partnering. The fathers of these children, whose partnership offers have been rejected, tend to have low incomes.

There has been little economic analysis of childbearing within cohabiting unions, which has grown in importance in many countries. In unions that are expected to have a short life, it may be akin to the analysis of out-of-partnership childbearing discussed above. More generally, it shares some features of the analysis of marital fertility, but there are also unique attributes of cohabiting unions that are probably important for fertility decisions. One is their high risk of dissolution. In light of it, it is essential to treat the fertility decision as problem of choice under uncertainty in which each partner is an individual agent whose preferences, expectations, and resources influence the decision. This presents new and difficult analytical problems, which are also relevant to marital fertility in high-divorce countries. These are new challenges in the economic theory of fertility.

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