Chapter 5: Economics of Fertility

Chapter 5:Economics of Fertility • Fertility: “baby-making” trends (not ability to conceive) • Trends: Decline over time • 1960: typical woman: 3.65 kids • 2000: typical woman: 2.1 kids • Replacement rate: fertility rate that results in population not growing or shrinking. • Replacement fertility rate = 2.1 • Also: big  out of wedlock births, particularly for teenagers. BUT this trend reversed itself in 1990s, particularly for African Americans.

Terms to Describe Fertility Trends • Can use more specific data for specific age groups, races, or marital states. • See Table 5.1: • Birth rate; • Fertility rate; • Non-marital fertility rate; • Total fertility rate. • Previous overhead: • Total fertility rate = # births avg woman today would have over lifetime if she had the age-specific fertility rates that prevail today.

Fertility Trends Over Time • See Figure 5.1: learn to read two-component graphs with two different vertical axes. • Fertility rate (births per 1000 women): • Fertility Transition: 1870s – 1930s. • Baby boom: 1945-1964; • Baby bust: big decline in 60s and early 70s; • Near stability since then. • Total Fertility Rate: • At peak of boom: 3.5 kids • At bottom of bust: 1.7 kids

Fertility Trends by Race • See Figure 5.2: • Fertility rate differs across race/ethnicity. • Hispanic rate quite high • Hispanic is an ethnicity and so listed by itself, but individuals in this group appear in specific racial groups also. • Much due to recent immigrants • Much difference within this ethnicity: • Cubans: 50 per 1000 • Mexicans: 112 per 1000

International Fertility Trends • See Table 5.2: • See  for every country listed. • In some countries: serious policy concern (ex. Italy). • Lesser developed countries: • Average = 5.1 but also is . • Key link:  education levels associated with  fertility. • BUT: controlling for education,  income leads to  fertility. • High non-marital fertility rates: • Iceland: 64% • Sweden: 54% • France: 40% • Italy: 9% • Japan: 1%

Modern Economic Analysis of Fertility • Becker (early 1960s): • “An Economic Analysis of Fertility” • Basic point of model: • Most adults would like to have children; they get utility from their kids. • Theoretical model tells us that decision to have kids is influenced by parents’ wages but model cannot predict direction of relationship (positive or negative). •  Mom’s wage: •  value of her time so  cost of her spending time with kids and  paid work   kids. • But also  ability to buy all goods including stuff for kids   kids.

Economic Theory of Fertility • Underlying concept: • Preferences for all goods including kids; refers to utility (happiness, overall well-being) from consumption. • But kids different from food: provide utility from their “consumption” much like we “consume” cars; i.e., via pleasure of interaction. • Call this child services. • Quantity vs quality: For cars and kids, the pleasure derives from # of cars as well as quality of each car. • U = U(CS, A) CS = child services; A = adult consumption goods.

Producing Child Services • Total spending on kids = cost of one unit of CS * total amount CS produced. * Per unit cost * # units = total spending. * Total amount chosen by parents and so is endogenous. * One unit of CS: no assumption about what IS one unit, just know that it is the same for all families and will change as exogenous factors change. * Cost is that cost per one unit of CS.

Continuing with CS Production • Start with parent(s) producing a child. This is quantity component. • Then parent(s) nurture that child to adulthood. This nurturing is the quality dimension. • Total CS can be enhanced by  # kids,  quality per kid, or both. • CS Production Function: CS = F(T, Z) T = amount of time the adults spend producing CS Z = mkt goods used in producing CS (including food, housing, books, etc.) T vs Z: varies by adults’ preferences and child’s age (infants more time-intensive)

Costs of One Unit of Child Services • Per unit costs of CS depend on the price (value) of parental time and prices of mkt goods used in production of CS. • Measuring these prices: • Prices of the mkt goods Z = PZ • Value of parent’s time = opportunity cost of time = value of time in paid labor market = WM , WF • These are the prices of the inputs in the production of CS. • CCS = C(WM, WF, PZ)

Changes in Costs • Most parents face same PZ but remember that parents choose how to combine Z and T to produce CS. • Wage rates very different for different individuals and for same person at different point in lifetime. • Model predicts that any input price increase will cause increase in PCS • Example: PCS/WF  0 • But size of impact depends on how much the input is used in production and how easily that input can be substituted for another input when price changes. • Treat PCS same as CCS

Complete the Fertility Model • Typical model: maximize utility subject to a budget constraint. • Here, use full income constraint = what family could earn if each potential worker were to work all hours in a day. • YF (WM* T) + (WF * T) + V T is 24 hours (or all “workable” hours) V is all income not earned

Utility-Max Problem • Max U(CS, A) s. t. YF • Yields demand equations for all goods in A and CS which represent the individuals best choice of each good. • CS* = D(PCS, PA, YF, Preferences) • Key feature: WF and WM are inside both PCS and YF

Comparative Statics • 1. Change in Full Income • Effect of change in YF typically arises from V (but could also come from W of spouse who spends little/no time in production of CS). • Concept from microeconomics:  income leads to an  demand for all normal goods. • Income Effect: CS*/YF  0 (ceteris paribus) • Quality vs quantity: expect change YF to affect both in same way.

Comparative Statics continued • 2. Change in PCS A. Change in PZ: PCS/PZ  0: PCS   demand for CS (via standard Law of Demand) and so will  demand for adult goods. B. Change in WF : • First, note that PCS/WF > 0 so might assume that an increase in wages leads to a decline in demand for child services. • BUT effect is complicated because wage lies inside YF too.

Effect of Change in WF: Two Separate Effects • B.1. Substitution Effect: effect of increase in PCS while imagining that YF does not change (a pure price ).  CS*/WF(YF fixed) < 0 * If woman’s wage  and YF somehow held constant, family will choose to consume fewer child services.

Second Effect • B. 2. Income effect: result of increase in full income arising from increase in wage (analyzed just like previous income effect)  CS*/YF (PCS, PA, and Preferences fixed) > 0. * Ceteris paribus, when full income increases, amount of CS demanded will increase. • Net effect: unknown since substitution effect is negative and income effect is positive.

Back to Explaining Observed Trends • Original goal of economic model of fertility was to explain declining fertility. • What is likely impact of wage increase on quantity and quality of children? • Key issue is time intensiveness: what if quantity more time intensive than quality? Then substitution effect might be more negative in case of quantity than with quality. • Income effect on quality greater than income effect on quantity (suggested earlier). • Net effects: • Quantity: dominant substitution effect so when WF, quantity falls. • Quality: dominant income effect so when WF, quality rises.

WHY Did Family Size Decline? • 1. Preferences: maybe adults now just prefer fewer, higher quality kids than in past years. No real justification for this though. • 2. Change in Price of CS via change in WF (focus on women due to tradition): consistent with economic theory developed as women’s wages did rise considerably in second half of previous century. • .

3. Easterlin Hypothesis (relative income hypothesis): • Relates family income to fertility. • What is important is not absolute income but rather, income relative to expected income. • High relative income leads to high fertility. So if grew up during Depression, had low expectations and when experienced strong earnings, families responded with  in # kids. • Now: so much income growth in 1990s that expectations are quite high. Might predict future decline fertility • 4. Ability to control fertility • birth control and abortion. • Lowered price of controlling fertility.

Quantity/Quality Trade-off • If a family has same amount of $$ to spend on kids: might want to have lots of kids but spend little on each one OR have few kids but spend more on each kid. • So if became easier to provide better quality relative to increasing # kids, might want fewer kids. • Theory: income from  education   quality per kid. • So it is rising human capital that alters choice between quantity and quality.

So WHY Has Fertility Fallen? • Rising real wages for women that has caused  work by women plays a role if rising family income component causes  quality. • Improvements in birth control. •  female education that delays fertility. • Movement of women into professional occupations that delays fertility.

Why Int’l Differences in Fertility Trends? • Fact: Female education  in many countries including US, but in US, fertility has not fallen much. Why this difference? • New theory: disentangle effect of  education from  wages. In Europe, link between the two not as strong, so negative effect on fertility from rising human capital overwhelms positive effect of rising family incomes. • Immigration plays huge role in keeping US fertility rates high, but new immigrants  fertility rates within 1-2 generations.

Chapter 5: Economics of Fertility