ECOS3027: Economics of the Family - Lectures Notes 7

Fertility I

Marian Vidal-Fernandez

Semester 2 2017

Background readings
• *BFW7 Chapter 13 – from p.307, OR BFW5 Chapter 9 - from p. 303

• *Hotz, V. J., J. Klerman, and R. Willis (1997): The Economics of Fertility in De-
veloped Countries: A Survey, Handbook of Population and Family Economics, http:
//www.sciencedirect.com/science/article/pii/S1574003X97800244 Sections 1,2,3

• *Feyrer, J., Sacerdote, B., and A. Stern “Will the Stork Return to Europe and Japan?
Understanding Fertility within Developed Nations,” Journal of Economic Perspectives,
Vol. 22, No. 3: 3-22.

• *Angrist, Joshua, Victor Lavy, and Analia Scholosser. 2010. “Multiple Experiments
for the Causal Link Between the Quantity and Quality of Children,” Journal of Labor
Economics, 28(4): 773-823.

• *Black, S. E, P. J. Devereux, and K. G. Salvanes (2005): The More the Merrier? The
Effect of Family Size and Birth Order on Children’s Education, Quarterly Journal of
Economics (120), 669- 700.

• *Beckers, S.O. (2016): Using instrumental variables to establish causality. IZA World of
Labor 2016 (250).

1 Definitions and trends in fertility

• Birth rate: Number of children born to a group of women / size of group of women

• Total fertility rate: sum of birth rates by age groups. The number of children a woman
entering her child-bearing years would be expected to have if she bears children at the
current age-specific birth rates

• Replacement fertility rate: around 2.1 for developed countries. Slightly higher than 2 due
to infant mortality

• Completed fertility rate: number of births per woman who has completed child-bearing
years. Often calculated where women are aged 45 and over

– Delayed childbearing reduces the total fertility rate but not the expected completed
fertility rate

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 • Convergence towards total fertility rates of just under 2 (See Gapminder.org Changes in
fertility by country and per capita income over time)

• Difference in whether downward trends are driven by more women having no children, or
women who have children having fewer children:

– Intensive margin: women who have children having fewer children: trading off quan-
tity and quality? A consequence of delayed childbearing? Greater spacing of births?
∗ Matters more in Ireland, Spain, Portugal, Italy, France (Feyrer, Sacerdote and
Stern 2008)
– Extensive margin: more women remaining childless. Definitive childlessness mea-
sured by proportion of women aged 45-49 who have not had children
∗ Post-war cohorts had historically extremely low levels of childlessness
∗ Whether this is voluntary or involuntary is not clear – how is voluntary child-
lessness defined?
∗ Matters more in Germany, UK, Sweden (Feyrer, Sacerdote and Stern 2008)

• 3 stages to fertility rate changes (Feyrer, Sacerdote and Stern 2008)

– Women’s wages relatively low; women specialise in home production. Fertility rates
are high.
– Relative wages increase due to technological change that favours human capital; men
do not adjust home production. The cost of children is higher and so fertility rates
decline.
– Over time, men increase involvement in childrearing and other household production,
reducing the costs of children and so increasing fertility rates.

• Government policy is thought to be a strong determinant in moving to the third phase

of increasing fertility rates, and social spillovers are thought to magnify these effects

• Factors contributing to decreased fertility in developed countries:

– Increased demand for human capital, meaning parents invest more in children
– Increases in labour income, increasing the opportunity cost of parental time
– Increases in women’s labour force opportunities
– Decrease in childhood mortality
– Availability of contraception and abortion

• Ex-nuptial births have also being increasing as a proportion of all births

– Includes births to single parents and to defacto couples – how important is this
trend? Given how Australia treats defacto and married couples, is this a meaningful
distinction?

2 Static models of fertility

• How to think about the fertility decision from an economic perspective? Start with a
standard consumer choice model. Parents maxmise their utility (for the moment, assume
a unitary household)
U = U (n, s)

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 where n is the number of children and s is other consumption. Parents maximise subject
to a standard budget constraint (where πs is the price of consumption and pn is the per
unit price of children):
I = πs s + p n n

• This generates a demand for children function:

n = N (pn , I)

• As the price of children changes, there are income and subtitution effects. As household
income increases, there are income effects

– With exogenous changes in the price of children or household income, we could

investigate this model empirically
– On the costs of rasing childen in Australia

• But, still this direct application of consumer choice doesn’t capture many specific features
of the fertility decision!

2.1 Quality-quantity model of fertility

• Becker and Lewis (1973) formalised the idea of the quality-quantity tradeoff in fertility
choice: parents do not just demand a number of children, but that they have certain
qualities

• What is child quality? Based on the idea of a bundle of characteristics (eg. when buying
a car); in practice we usually think about the child’s human capital

• The idea intended to reconcile that fertility tends to be negatively correlated with income
without resorting to the idea that children are inferior goods, or that higher income
families face higher costs of children

• Households have utility function

U = U (n, q, s)
where q is the quality per child. The household’s budget constraint is:

I = πc nq + πs s

where πc is the price of goods devoted to children. Importantly the budget constraint is
nonlinear

• The shadow price of the quantity of children is pn = qπc , and of the quality of children
is pq = nπc

– As you have more children, the marginal cost of improving child quality increases.
As child quality increases, the marginal cost of the quantity of children increases

• This can be illustrated as in the diagram below (taken from Hotz et al 1997)

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 296 V.J. Hotz et al.

_5:2
U

Mx
CY C1 = NQ

NQ

Nubero N
Number of Children

Fig. 7. Interaction of the demand for quality and quantity of children.

As income increases,
subject to the choicebudget
the family in this spacein depends
constraint on the
Eq. (5) yields thefollowing
relativefirst-order
income elasticities
for quality andconditions:
quantity
• – If the income
MUelasticities are equal, point
n = qn c = APn, MUq = An = Pq d would be chosen (on the (7)
45 degree line)
– If εq > εn , additional income is invested in quality and this may decrease the quantity
of childrenwhere the MU's
desired are amarginal
(eg. moveutilities and the
to point c)p's are marginal costs or shadow prices
of the number of children and quality per child, respectively, and A is the marginal
– This can be decomposed
utility into
of income. These a pureimply
conditions income
that theeffect
shadow(to
priceb)ofand an induced
the number of chil- substitution
dren is an increasing function of child quality and, similarly, that the shadow price of
effect child quality is an increasing function of the number of children. Additionally, since n
and q are chosen by the household, the shadow prices are endogenous. It is ironic that
• We can also include
the samequality- and(1960)
model Becker quantity-specific costs,
used to demonstrate which
why rich and might capture changes in
poor households
contraception costs
really face the same prices of children despite evidence that the rich spend more per
child is used by Becker and Lewis (1973) to show that the shadow price of the number
• Why care aboutof children
this theory?is higher It
under
is these
usedcircumstances.
to justify policies to decrease fertility in developing
The household's optimal choice of number and quality of children is illustrated
countries. by the indifference curve diagram in Fig. 7. Equilibrium occurs at point a. At this
point, the indifference curve U0 is tangent to the budget constraint, co = nq = (I -
mrss(7r¢, ar., I))/,rc , where co is the household's real expenditure on children and
3 The quality-quantity
s(cr, ns, ) is the demand tradeoff
function for–parents'
does it exist
standard of living. in reality?
The assumption that
this tangency point corresponds to maximum utility implies that the indifference curve
must be
• Are parents really makingmore concave than the budget
this tradeoff? constraint,
If so, if thereco =isnq,
anwhich is a rectangular
exogenous increase in family
size, we should see households decreasing their investments per child

• There is a negative correlation between family size and schooling or academic achievement,
and this has been used as evidence for the tradeoff

– But, there are almost certainly unobserved characteristics correlated with both
choices

• Test of this – Angrist, Lavy and Schlosser (2010)

– Two sources of exogenous variation in family size: twins, and first two children of
same sex
– Multiple dimensions mean multiple local effects
– Estimating the effect of more siblings than expected on the oldest child
– Data from Israeli censuses
– First stage: multiple second birth increases the average number of siblings by about
0.5; first two children same gender increase average siblings of first born by 0.07 (and
by 0.11 if girls)

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 – Second stage: no effect of these increases in family size on schooling and labour
market outcomes
– But, some increases in marriage and fertility for those from larger households

• Why no quality-quantity tradeoff? Parents adjust along a different margin (own consump-
tion)? Home childcare is of higher quality? Welfare state compensation? Countervailing
effects – benefits of siblings?

Table 5
Estimates for Firstborns in the 2+ Sample
OLS 2SLS Instrument List
Basic All Twins, Girl12, Girl12, Boy12,
Mean Covariates Covariates Twins TwinsAA Boy12 Girl12AA, Boy12AA All
(1) (2) (3) (4) (5) (6) (7) (8)
Schooling:
Highest grade completed 12.6 !.252 !.145 .174 .105 .294 .222 .160
(.005) (.005) (.166) (.131) (.184) (.176) (.106)
Years of schooling ≥ 12 .824 !.037 !.029 .030 .024 !.009 !.015 .007
(.001) (.001) (.028) (.021) (.028) (.028) (.017)
Some college (age ≥ 24) .291 !.049 !.023 .017 .026 .089 .089 .057
(.001) (.001) (.052) (.046) (.048) (.046) (.032)
College graduate (age ≥ 24) .202 !.036 !.015 !.021 !.006 .115 .115 .054
(.001) (.001) (.045) (.041) (.046) (.044) (.028)
Labor market outcomes (age ≥ 22):
Worked during the year .827 !.025 !.024 !.005 .002 .062 .072 .034
(.001) (.001) (.038) (.033) (.043) (.043) (.026)
Hours worked last week 32.6 !1.06 !1.20 !.97 .00 1.46 1.06 .51
(.05) (.06) (2.58) (2.18) (2.06) (1.98) (1.45)
Monthly earnings (1995 shekels) 2,997 !217.0 !179.1 !7.7 73.0 266.7 429.1 264.1
(7.4) (8.0) (394.1) (324.5) (283.6) (292.1) (214.2)
ln(earnings) for full-time workers 8.24 !.045 !.028 .082 .125 .120 .180 .435
(.002) (.002) (.116) (.100) (.124) (.215) (3.852)
Marriage and fertility:
Married on census day .446 .023 .020 .043 .060 .118 .101 .078
(.001) (.001) (.029) (.025) (.034) (.032) (.020)
Married by age 21 (age ≥ 21) .172 .027 .022 !.006 .024 .197 .192 .110
(.001) (.001) (.037) (.032) (.047) (.046) (.026)
Any children .448 .029 .019 .090 .013 .135 .134 .079
(.001) (.001) (.056) (.036) (.041) (.041) (.026)
Note.—Means of dependent variables are in col. 1, and ordinary least squares (OLS) estimates of the coefficient on family size are in cols. 2–3. Two-stage least
squares (2SLS) estimates using different sets of instruments appear in cols. 4–8. Instruments with an “AA” suffix are interaction terms with an Asia-Africa dummy.
Sample includes firstborns from families with two or more births (2+) as described in table 1. OLS estimates for col. 2 include controls for age and sex. Estimates for
cols. 3–8 are from models that include the control variables specified in table 3. Robust standard errors are reported in parentheses.

• Alternative test using Norwegian data – Black, Devereux and Salvanes (2005):

– Takes a similar approach, and finds that what matters is birth order – later born
siblings have worse educational outcomes
– Evidence of an effect on the marginal child?
– Suggestion that as families get smaller, the average educational outcome may im-
prove but there is likely to be no effect on the firstborn child

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 THE MORE THE MERRIER
FIGURE I
Effect of Family Size and Birth Order on Educational Attainment Relative
to the Educational Attainment of a Child in a Single-Child Family
(Predicted Values from Table III, column 6)

689
3.1 Time allocation and fertility
• Traditional economic models of fertility have also incorporated time use – as women’s
labour market opportunities improve, the opportunity cost of children is expected to
Downloaded from http://qje.oxfordjournals.org/ at University of Sydney Library on May 16, 2014

increase: children are time-intensive

• Child quality and quantity cannot be simply purchased from the market: they must be
produced

• The model:

– Husband specialises in market work, generating exogenous income H

– Wife can supply labour (chooses L) and be paid wage w, or engage in household
production
– Household production generates children, c = f (tc , xc ), and adult goods s = g(ts , xs ),
where xc and xs are purchased goods and tc and ts are the wife’s time devoted to
production (note these are constant returns to scale production functions)
– The wife’s total time T is used in these three activities: T = tc + ts + L
– Household income is I = H + wL, and used to buy xc and xs
– Utility from children is given by c = nq

• Assume that children are relatively more time intensive than adult goods

• There is a production possibility frontier assuming the wife does not work in the market

• When the wife does work in the market, she earns w per hour, allowing more input goods
to be purchased, but loses an hour of home production. This expands the production
possibility frontier to include points within the sloped line to S in the diagram – the
slope represents the relative (shadow) price of parental consumption and children

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 – The line does not extend beyond point a as the wife cannot supply negative hours
of labour and so spend more time in home production
Ch. 7: The Economics of Fertilityin Developed Countries:A Survey 303

.
U

C
Cs

O C
Child Services
Fig. 9. Effect of an increase in the female wage.

the probable outcome because it seems unlikely that child quality would decrease
• As the parents'
while wife’s wage increases,
standard the relative
of living (shadow)
increases sharply.price
3 6 of children increases (as children
are Although
more time intensive than adult goods) – the slope of this line increases
the income effect associated with increasing female wages may push
women
– The away
utilityfrom childlessness
maximising familytoward
choose married lives in of
point d instead which they increase,
b: c may combine butmother-
this
hoodrepresents
and work,thethis effectofmay
product be offset
quality by increasing returns to human capital in-
and quantity
vestments
– Again, in labor market
substitution careers effects.
and income caused Theby income
the facteffect
that isthe returns
larger whereto the
a given in-
previous
vestment in human capital are proportional
choice of c is lower: this is where fertilitytois its
mostratelikely
of utilization.
to increaseTo the extent that
rising female wages lead women to devote a larger fraction of their lives to market
– Parental consumption is always (weakly) increasing with an increase in w
work, there is a larger return to investments for women in market-related skills and
reinforcing
• As effects(exogenous)
the husband’s on their incentive
income to supply market
increases, the baselaborPPFand on the
shifts shadow
outwards price
(asym-
37
of time. As
metrically). As shown byare
children Willis
time (1973), investment
intensive, a majorityin ofwife's human will
this income capital leads totoa
be devoted
non-convex
parental production possibility frontier which decreases the likelihood that a mix
consumption

References
36 We note that the weight of the income effect relative to the substitution effect caused by an increase
in the wife's wage is smallest in the neighborhood of point a in Fig. 10 where women have high fertility
• Rowland,
and spend aDonald
small fraction of marriedtrends
T. “Historical life in the labor force and largest
in childlessness.” Journal of vicinity
in the Family of Issues
point 28, no.
S where
women
10 (2007):are childless and spend a relatively large fraction of their lives in the labor force. This suggests that
1311-1337.
a general increase in the price of female time might help to explain the decline in the variance of cohort
• Becker,
TFR in the G. US S. since
and H. the G.
mid-1930s
Lewis first noted On
(1973): by Ryder (1986). Specifically,
the Interaction betweenthethe substitution
Quality effects
and
against fertility are not offset by income effects for households
Quantity of Children, Journal of Political Economy (81), S279-S288. with strong tastes for children while only
income effects are possible for childless households. Thus, increases in the female wage might tend to
• Lehmann,
attract increasing
J. K.,numbers of women into
Nuevo-Chiquero, A.the
andlabor
M. force and reduce fertility
Vidal-Fernandez at high
(2016): ”The Early
parities Origins
while, at the
same
of time,Order
Birth it reduces the incidence
Differences of childlessness
in Childrens among women
Outcomes who have Behavior”.
and Parental the lowest levels of fertility.
Forthcoming
37 The
at the enormous
Journal literatureResources.
of Human on investments in human capital by women originates with Mincer and
Polachek (1974) and the emphasis of the effects of increasing returns on the sexual division of labor is
found in Becker (1981).

7
Short answer
1. Give an explanation for how the total fertility rate can fall but, at the same time, com-
pleted fertility remains constant.

2. Describe why an increase in a unitary household’s income might lead to a reduction in

the number of children desired, even if children are not an inferior good.

3. Explain why a negative correlation between household size and children’s educational
outcomes does not imply that parents tradeoff the quality and quantity of children.

Figure 1: Total fertility rate, Australia

Source: ABS 3301.0 Births, Australia, 2012

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 Figure 2: Age-specific fertility rates, Australia

Source: ABS 3301.0 Births, Australia, 2012

Figure 3: Total Fertility Rates: Selected OECD countries

8  

7  

6  

5  
Total  Fer*lity  Rate  

4  

3  

2  

1  

0  
1970   1975   1980   1985   1990   1995   2000   2005   2010  

Australia   Canada   Israel   Japan   Korea   Mexico  

New  Zealand   United  Kingdom   United  States   EU  27   OECD   Brazil  

China   India   Indonesia   Russian  FederaOon   South  Africa  

Source: OECD

9
 Figure 4: Median age at first birth, Australia

Source: Australian Institute of Family Studies Family Facts and Figures: Births

Figure 5: Median age at birth, Australia

Source: ABS 3301.0 Births, Australia, 2012

10
1318 Figure 6: Definitive
Journal of Family Issues childlessness by birth cohort

Figure 1
Proportions Childless in Selected Countries, Female Birth
Cohorts at Ages 45 to 49 or Older

35

30

25
% Total Cohort

20

15

England & Wales

France
10
Finland
Germany [Federal Republic]
Netherlands
5
Australia
United States

0
1840-1844

1850-1854

1860-1864

1870-1874

1880-1884

1890-1894

1900-1904

1910-1914

1920-1924

1930-1934

1940-1944

1950-1954

Year of Birth

Source: See Table 1. Germany (former Federal Republic) 1900-1924 compiled by Michael
Wagner (University of Cologne), 1935-1954 from Coleman (1996, p.33).

Source: Rowland (2007)

proportions of women to remain childless. Figures of between 15% and
25% were typical for cohorts born in the 19th century. In the United States,
there was an appreciable increase between the 1840 and 1875 cohorts in the
proportions childless and again among cohorts born in the early 20th century.
Marital childlessness was the main factor in the overall trend. The peak figures
for cohorts born in the 1890s and early 1900s especially reflect the effects on
family formation of the Great Depression (Morgan, 1991).

Downloaded from http://jfi.sagepub.com at Thuringer Universitats - und on March 25, 2010

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 Figure 7: Ex-nuptial births, Australia

Source: Australian Institute of Family Studies Family Facts and Figures: Births

Figure 8: Cost of raising children in Australia by age and income

Source: AMP.NATSEM, 2013

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