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 Income Effect: 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.