Thoughts on economics and liberty

Why do people in the West no longer have “enough” children?

I came across an interesting article by Shelly Lundberg (a professor at UC Santa Barbara) that proposes a number of economic reasons for the decline in fertility in the West, a phenomenon known as the second demographic transition. I encourage you to have a read.  

A few comments:

Main cause: Children no longer main support for the elderly 

In my view Lundberg under-sells the negative impact of social security and pension schemes on fertility. I've written about this issue here and here (among others). Basically, till having children is crucial to one's old age plans, there will be a strong incentive to have fewer children. Lundberg could improve her analysis by exploring the effects of social security polices more carefully. 

If this view is correct then abolishing social security and pension schemes in the West would help increase fertility. It would be important to restrict social insurance to an extremely frugal minimum. When children once again become the main provider of 'top up' old-age income and old age care, then the demand for children should pick up. 

That means the end of the welfare state. I'm not sure if the West is capable of such a radical shift in policy. 

Secondary cause: Parental 'property rights' in children are eroding rapidly 

But Lundberg does makes a few good points that, I suggest, can be summarised as an erosion in 'parental 'property rights' in children. With divorce, for instance, the investment in children is largely lost. In extreme cases, one might not see one's children again. 

If couples are unable to make binding agreements about their future – basically, I can’t credibly promise not to leave you – then investments in joint ventures, such as children, may be inefficiently low. Investments that are ‘portable’, such as education and career experience, conversely, will be more attractive. If a couple also has a limited ability to make legally-binding agreements about custody or post-separation financial arrangements, the problem is exacerbated [Lundberg]

Then again, if children decide (after all the investment that is put into them) to not take care of older parents, or to move elsewhere where they can't provide useful assistance, then too the investment is lost. Strategic controls (such as not leaving a bequest for the child who does not take care) are becoming less useful as childrens' incomes far exceed that of their parents.

Therefore it is becoming less effective to invest in children given the uncertainty surrounding the 'return on investment'. Children are becoming a risky asset, and risky insurance product. Less risky assets and more assured insurance products then become attractive, such as ordinary savings or education to advance once's career prospects and lifetime earnings. The existence of a government pension plan at that stage effectively makes children redundant as an economic asset (except for 'care').

Another effect of risky marriages is that women tend to postpone child-bearing as they wait to find a more stable match, which takes them to their less fertile years. 

Given all this, it would appear that laws that allow marriages to be easily dissolved can directly reduce fertility. True, these laws are not unidirectional in their effect. One way to for a woman to demonstrate commitment within a new marriage (after divorce) is to produce a new child. Such 'commitment fertility' could partially offset the effect of reduced childbirth due to increased likelihood of divorce.

Lundberg's paper has also picked up many cultural refinements in relation to the 'other half'. Overall an excellent and thought-provoking article.

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