The economics of Australia's "baby bonus"
Birthrates in rich countries have been falling for decades. The reason is simple: babies have gotten more expensive (See previous entries here and here).
Childbirth follows the law of demand like everything else. So we get fewer babies when the price goes up.
What does a baby cost? There are two parts—out-of-pocket costs like diapers and school tuition, and opportunity costs for time spent childrearing. Not surprisingly, both depend on how much money you make.
Rich parents spend more on babies. According to the U.S. Department of Agriculture’s Consumer Expenditure Surveys, families making $65,800 a year or more will spend a staggering $249,000 to raise a child through age 17. Poor families spend a lot less: those earning $39,100 to $65,800 spend about $170,000, and those making less than $39,100 spend about $125,000. (More here, full data here [PDF]).
But those estimates don’t include the opportunity costs of bearing children. For all the joys of forming family, kids take away from leisure and work time. As income rises, so do the opportunity costs of time. That’s why we see birthrates falling in rich countries vs. poor countries, and among the wealthiest within rich countries.
Falling birthrates may be good for individuals making the decisions behind the numbers, but they’re bad for politicians. They reduce future tax collections, economic growth, and threaten to bankrupt pay-as-you-go social insurance schemes.
Europe’s birthrates have fallen most sharply, and legislators have been aggressively crafting policies to boost birthrates. The latest plan comes from Australia, where the federal government began offering a “baby bonus” of 3,000 Australian dollars (U.S. $2,100) to new moms starting July 1, 2004.
Will the plan work? Compared to the total costs of childrearing, a $2,100 bonus is peanuts for most of us. But as economists always point out, at the margins there are always people who are indifferent between two actions. $2,100 per baby may not induce the next baby boom, but tiny changes in incentives tipping people at the margin one way or the other can have big social consequences.
A trivial example comes from the AP account of the baby-bonus launch. Births were down just before the launch of the baby bonus, and surged just afterward:
St. John of God Hospital in the west coast city of Perth reported that the number of babies born there fell 21 percent in the second half of June compared with the corresponding period last year, the West Australian newspaper said. But the number of births in the first half of July increased 30 percent compared to a year earlier.
More important than the timing of births may be the impact of these plans on the distribution of births between rich and poor. All else constant, we’d predict a baby-bonus to increase births among those with the lowest opportunity costs—poor, uneducated, single parents.
If that happens, expect a demographic bulge of males from poor, single-parent households to reach maturity between 15 and 25 years from now—and a classic policy boomerang in the form of a surging Australian crime rate.
Posted by Andrew on Thursday August 5, 2004 | Feedback?
