Moar kids

By Eric Crampton 04/02/2014

Overshadowed (predictably) by Lorde’s Grammy wins was Labour’s policy announcement. Should Labour form government, they’d like to pay parents $60 per week for the first year of the child’s life. 95% of children are meant to be covered by the plan, which is not income contingent for the first $150,000 of family income but abates to zero immediately at $150,000. Parents of 2 and 3 year olds would also receive up to $60 per week. Those with family income less than $50k/year would receive the full $60/week for the extra two years, abating to zero by $80k annual income for those with one child and somewhat more slowly for those with two or three children.

The policy will likely increase fertility rates. We can look to two decent studies for evidence. First, Josh Gans and Andrew Leigh found that an Australian baby bonus programme induced a very strong timing effect: women delayed giving birth until 1 July, when the programme came into effect. This suggests that people do respond to these kinds of incentives, but it doesn’t tell us whether the programme increased total fertility or just affected the timing.

Of more relevance for present purposes, Kevin Milligan found that Quebec’s baby bonus increased fertility in Quebec relative to that in other provinces for the duration of the programme. For those without NBER access, here’s the CD Howe summary. Canada’s federal system provided him a nice way of running difference-in-difference to be able to infer causality. While the programme mostly paid families for children they would have had anyway, he did nevertheless find a substantial effect on fertility. He writes:

…the estimates suggest a strong, positive, and robust impact of the policy on fertility. In the model containing the full set of control variables, the fertility of those eligible for the new program is estimated to have increased by 12 per cent on average, and by 25 per cent for those eligible for the maximum benefit

As the Quebec programme’s intention seemed to have been to produce more Quebecois,* Milligan figured out the cost per child-who-would-not-otherwise-have existed. It cost about $15,000 per additional child. Is that value-for-money? Depends what you think a child is worth. I think life is worth at least that much to each of the children who wouldn’t otherwise be born, and that New Zealand is so far below optimal population size that it would be a bargain, if results here were similar.

Milligan also found some really interesting demographic effects.

Suppose your model of the world is as follows. Poorer people have lower IQ on average and are more likely to be income-constrained against having another child. We might then expect that a lump sum baby bonus, like Labour’s, and like Quebec’s, that doesn’t scale with income, would differentially encourage poorer people to have more children. Then, this.

Milligan found instead that the greatest policy effect on fertility was in the middle income ranges – those earning $50,000 or so in Canadian dollars at the time. The poorest groups didn’t see much fertility increase. Milligan speculates that the group either didn’t know about the policy or were farther away from being at the margin where another child would be desired. There also was less fertility response among rich cohorts, for whom income would not have been the binding constraint anyway.

Some of the demographic separation could be due to the structure of the Quebec programme. After the programme was made a bit more generous in 1992, it paid $500 on the birth of a first child. The birth of a woman’s second child also generated a $500 payment as well as another $500 on that child’s first birthday. Things got far more generous for larger families: third and subsequent children drew twenty quarterly payments of $400 ($31/week) for a total of $8000. Milligan then, as expected, finds the largest effect on the likelihood of a woman’s bearing a third or further child. Where the very poorest women cannot afford a first child, a $500 payment is unlikely to change things much. Only those who were more affluent to start with could afford to reach the hurdle necessary for accessing the payments for very large families.

We then shouldn’t conclude that the differential fertility effect will necessarily hold under Labour’s proposed scheme, which provides fairly generous payments for any newborn regardless of parity. As Labour’s proposed payments for children after their first birthday abates quickly for families earning more than $50,000, we might expect a humped effect where there would be little effect on fertility decisions among the very poorest cohorts, rising effects up to $50,000, then attenuating effects thereafter. I wouldn’t be surprised to see negative fertility effects in the upper-middle income cohorts due to income effects, but that would depend on how Labour finances the scheme.

The tldr; summary then:

  • Labour’s programme is near certain to increase total fertility rates, regardless of how much snark leftie folks on Twitter want to throw around about “Oh, would you want to take care of my kid for $60 a week then?” They’re nuts to suggest it won’t happen. You don’t need the programme to cover all the costs of child-rearing – you just need that some people had just barely decided against having a(nother) kid due to the cost and that these people change their mind under the new programme. I hate seeing tweets from people who know better pretending the opposite. You’re not idiots – why pretend to be idiots on Twitter? Go read Kevin Milligan. 
  • We should perhaps worry less about “Oh, well, poor people are just going to have a pile of kids in order to draw the payments then, and anybody who’d decide to have a kid on that basis is exactly the kind of person who shouldn’t be a parent.” Milligan’s results suggest that they don’t, but we need to be very careful on that one as we just don’t know what would have happened if the Quebec payments had been really generous for first and second children. It’s possible that Matthew Hooton’s right here and that there will be a strong fertility response among the poorest cohorts. 

Other observations:

  • Bill Kaye-Blake is right that the $150k family income cutoff is a bit odd
  • I would love to see somebody put together a new Effective Marginal Tax Rate schedule incorporating Labour’s proposed changes. The abatement rates from $50k-$80k household income are pretty sharp. We’d also see a very large EMTR spike at $150k: the $1 that pushes you from $149,999 to $150,000 in family income will cost you $3120 if you have a newborn. 
  • Because of the large EMTR effect based on household income for those with newborns, I expect this will induce many second-earners, predominantly women, to spend longer outside of the labour force on the birth of a child. We’d see this in higher-earning couples, where the second-earner’s income pushes family income above $150,000, and in middle-earning couples in the high abatement ranges. 
  • The plan’s proposed extension of paid parental leave to 26 weeks will intensify the effect above. Consequently, small businesses may be more reticent to hire women of prime childbearing ages. The costs of bearing a half-year’s likely leave are not trivial for employers. The wage gap will consequently increase. Sadly, National’s jumping onto this bandwagon as well

* Milligan infers this from the increasing payment schedule. As there are economies of scale in child-rearing, a model designed simply to compensate for child-related costs would have a large payment for the first child, with lower payments thereafter. Political discourse at the time, if I recall correctly, was entirely pro-natalist. Citizens and Permanent Residents had access to the payments, immigrants who hadn’t made PR weren’t. Quebec nationalists later blamed “money, and the ethnic vote” for the failed sovereignty referendum; breeding more pure-laine was a potential solution.