Economic Returns of Childrearing
and Fertility Transition
Nicole Mun Sim Lai
• Caldwell’s Wealth Flow Theory (1976)
– Economic value of children and the direction of
intergenerational wealth flows determine the
incentive of childbearing
• Empirical assessments of economic returns
to childrearing have shaky foundations
– Qualitative data
– Do not measure the whole lifecycle
– Ignore intra-household transfers
Objective & Contribution
• Examine the economic returns of children
during the fertility transition
• Describe a new method for assessing the
economic returns to the average parent over
the entire parental lifecycle
Methods
• Measure the net familial transfers of the
average parent over the entire parental
lifecycle
– Average net upward transfers received by a parent at
age a of birth cohort c
– Average child costs given by a parent at age a of birth
cohort c
• Historical familial transfers (1950-2003) &
net upward transfers projection (2004-2040)
Figure 1: Internal Rate of Return (IRR), Taiwan
5
4
upw ard
direction
IRR (%) .
3
incom e grow th rate=5%
2
incom e grow th rate=3%
1
0
dow nw ard
direction
-11925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945
Parent's Birth Cohort
-2
-3
Projection does not affect much the rates of parents of birth cohorts 1925-1929 because
estimates of these cohorts are mainly based on historical data
Figure 2: Total Fertility Rate and Internal Rate of Return,
Parent's Birth Cohort 1932-1945, Taiwan
Cohort Fertility Rate .
6.0
Parents of birth
cohort 1932
5.0
Parents of birth
cohort 1945
4.0
3.0
2.0
Direction of Net Transfer Flow =
Dow nw ard
Direction of Net Transfer Flow =
Upw ard
1.0
0.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
Internal Rate of Return (%)
Notes: Upward transfers for 2004-2030 are projected at 3% income growth
3.0
• Parents of high cohort fertility (5-3.5
children) receive positive net familial
transfers from children. The direction is
upward
• Parents of low cohort fertility (<3.5
children) receive negative net familial
transfers from children. The direction is
downward.
• Support Caldwell’s Wealth Flow Theory
Does the timing of the fertility reduction
correspond to the timing of the changes in
the direction of net transfers?
• No: if use net familial transfers
• Maybe: if use net familial transfers plus
opportunity cost of physical investment
Figure 3: Investment in Children Vs Physical Investment
Taiwan
10
Average time deposit rate
IRR (%) .
5
IRR
0
1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945
-5
IRR + opportunity cost
-10
Parent's Birth Cohort
income growth rate of upward transfer projection at 3%
Source: Statistical Yearbook of the Republic of China, 1975-2004
Family Income and Expenditure Survey, Taiwan, 1964-2003
Conclusion
• Children are net economic benefits to parents of high
cohort fertility & net economic costs to parents of low
cohort fertility.
• Parents rely on children for old-age support
• Our approach is more comprehensive and
return estimates are higher than previous studies
(Stecklov 1999 (-31.5%); R. Lee 2000 (-6.7%); R. Lee and K. Kramer 2002)
• Implication: Trend shows that children are net economic
costs to young parents in current decade.
– Pronatalist programs for declining fertility