Child allowances and fertility incentives

In the first week of most economics classes (and indeed, throughout most of those classes), one of the first lessons is that 'people respond to incentives'. When economists say that, they mean that when the costs of doing something increase, we tend to do less of it. And if the costs of doing that thing decrease, we tend to do more of it. The reverse is true of benefits - when the benefits doing something increase, we tend to do more of it, and when the benefits decrease, we tend to do less of it.

Incentives matter, even in decisions that most people wouldn't automatically think of as being 'economic' decisions. This week's example comes from the U.S. debate over the introduction of a child allowance. As the New York Times reports:

Governments worry about declining fertility for many reasons; for one, they count on the next generation to finance the safety net and provide the caregivers, inventors and public servants of the future.

The birthrate in the United States fell in part because of large decreases in births among two groups: teenage and Hispanic women. The Great Recession also contributed to the fertility decline — births have sunk below replacement level since then, and there are indications that the pandemic may decrease fertility further. American women are also waiting longer to have babies.

There are many reasons. Would-be parents face challenges like the rising cost of child care, record student debt, a lack of family-friendly policies, workplace discrimination against mothers and concerns about climate change and political unrest. At the same time, women have more options for their lives than ever and more control over their reproduction. As countries become wealthier, and as women have more opportunities, fertility rates decline, data shows.

The monetary costs of raising children have increased (e.g. due to the rising cost of childcare), and the opportunity costs have increased as well. In terms of opportunity costs, women are earning more, so the costs of time taken out of the workforce for childbirth are higher (even putting aside the extra time spent on caregiving and parental responsibilities after birth).

A child allowance paid to every family lowers the costs of raising children [*]. When the cost of something decreases, we tend to do more of it. So, we could expect (at the margin) more children, i.e. higher fertility. That doesn't mean that every family would have more children, only that the child allowance would provide enough incentive for some families to have another child (or a first child), so that the average number of children per family increases by a little.

How many extra children? It's difficult to say exactly, but the New York Times articles notes:

Research from other countries shows that direct payments lead to a slight increase in birthrates — at least at first. In Spain, for instance, a child allowance led to a 3 percent increase in birthrates; when it was canceled, birthrates dropped 6 percent. The benefit seems to encourage women to have children earlier, but not necessarily to have more of them — so even if it increases fertility in a given year, it doesn’t have large effects over a generation.

Incentives matter, but sometimes they only matter a little bit.

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[*] Alternatively, you could think of a child allowance as increasing the benefits of raising children. The incentive effect is the same either way.