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Tuesday, September 06, 2005

Low Fertilty and Public Policy

Many thanks to New Economist who has just sent me a link to a paper from OECD staff - "Trends and Determinants of Fertility Rates: The Role of Policies" by Anna Cristina d’Addio and Marco Mira d’Ercole.

What follows is an on-the-fly review of the paper. Perhaps the first thing I can say is that the research in this paper seems to depend on the macro economic work of another group of OECD staff, headed by Joaquim Oliveira Martins - The Impact of Ageing on Demand, Factor Markets and Growth - and I will look at that work directly after I consider this paper.

My initial impression is that this work does not represent any major advance in our understanding and that the work of macroeconomists like Bryant and company, or demographers like Lutz and Thomas Sobotka (who has conducted the most extensive recent study of low fertility) don't seem to get much in the way of a look in. In fact none of these authors even figure in the bibliography, which I consider lamentable, (nor does Faruqee, or any of the other IMF staff economists whose work I have been looking at lately). This apparent inter-institutional rivalry is to be deplored in an issue as important as this. Let e be clear: in general the IMF work is much better.

Another serious and astounding omission is the failure to look at the US as a very distinctive separate case. If I were talking about OECD fertility, the US 'outlier' would form a central part of what I wanted to talk about.

One demographer whose work does feature is Australia's Peter McDonald, and while I am generally sympathetic to what he is saying (and see especially this recent paper - again not in the OECD work), it is important to be careful with this work, in particular since it runs counter to the previous - more quietist - consensus.(See this influential paper by the UNs Paul Demeny).

So why does a paper like this need to be 'handled with care'? Well basically they don't address head-on the idea that there might be a fertility trap below the 1.5TFR level. They thus don't distinguish clearly enough those countries suffering from extremely low fertility from others which are settling down to what appears to be long term TFRs in the 1.7 - 1.9 range. These are the countries which have applied most the child-friendly policies that the OECD authors are correctly advocating, but they don't, in my opinion, consider sufficiently the limitations and possible ceilings to the proposed pro-fertility policies.

Also they certainly don't take into account the possible negative feedback of the macroeconomic environment, and how emerging fiscal and employment issues may make it difficult to raise fertility beyond certain levels, but here it may have been the work of Oliveira Martins which has mislead them.

Let's take some examples:

"Simulations of the possible effects of various reforms show that a package of policies relaxing some of the constraints to childbearing may significantly raise total fertility rates and, thereby, the size of the population and of the labour force. For example, in the case of Japan, such policies may raise the total fertility rate to a level of 2.0, which would leave the population in 2050 at 94% of the 2000
level, as compared to 79% projected by national authorities.

This is really astounding. If they are getting Japan fertility rates up to 2.0 out of their simulations they really need to re-examine their parameters. Japan is currently at TFR 1.3, and has been for some time, but a jump to 2.0 would be huge, and it is hard to believe this would be attainable at any point within the significant time horizon. Particularly since Japan with estimated government debts of around 160% of GDP is about to enter a period of severe fiscal restriction *and* rising health and pension costs for the elderly, at the same time as it tries to raise labour force participation rates among women. I have to ask: do these authors live in the same world where I am living?

Postponement of the first childbirth is probably the most important event of what has been labelled as the "second demographic transition" that is characterizing most OECD countries (van de Kaa, 1987). Postponement results in the rise in the mother’s age at childbirth (see Gustaffson and Wetzels, 2000). An indicator that is often used to describe this phenomenon is the mean age of mothers at first childbirth. For the seventeen countries depicted in Figure 2, this mean age at first childbirth has increased, on average, from 23.8 to 27.2 years over the period 1970-2000, an increase of over 1 year per decade.

"If successive cohorts have the same average number of children per woman, but delay their childbearing until later in life, this will lead to a temporary reduction in the period fertility rate; the opposite would occur if each cohort of women advanced the timing of their childbirths. Changes in the mean age at first childbirth for different cohorts of women can therefore generate cyclical swings in the period fertility rate (a decline, followed by recuperation) even when the cohort fertility rate is unchanged. The use of total fertility rates, when postponement of childbirth is occurring, will thus overestimate the short-run effect of the decline in fertility rates."

Yes, but they really are confusing the question here, since we are not dealing with cyclical swings, but with a long term upward rise in the timing of childbirth. There is no evidence that this is reversing anywhere, and there is no indication whatsoever of a 'swing' phenomenon.

"The decomposition presented in Figure 3 helps understanding whether lower fertility rates in one period, due to reductions in fertility rates at younger ages, are compensated by increased fertility rates in subsequent periods. However, it does not allow determining whether full recuperation is occurring. This reflects two factors. First, postponement alters the contribution of the two groups of women to the total fertility rates: even an increase in fertility rates of older women in one period that exactly matches the decline of younger ones in the previous decade may leave the total fertility rate below the level that prevailed before the onset of postponement. Second, period indicators give only a cross-sectional view of what is unfolding at the cohort level."

The childbearing patterns observed for these four birth cohorts confirm that, in all countries, recent generations of women have fewer children at early stages of their reproductive cycle and more children at later ages. In general, however, the higher number of children that women have when old does not fully compensate for the lower number of children that women have when young: for example, in the case of Australia, the age-specific fertility rates of different cohorts decline by significant amounts at age 25 to 29, when moving from the oldest to the youngest cohorts, while they increase by small amounts at age 35 to 39. Sweden and other Nordic countries are exceptions, as the increase of age-specific fertility rates at age 30 to 34 is much larger than in other countries. In Sweden, in addition, the median value of the distribution shifts to the right, reaching a higher level than that recorded in the previous period; in other words, by the time Swedish women reach age 25 to 29, the cohort born in the years from 1961 to 1965 had a higher fertility rate than the maximum attained by the cohort born from 1941 to 1945.

This paragraph is important:

Bearing these caveats in mind, Table 2 suggests that women born in 1956-60 are likely to experience a further significant reduction in their total fertility rate relative to the level realised by the previous cohort in Austria, Italy, Japan and Spain, while possibly recording a recovery in France, Norway, Sweden and the United States. The average decline in completed fertility rates increases for later cohorts (as "projected childbearing" over their full reproductive cycle declines from a level of 1.89, for womenb born in 1961-65, to 1.81 for those born in 1966-70 and to 1.77 for those born in 1971-75), before recovering slightly for the cohorts born in 1976-80. For women born in this later period, fertility rates are slightly above those needed to ensure replacement of the population in France, Netherlands and the United States, while Austria, Japan, Poland and Sweden have fertility rates of around 1.5 or lower. In these and other countries, the size of recuperation in fertility rates required to bring birth rates back to the levels achieved by the cohorts born in 1951-55 is very large: on average for the cohort born in 1971-75, the extent of recovery required is 54%, and this rises to 65% or more in Italy, Japan and Spain. While still being "feasible" in biological terms, the pace of such recovery would be without historical precedents. This suggests that the decline in fertility rates observed over the past three decades on the basis of period and cohort indicators is likely to be lasting.

The authors do note that:

"Postponement of childbearing has important consequences on both the number of children women have over their life and on the mother's and child's health. Close to half of all children are growing up without siblings in several OECD countries; the share of women that remain childless at ages 30 and 40 has increased strongly over time; and the risk of some health problems for mothers and their children has also risen."

Which is a point I was highlighting here, and they fail to assimilate the important point that Lutz is making that the postponment of childbirth has long term structural consequences for the population (regardless of the final cohort TFR values) since in the next generation there will be succesively less young adults capable of having children.

The second chapter gives an assessment of the societial and individual changes which have lead to the changed childbirth patterns. This is all largely uncontroversial, and is a worthwhile read for anyone not familiar with the situation.

One of the items they have a section on is 'marital status'. This may not appear at first sight to be self-evidently important. Then consider this: one of the factors which influence fertility is te rate of new household formation, and one of the factors which affects age on childbirth is the age of setting up the household. Now in Northern Europe and the US people may well go and live together and maybe marry later, whereas in Southern Europe or Japan people may 'hang on' until they are able to formally marry. This obviously affects household formation, and hence fertility.

The key to the whole issue comes with the discussion of the widening gap between desired and observed fertility rates:

While changes in structural conditions and life styles are contributing to delay and decline of birth rates, the effects of these changes on the number of children that women will have over their reproductive life have been exacerbated by the constraints that individuals and couples face in everyday life, by the emergence of new risk factors confronting them (labour market insecurity, difficulties in finding suitable housing, unaffordable childcare) and by the failure of social policies to provide adequate support. Indications about the potential role of these constraints on women’s childbearing decisions can be derived from answers to questions about the "desired" or "ideal" numbers of children provided from opinion surveys."

In fact McDonald suggests that the two *key* phenomena are changing gender identities on the part of women (including attitudes to education and labour market participation) and the lack of similar changes in the male mindset. Where the first occurs rapidly, and the male minset either doesn't change, or only slowly (Southern Europe) then it is very easy to fall into the low-fertility trap.

Chapter 3 deasl with government policies, which of course is the other key parameter which may affect the childbirth decision. As the authors indicate there are direct, and indirect costs associated with having children, and the indirect (or opportunity) costs are probably much the more significant ones:

Beyond direct costs are the indirect (or opportunity) costs associated to childbearing. If direct costs may be shared among parents, indirect costs fall almost exclusively on mothers. While the difficulties of estimating their size are even larger than in the case of direct costs, it is very likely that the size of these indirect costs rises alongside the higher employment opportunities available to mothers. For women that — because of their education and preferences for financial autonomy — can get a foothold in the labour market, the decision of having a child will affect their career opportunities. They may have to withdraw from the labour market, at least temporarily, shortly before and after childbirth; they may not be able to return to work after childbirth, or may have to work part-time or under atypical schedules; or they may find that, in the longer term, their career prospects have worsened relative to childless women and to men. Often, one immediate consequence of these changes in work arrangements following childbirth is a loss of income. Further, as the longer a mother stays out of the labour market the more difficult it becomes for her to re-enter it, indirect costs of children increase as the mother ages.

The paper considers a number of alternative policies - tax policy, child care provision, parental leave from employment, - and then carry out a number of simulation tests to assess possible outcomes. As I said, my impression is that they are way to optimistic here, but that doesn't mean that the policies they advocate should not be given urgent and serious consideration. Even a much smaller impact would be a strong positive factor. Their conclusions:

"Despite the limitations of the analysis undertaken in this chapter – which reflect the difficulty in considering the full range of factors that may contribute to cross-country differences in the levels and changes of fertility rates in OECD countries – the evidence presented suggests that changes in a range of policies may prove to be helpful in removing obstacles to childbearing faced by individuals and couples. Childcare arrangements, transfers to families that reduce the direct cost of children, as well as provisions that allow mothers to better cope with their family and career responsibilities all can help in removing obstacles to childbearing decisions. Illustrative simulations of the possible impact of a range of policy changes also point to significant increases in fertility rates of several OECD countries, with significant effects on population size (and structure) and with smaller but still large effects on employment levels."

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