What’s up, Doc?

Demographic Conference of Young Demographers provides a great opportunity to get familiar with ongoing research in the field of demographics and to exchange ideas with fellow economists. We travel to Prague to share with other young researchers our recent findings in the area of the effects of raised fertility.

Given the fact that many countries consider natalistic policies as a viable solution to the fiscal pressure stemming from longevity and declining fertility, we are interested in the overall effect of such policies. We abstract from the question of natalistic policies effectiveness, while that is more empirical matter, largely discussed in the literature. However, quantification of the policies has so far been largely missing from the literature. We fill this gap by developing a model to provide an estimate of how much may be spent at all, to achieve certain fertility targets maintaining long-term aggregate welfare unharmed. Increased number of births implies immediate economic costs and delayed economic gains. Quantification of the net effects remains a challenge. We analyze the overall macroeconomic and welfare effects as well as distribution of these effects across cohorts and study the sensitivity of the final effects to the assumed target value and path of increased fertility.

In our setting, when a larger number of children is born, the immediate reaction is a decline in labor supply of the adults and a decline in the consumption of the adults. The decline in the labor supply necessitates adjustments in the wages (and thus interest rates). The exact magnitude of these costs depends crucially on the extent to which larger fertility is associated with an intensive margin adjustment (households with children have more of them) and the extent to which they are associated with an extensive margin adjustment (households without children start having them). This discrepancy owes to the fact that we allow for economies of scale in child rearing, which is in concordance with a large number of empirical regularities. On the side of the benefits, an increased number of adults, as children grow older and start participating in the labor market, raises the output of the economy, as well as the tax base. By consequence, when population is growing – relative to the baseline of unchanged fertility – fiscal gains are emerging. Once the society stabilizes at a new demographic structure, a larger number of people per se implies the fiscal costs, as many public policies are fixed per capita.

What is the overall effect? All the identified fiscal and welfare effects are small. In fact, if natalistic policies result in an increase in fertility in the range of up to 30% they are likely to bring about fiscal loss in the long run. A relatively high increase in fertility from 1.4 to 1.9 creates a permanent fiscal surplus in the aggregate terms of as little as 0.05-0.3% of GDP, which is much less than the budget of natalistic policies in many countries (e.g. Poland currently spends 1.6% of GDP on child benefits alone, in addition there are expenditures related to health during pregnancy and child-rearing, institutionalized care programs and tax credit for families with 2 or more children). Moreover, intensive margin scenarios yield the lowest of in the range of the fiscal effects, which implies that in the case of policies encouraging bigger families rather than more families the net fiscal effect is less likely to be positive.