The price of children and fertility responses: Evidence from the Israeli Kibbutz

Avraham Ebenstein, Moshe Hazan, Avi Simhon, 2 December 2011

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To what extent does economics affect fertility decisions? Ever since Gary Becker’s seminal work on the economics of the family in the 1960s (Becker 1960), economists have argued that money weighs heavily on the minds of would-be parents, and policymakers throughout the world have been heavily influenced by such research. For instance, French policymakers looking to combat an ageing population have not only implemented generous maternity-leave benefits at almost full pay, they have also provided special support for women who have a third child and reduced mortgage payments on larger apartments. China, meanwhile, has tried to push fertility in the opposite direction. In a bid to stem its growing population, China’s One Child Policy has imposed heavy costs on parents who have unsanctioned births, with fines often representing several years of household income for parents who have a second or third child. For policymakers, the relationship between fertility and financial incentives has tremendous relevance.

In recent research (Ebenstein et al. 2011), we try to test the effectiveness of such policies. To conduct a reliable study, we would require data on a large population who experienced a dramatic and sudden change (‘an exogenous shock’) to the cost of raising children. To a large extent, this is precisely what occurred in many collective communities (kibbutzim) in Israel during the 1990s and 2000s, as a result of a wave of “privatisation” where kibbutzim began to require members to bear the costs of children privately. Traditionally, in kibbutzim the cost of raising children was borne fully by the collective, with all costs of daily life shared equally among members. The collective funded food, medical care, day care, clothing, and education. Parents with more children were allocated larger housing units by the kibbutz, insulating parents from virtually any (financial) marginal cost of having an additional child. Beginning in 1996, however, kibbutzim began to change their economic organisation by paying differential wages and charging their members the full price for services that had previously been provided at no cost to the member. Privatisation transferred the costs of food, day care, clothing, and housing from the collective to the individual parents. Between 1996 and 2005, 166 of the 237 kibbutzim were privatised. For economists, this provides an ideal opportunity to examine how changes in the cost of childbearing affect fertility.

Existing research on the price of children and fertility

A flurry of recent research has examined the impact of fertility subsidy programs directly in several developed countries. Researchers exploit changes in government subsidies to fertility to identify the price elasticity of demand for children. For example, Mulligan (2005) examines an incentive programme in Quebec during the 1990s, which issued women with an $8,000 cash benefit on the birth of a child, and finds that the benefit strongly stimulated fertility. Other studies examine variation in policies in France and Israel (Laroque and Salanie 2008, Manski and Mayshar 2003, Cohen et al. 2011). These papers find that fertility is highly responsive to incentive programmes, and imply that large incentive programmes could offer policymakers an avenue to increase fertility, and slow the ageing of a country’s population.

However, these studies, while important, generally share several drawbacks.

  • First, many rely on small changes to the financial incentives of childbearing, where parental incentives change by a tiny fraction of the cost of raising a child. As such, these studies reflect decisions made at the margin, and it may also be worthwhile to examine large changes in the cost of childbearing, if the elasticity is not constant.
  • Second, these studies are generally conducted exploiting the introduction or increase in a means-tested incentive of childbearing, where individuals beyond a certain income or wealth level are not eligible for the subsidy. As a result, they may be providing information relevant for only a subset of the population, and the results may not be generalisable to the overall population.

Using the Kibbutz privatisation

Our study, which examines the change in fertility among the membership of Israeli kibbutzim, overcomes these issues.

  • First, in our study, we exploit a relatively large change in the costs associated with raising children. Prior to privatisation, kibbutzim essentially insulated parents from any marginal financial costs to having an additional child. As such, our natural experiment represents a large shift in the financial incentives of childbearing, from close to zero to a substantial share of disposable income.
  • Second, our study is based on a large sub-population of Israel that is broadly similar to the population of the country. The membership of kibbutzim was generally composed of descendants of Jews from Eastern Europe and Central Europe, with residents being generally similar in terms of ethnicity and social status to the overall population.

Results

In our study, we first examine how the population of women of childbearing age was affected by the change in policy. As shown in Figure 1, we see that relative to the kibbutzim that did not privatise, the set that privatised experienced a decline in the population of women in this age group between 1995 and 2005. We interpret this as evidence of selection, in which women have left the kibbutz because the benefits of living there no longer outweigh the costs. As a result of this shift, and due to potentially a direct impact of price on fertility, we find in Figure 2 that the kibbutzim that never privatised experienced large increases in fertility relative to those that privatised. This effect is driven by both the impact of selection of women, and the direct impact on fertility from the price increase.

Figure 1 The distribution of number of females aged 15-49, in 1995 and 2005: Never privatised versus privatised kibbutzim

Source : Kibbutz Research Center of Haifa (1995-2005)
Notes: The figure represents a plot of a kernel density function using STATA (version 11) with the Epanechnikov kernel.

Figure 2 The distribution of number of births in 1995 and 2005: never privatized versus privatized kibbutzim

Source : Kibbutz Research Center of Haifa (1995-2005)
Notes: The figure represents a plot of a kernel density function using STATA (version 11) with the Epanechnikov kernel.

Using our panel data on the kibbutzim, we examine the magnitude of the direct impact by exploiting timing variation in privatisation across kibbutzim. As shown in Table 1, we find that the impact on the general fertility rate among women is modest, with the impact occurring in the year prior to the policy change. This is perhaps unsurprising, since many kibbutzim debated the relative merits and demerits of privatisation in the year(s) prior to the shift. We find only a modest effect on fertility among women in the kibbutz, with our estimate indicating a decline in the general fertility rate (GFR) by 3-4 births. Since the average general fertility rate in kibbutzim in 1995 was 63, this represents a decrease in the GFR of roughly 6%. In light of the massive change in costs to children imposed by the policy change, we interpret this as evidence that financial factors have a relatively modest role in fertility decisions for the average woman. These results suggest that non-financial factors, such as time or fertility tastes, are more important factors in predicting fertility than the financial costs facing parents.

Table 1 Relationship between privatisation and general fertility rate on the kibbutz, fixed effects

Notes: * significant at 10%. ** significant at 5%. *** significant at 1%. See Table 3. The dependent variable is the general fertility rate, which is the number of births divided by the number of females, multiplied by 1000 for each kibbutz in every year. Because of the structure of the dependent variable, there is no need to control for number of females, and that variable was excluded from this model.

Source: Israeli Central Bureau of Statistics (1995-2005), Kibbutz Research Center of Haifa (1995-2005)

Caveats and conclusion

Our findings have to be interpreted with caution in this context.

  • First, without detailed panel microdata on the kibbutz members, we are unable to fully estimate the impact of selection versus the direct effect of price on fertility.
  • Second, while we present evidence in our working paper that the kibbutz privatisation decision is arguably exogenous to the fertility tastes of women, this is a debatable point.
  • Third, imprecise data on exactly when parents factored in the likelihood of privatisation rules out a sharp analysis of the event.

In spite of these caveats, our paper suggests that the role of price in fertility decisions is rather modest, and even very large changes in the financial incentives to fertility may not be enough to radically alter fertility patterns among women in developed countries.

References

Becker, Gary S (1960), “An Economic Analysis of Fertility”, in Demographic and Economic Change in Developed Countries: a conference of the Universities - National Bureau Committee for Economic Research, Princeton University Press.
Cohen, Alma, Rajeev Dehejia, and Dmitri Romanov (2007), “Do Financial Incentives Affect Fertility?”, NBER Working Paper No. 13700.
Ebenstein, Avraham, Moshe Hazan and Avi Simhon (2011), “Raising the Financial Costs of Children and Fertility Responses: Evidence from the Kibbutizim”, CEPR Discussion Paper No. 8634.
Laroque, Guy and Bernard Salanie (2008), “Does Fertility Respond to Financial Incentives?”, Unpublished Manuscript.
Manski, Charles F and Joram Mayshar (2003), “Private Incentives and Social Interactions: Fertility Puzzles in Israel”, Journal of the European Economic Association, 1(1):181-211.
Mulligan, Kevin (2005), “Subsidizing the Stork: New Evidence on Tax Incentives and Fertility”, The Review of Economics and Statistics, 87:539-555.
 

Topics: Frontiers of economic research, Health economics
Tags: China, demographics, fertility, France, Israel, population

Member of the Hebrew University Department of Economics

Assistant Professor of Economics at Hebrew University and CEPR Research Fellow

Senior Lecturer, Department of Agricultural Economics and Management, Hebrew University