Demography and Development

Topic 2 The Household Demand Approach and its Applications

Sriya Iyer
Faculty of Economics and St. Catharines College University of Cambridge

Recapitulate
The relationship between population growth and economic development can be explained by the theory of 'demographic transition' and by Malthusian theory

Transition theory is purely descriptive explaining fertility transitions in terms of the black box of modernization
Malthusian theories are flawed by the assumptions of diminishing returns and of a positive income effect on fertility We need an alternative theory of population and development

What are the origins of the neoclassical household demand approach?

Approach not a single theory: Becker 1960, 1981; Willis 1973; Becker and Barro 1988 Four developments in economics underlie the household demand model: Investment in human capital Benefits of children different in rich and poor countries Allocation of human time Market and household activities Money costs and time costs Household production function Household services Child services Household as consumption or production unit Assumptions similar to the theory of the firm
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How do we set up a household demand model for fertility?

Utility-function: U = U(N, Q, Z) where: N = number of children Q = quality per child = household investment per child Z = all sources of satisfaction to husband/wife other than those arising from children Production function: C = NQ = f(tc, xc)

where: C = child services = product of no. children (N) and quality per child (Q) tc = vector of total amount of time parents devote to children during parents lifetime xc = vector of total amount of goods parents devote to children during parents lifetime

Household demand model (continued)

Budget constraint (this is a full-income wealth constraint, which includes both money and time, and in which income is exhausted on child quantity N, child quality Q, and all other satisfactions Z): where: I = familys full income i = cost-minimizing shadow prices; i.e. c = shadow-price of child services Z = shadow-price of all other commodities/satisfactions PN = fixed price applying to component of child costs independent of level of Q chosen PQ = fixed price applying to component of child costs independent of level of N chosen I = NQc + NPN + QPQ + ZZ

Household demand model (continued)

Derived demand for children:

N = demand for child quantity = N (I, c, Z, PN, PQ)

Q = demand for child quality = Q (I, c, Z, PN, PQ)

Z = demand for other satisfactions = Z (I, c, Z, PN, PQ)

What does this model predict about the relationship between fertility and income?
Child services are normal goods

Rising wages increase value of time

Price of children rises relative to price of less time-intensive satisfactions

Price of children rises because womens time costs rise disproportionately

What does the model predict about the tradeoff between child quantity and quality?
Differing income elasticities of demand for quantity and quality

Demand for child quality may be more responsive to income gains than demand for child quantity.

Interaction between quality and quantity

A fall in the shadow price of child quality causes a decrease in demand for child quantity

What does the model predict about the expected benefits from having children?
Shift from household to market production makes child labour input less valuable Infrastructure reduces value of child labour to collect households fuel and water requirements Structural change in economy reduces market jobs for children Greater access to capital markets reduce savings/investment value of children Insurance, pensions, state welfare reduces old-age motive for having children Greater geographical mobility reduces certainty of old-age support from children

What are the limitations of the household demand model?

Assumes fertility maximisation

Assumes complete information and certainty

Assumes a household utility function

Explains changes at the margin better than changes over time

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What is the empirical evidence on the price-income relationship?

Mothers time is a key component in the price of a child

Consider time taken to bear and rear children

Reproductive costs differ between men and women

Costs of children spread across extended family leads to reproductive free-riding e.g. in India and in Africa

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What do empirical findings show about the relationship between womens education and fertility in poor economies?
An increase in female education reduces fertility Primary schooling may be an exception in some contexts e.g. in Africa Education lowers fertility other than through the value of time Increases efficiency of contraceptive use Informs women better about non-household options Increases efficiency in producing high-quality children Increases performance of status production duties

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What do the empirical findings show about the relationship between female economic activity and fertility?
A universal negative relationship does not exist But a clear association can be seen between fertility, female economic activity and female education Both female economic activity and adult literacy variables in table are reported as rates (% age 15 and above) Source: Compiled from the UNDP Human Development Report, United Nations (2000)
Region TFR 19952000 4.1 1.8 2.7 Female economic activity 1998 30.8 72.3 41.4 Female adult literacy 1998 47.3 75.5 86.7

Arab states East Asia Latin America

South Asia
South-east Asia Sub-Saharan Africa Least developed countries All developed countries

3.3
2.7 5.5 4.9

42.8
60.8 62.0 64.9

42.3
85.0 51.6 41.0

3.0

55.6

64.5

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What is the empirical evidence on the quantity-quality relationship?

Trade-off between child quantity and child quality implies that as income rises, demand for quality increases faster than demand for quantity

Income effect conceals a hidden price effect: a shift to rising Q => PN will rise => demand more Q, less demand for N
Empirically as economies grow and develop the average quality of children rises Labour market changes also important Evidence from South India: time spent by children in school has a significant negative effect on family size (e.g. Kanbargi and Kulkarni, 1986) How much children go to school is partly a function of child labour requirements (e.g. Iyer, 2002) Evidence from the Progresa scheme in Mexico

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What is the empirical evidence on the income-benefits of childbearing?

Children contribute to current income

Children are costless to rear by the time they reach adolescence in some poor countries (Cain, 1977)

The lack of fuel and water infrastructure increases the value of children as producer goods

The population-poverty-environment relationship (Dasgupta 1993; 2000)

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How can we model children as investment goods?

Children contribute to future income Lexicographic safety-first decision-rules show the probability that parents would have a son for old-age support (e.g. May and Heer, 1965; Cain 1984) Offspring substitute for missing markets in social security Social security in the formal and informal sectors Rise in incomes can change parents investment decisions Increases cash surplus for investment, awareness of alternative investments, availability of other methods of saving and insurance Evidence on widows in Bangladesh (Cain 1977, 1984) and microcredit schemes Evidence on pensions in Mexico (Nugent and Gillaspy 1983)

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So what is the bottom line on the household demand approach?

Model explains fertility decisions in terms of money costs of children and opportunity costs of parental time

Empirical findings address the relationship between income and price, quantity & quality, income and benefits of childbearing

=> Compared to previous approaches, it explains better both the current causes of high fertility in less-developed countries, and the reasons behind the fertility transition in the historical experience of more developed ones.

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Useful Reading (the most important readings are starred)

On the Household Demand Approach:

On Price-Income Effects G. Standing, Womens work activity and fertility, in R.A. Bulatao & R.D. Lee, Determinants of fertility in developing countries (1983), 417-46. *C. L. Jolly & J. N. Gribble, The proximate determinants of fertility, in K. A. Foote et al. (eds.), Demographic change in Sub-Saharan Africa, Washington DC (1993). J. Drze and M. Murthi, Fertility, Education and Development: Evidence from India, Population and Development Review 27:1, 33-63, (2001).

N. Birdsall, Analytical approaches to population growth, in H. Chenery & T. N. Srinivasan (eds.), Handbook of development economics vol. 1 (1988).
*G. S. Becker, An economic analysis of fertility, in A. J. Coale (ed.), Demographic and economic change in developed countries (1960), 209-31. *R. Willis, A new approach to the economic theory of fertility, Journal of political economy March/April (1973) [supplement], S14-S64. G. S. Becker & R. Barro, A reformulation of the economic theory of fertility, Quarterly journal of economics 103 (1988), 125. T. P. Schultz, Demand for children in low income countries, in M. R. Rosenzweig & O. Stark (eds.), Handbook of population and family economics (Amsterdam, 1997).

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Useful Reading (continued)

On Quantity-Quality Relationships *G.S. Becker & G.H. Lewis, On the interaction between the quantity and quality of children Journal of political economy 81:2 (1973), 279-88. J. Behrman & B.L. Wolfe, The socioeconomic impact of schooling in a developing country, Review of economics and statistics 66 (1984). On Income-Benefits of Childbearing *R. Kanbargi & T. Kulkarni, Child labour and schooling in South India, in J. Stoeckel & A. K. Jain (eds.), Fertility in Asia: Assessing the impact of development projects (1986). *M. Cain, The Economic Activities of Children in a Village in Bangladesh, Population and Development Review, 3, 201227 (1977). *J. Nugent & T. Gillaspy, Old age pension and fertility in rural areas of less developed countries: Some evidence from Mexico, Economic development and cultural change 31 (1983). M. Cain, Womens Status and Fertility in Developing Countries: Son Preference and Economic Security. World Bank Staff Working Papers, 682 (1984). P. Dasgupta, Population and resources: an exploration of reproductive and environmental externalities, Population and development review 26, 643-689 (2000). S. Iyer, Demography and Religion in India, Delhi: Oxford University Press, Chapter 8 (2002).

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