Evaluating welfare and economic effects of raised fertility

1. Evaluating welfare
and economic effects of raised fertility
Krzysztof Makarski Joanna Tyrowicz Magda Malec
FAME|GRAPE, NBP FAME|GRAPE, IZA, IAAEU FAME|GRAPE
Warsaw School of Economics University of Warsaw Warsaw School of Economics
Motivation
Conflicting empirical literature on the effects of
natalistic policies.
No macro and welfare perspective.
Declining population generates fiscal pressure
due to risisng costs of social security.
Relevant from the policy perspective!
Many countries introduce costly natalisic policies.
Are they worth it?
What do we do?
Construct an overlapping generations model with rich family structure
1. Provide an identification of private and public costs and gains from a given increase in birth rate
2. Consider a variety of fertility scenarios to capture potential regularities between levels of the
fertility and its macroeconomics and welfare consequences
3. Obtain an overview of effects conditional on the distribution of children across families – intensive
(families with kids have more) and extensive margin adjustments (less childless families)
How much can be spent (fiscally) in order to achieve fertility target without detriment to welfare?
Result 1: positive fiscal effects & neutral margin adjustment
fiscal effects in % GDP delayed benefits > immediate costs
.40%0.1%0.2%0.6%
1.4 1.6 1.8 2
target completed fertility
intensive margin extensive margin
Difference between government spending in baseline and raised
fertility scenario, discounted for the moment of the fertility
change and expressed in terms of GDP per capita.
Time mismatch: labor market effects, a higher tax base
in the future, but also an immediate higher government spending.
Beneficiary mismatch: public and private benefits and
costs of raised fertility (also adjusting to expected fertility).
Does it matter what kind of policy we do?
051015
Frequency
0 .05 .1 .15
% of GDP
intensive margin extensive margin
final fertility 1.50
051015
Frequency
.25 .3 .35 .4
% of GDP
intensive margin extensive margin
final fertility 1.85
fiscal gains are universal
fiscal gains are respon-
sive to the distribution of
children across households
(on the extensive margin)
Result 2: negative welfare effects & crucial margin adjustment
−0.0024%−0.0008%0%
1.4 1.6 1.8 2
target completed fertility
intensive margin extensive margin
Do I prefer to live in the world with increased fertility? No.
Welfare effects expressed as a discounted expected utility
in the form of a consumption equivalent.
Individual welfare is not particularly responsive to the
population dynamics, the welfare effects of raised fertility are
small. Nonetheless, they are universally negative.
Does it matter what kind of policy we do?
051015
Frequency
−.002 −.001 0 .001
intensive margin extensive margin
final fertility 1.50
051015
Frequency
−.002 −.001 0
intensive margin extensive margin
final fertility 1.85
welfare effects depend on
the distribution of children
across households (− / +)
welfare effects are re-
sponsive to the distribution
of children across families
(on the extensive margin)
Demography scenarios
Baseline scenario
• status quo projection provided by Polish
CSO (mortality projection until 2060)
• initial steady state: population and house-
holds structure replicated from the data
• the completed fertility continues at 1.4
Raised fertility scenarios (≈ 1000 simulations)
• scenarios distinguished by final completed
fertility level, ranging from 1.4 to 2.1
• for each targeted fertility scenario two alter-
native margin adjustments: an intensive and
extensive margin adjustment
• check 1: 100 combinations of different fam-
ily structures × each targeted fertility sce-
nario × both margin adjustments
• check 2 : different initial steady state fertility
The model
Households consist of children (0, 1, 2, 3+) and
two individuals: one is a primary care-giver with
lower labor endowment. Households are formed
when individuals are young and the number of
children is exogenous. While making decisions
on consumption and labor, households face a
cohort-specific mortality rates.
Individuals work until retirement, pay taxes
(on labor income, capital income and consump-
tion) and contribute to the pension system
(defined contribution PAYG). Their consumption
adjust to reflect the equivalence scale.
Government collects taxes, finances govern-
ment expenditures (fixed per capita) and operates
pension system.
Production sector employs labor and use
capital to produce output, consumed by the
households.
Conclusions:
• Fiscal: the universal net surplus in government budget, but far less than costly natalistic policies
• Welfare: the universal (but small) negative welfare effect of raised fertility:
• Margin adjustment: it matters what kind of a policy is introduced and whom it addresses
Acknowledgements
We would like to thank A. Matysiak, H. Fehr, R. Beetsma and
I. Kotowska for extremely valuable comments. The support of
National Science Centre (grant UMO-2014/13/B/HS4/03643)
is greatly acknowledged. All opinions are ours and have not been
endorsed by NSC nor NBP. The remaining errors are also ours.