In virtually all developed countries, there has been a remarkable change in the reproductive behaviour, marked by a secular decline in fertility rates and a fall of the number of births below the “replacement level” in the second half of the 20th century. The question of whether and, if so, how these changes affect the economic development of these countries is of first-order significance not only for economic research but also with respect to the policy implications that may arise. Yet, up until now there have been few attempts to subject the relevant theoretical considerations to systematic and rigorous empirical inquiry. Therefore, as a first step to take, this is precisely what the project aims at based on a large panel of data covering 104 countries, with special attention being given to 27 industrialised countries, and the time period from 1960 to 1990. Using the same data panel, the project also looks at the economic determinants for the observed fertility trends in a series of parallel regressions. As a second step, an in-depth analysis of the institutional framework for parental fertility choices in developed countries is provided, wit a particular focus on Germany, France, the UK, and Sweden. This survey is meant to complement the empirical analysis and to facilitate discussions of potential policy implications.
The empirical analysis is based on a data panel which has been specifically established for this project, mainly encompassing macro-level variables that measure economic development, fertility and the demographic structure, and a variety of economic and institutional factors that may influence observed trends in both these areas. Building on this data set, parallel estimates are run regarding (i) levels and growth rates of GDP per capita, productivity and “total factor productivity” (using a conventional growth-accounting framework) as a function of the age structure of the working-age population, (ii) current fertility rates as a function of the current economic and institutional environment. Auxiliary estimates for intermediate aspects, like investment and human capital formation, may be needed. The in-depth analysis of the institutional framework for fertility choices, in particular, national family policies, in a narrow selection of developed countries provides a set of complementary case studies.
The data panel has been compiled from existing data bases and data collections which have substantially grown over the last years and are often used for macro-econometric studies on related issues. The most important sources are the Penn World Tables (version 6.1), the World Bank’s World Development Indicators, supplemented with statistics and additional indicators regarding demographic development (Mitchell 2003), human capital accumulation (Barro and Lee 1996) and the age structure of the labour force as well as public revenues and expenditures on social protection (ILO).
One of the core results of the study is that, based on the multi-country macro-level panel regressions that have been conducted, there is a significant link between the age structure of the labour force (which can be seen as a function of past fertility decisions) and productivity (i.e., GDP per worker) as well as productivity growth in the countries covered. The profile of age-specific contributions appears to be inversely u-shaped, peaking for those aged 40–49 and increasing for younger workers, but declining for older workers. As this result is mainly driven by a parallel impact on total factor productivity and as the profile is much more pronounced than typical age-related wage profiles estimated based on micro-level data, it points to a substantial “growth externality” of the age composition of the labour force that is not so much related to productivity differentials that can be attributed to individuals. Rather, it appears to be shaped by the specific mixture of age groups of workers interacting at a firm level or across the entire labour market. Basically, the results correspond to those reported in Feyrer (2002). Illustrative simulations that build on the empirical findings indicate that developed countries such as the US or France, which will have a much more balanced age structure, mainly because the fertility decline has been less sharp than in Germany, for instance, are likely to have a substantially higher cumulated growth of productivity, GDP and GDP per capita in the future.
Parallel estimates regarding the economic determinants of current fertility decisions yield results that are much in line with the predictions emerging from the economic theory of fertility. Also, they basically conform to existing empirical work. Higher GDP per capita appears to have a negative impact on fertility, an observation which could be explained by the quantity-quality interaction as hypothesized by Becker and Lewis (1973) that cannot be tested directly. A positive income effect which, according to this hypothesis, could be dominated by a price effect may drive the result that higher qualifications of males have a positive impact on fertility; even the fact that this impact is not statistically significant in all the specifications considered would fit to this interpretation. By contrast, higher qualifications of females have a significant negative impact, which is easily explained by increasing opportunity costs. The impact of public policies that visibly redistribute across generations is also significant and easy to interpret: while child-related benefits increase fertility, there is a negative effect of public pay-as-you-go pension schemes that may be due to the “fiscal externalities” of children created by such schemes. Again, illustrative simulations show that these institutional determinants could be adjusted in such a way that countries with very low birth rates, such as Germany, were able to increase fertility in a substantial way.
The concluding case studies subject to closer inspection the measures of family policies applied in European countries which, by the standards of developed economies, show a considerable degree of variation in national birth rates, viz. Germany (very low fertility), France (relatively high fertility), the UK, and Sweden (both with intermediate levels of fertility). They offer a detailed comparison of their national systems of monetary benefits (cash benefits and tax allowances, paid to all families alike or specifically to families with small children), child-care facilities, expenditure on education, health-care benefits for children as well as public pension schemes (also covering the rules regarding special, child-related benefit entitlements for parents). All in all, this does not yield a simple, consistent and exhaustive explanation of why fertility varies so much across countries. Nevertheless, a number of deficiencies of the German system can be demonstrated to exist, specifically in terms of policy measures that are suited to reduce parental opportunity costs, e.g. through an appropriate differentiation of monetary benefits or the supply of institutional child care, the level and structure of public educational expenditure and, last but not least, the high level of pay-ay-you-go financed social insurance schemes, especially with respect to public old-age provision.
M. Werding, S. Munz and V. Gács (2008), Fertility and Prosperity: Links Between Demography and Economic Growth (final report), ifo Forschungsbericht No. 42, Munich: Ifo Institute for Economic Research.
M. Werding (2008), “Ageing and Productivity Growth: Are There Macro-level Cohort Effects of Human Capital?”, CESifo Working Paper No. 2207 (Download, 343 KB).
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