Does a Recessionary Economy have a Negative Impact on Birth Rates in Ohio?

Transcription

1 Recessionary Economy and Birth Rates 1 Does a Recessionary Economy have a Negative Impact on Birth Rates in Ohio? The University of Akron, Economics Department Fall 2010 William K. Gilkison Phil Campbell Eric Tannehill Caleb Shalala Group Leader: wkg1

2 Recessionary Economy and Birth Rates 2 Table of Contents I. Abstract....3 II. III. IV. Introduction...4 Literature Review...5 Empirical Model 9 V. Data Description...10 VI. VII. VIII. IX. Results..13 Conclusion Appendices..17 Bibliography. 20

3 Recessionary Economy and Birth Rates 3 Abstract This paper uses consumer demand theory based on birth rate studies by Dr. Gary Becker to explain declining birth rates in the face of a recessionary economy. Children are very similar to consumer goods, such that parents must determine if they have the means to procreate, given children represent a cost to parents. Using data from the Bureau of Labor statistics, Bureau of Economics Analysis, and information from the U.S. Census Bureau it is found that economic downturns and the past recession have caused a significant decline in the birth rate of Ohio.

4 Recessionary Economy and Birth Rates 4 II. Introduction Demographic changes due to declining birth rates bear significant economic consequences. Understanding the role of the business cycle and its effects on the birthrates is crucial for government stability. Children replace productive members of society, and in turn support social initiatives to include social security through taxes. Thus, the birthrate will have a direct impact on the future tax base and revenue of the future. When observing the birth rate for the state of Ohio, we noted a steady decline during the time period from 1975 to Several reasons may explain this trend. Since the 1970s and the civil rights movement women have migrated up the social ladder and have made large inroads into the American labor force. Consequently, labor force participation for females within the child bearing years of has lowered the birth rate. Since the 1950 s contraceptives have been a major factor in lowering the unplanned pregnancy rate. Further, medical innovation has drastically decreased the infant mortality rate. Parents can expect that their children will survive their first year of life, and this expectation has led to an ideological change in childbirths. Parents no longer need to mass produce in order to ensure offspring survival. Lastly, from a historical perspective, the shift from agrarian to industrial to service based economies has limited the need for children as workers. Children are no longer essential to provide labor and financial assistance to the family unit. With birth rates decreasing in the long run, does a recession accelerate the decline further? Additional stress on parents and families from the current recession

5 Recessionary Economy and Birth Rates 5 should show that poor economic conditions lower the birth rate in Ohio further. This is important because a smaller number of new entrants into society will create an even lower population to bear the tax burden in supporting the graying economy. This research paper is organized as follows. A review of past literature is located in the next section. The empirical models in section 3 show robustness. The data and description is enclosed in section 4. The results for the three measures of the economy are discussed in section 5. Finally, conclusions based on the models and literature is listed in section 6. All relevant tables and graphics are located in the appendices. III. Literature Review In his paper on Family Economics and Macro Behavior, Dr. Gary S. Becker discusses the role that economic health plays on family decisions 1. Marriage is a crucial step in the lives of all people who participate in it. Children, in particular, take up crucial quantities of both time and money from parents in order to raise the children successfully. Becker argues that family behavior is very active and deeply intertwined with the economic climate of society. In the Malthusian argument, children are looked at in the same light as a commodity. Parents must choose the number of children to have, as well as how much time and money can be allotted to each child. The case is made where each additional child reared by parents has a decreasing marginal return for the parents, much like the consumption of goods and services. In this scenario, the cost of raising a child is positively related to the value of the parent s time. 1 Gary S. Becker. Family Economics and Macro Behavior. The American Economic Review, pp March (November 2, 2010)

6 Recessionary Economy and Birth Rates 6 Recalling the sharp decline in birth rates during the Great Depression of the early 19 th century, the Malthusian model states that birth rates decrease when productivity, wages, and interest rates fall. Becker says that, in general, the number of children demanded by the typical family is positively related to the income of the parents. This is proposed because of the steep time and financial investment involved in raising a child. Becker discusses the effects of a countrywide decreased demand for children. When the demand for children is lowered, this raises the capital (in this case, child rearing resources) allotted to each child. This causes institutions such as Social Security to raise private savings per child, which in turn raises the wage rates and the capital to labor ratios for the next generation. In Becker s next paper, he discusses the conditions of parental altruism towards their children where the value of the parents depends on their own necessary consumption, the utility of each reared child, and their fertility 2. Altruism is defined to be the principle or practice of unselfish concern for or devotion to the welfare of others. In this explanation, altruism towards children implies that the welfare of the family is linked to consumption, fertility, and the number of children reared. The family leaders attempt to maximize the utility of the children considering the restraints of wealth earned by the head of the family, costs of raising each child, and earnings in all generations of the family. 2 Gary S. Becker, Robert J. Barro. A Reformation of the Economic Theory of Fertility. The Quarterly Journal of Economics, Vol. 103 No. 1 pp February (November 2, 2010)

7 Recessionary Economy and Birth Rates 7 Maximizing utility in this model requires equality between the marginal benefit of an additional child and the net cost of having one more offspring. Costs are negatively dependent upon lifetime earnings of children produced and are positively related to the cost of raising a child and the investment into their human capital (e.g., education). The optimization condition described shows a positive relationship between the consumption per child raised and the net cost of producing each offspring. Fertility is also said to be negatively related to the growth in net costs of raising a child between generations. Assuming children are not a Giffen good, parents follow a normal demand for children based on variables at a decision point (mainly income). Where Dr. Becker focused his study on the utility presented with an additional child, our group will focus on the variables that affect decision making at the margin. The Pew Research Center presented an argument for the decline in birth rates of 25 states. Ohio was not used in their modeling. No model was cited, but the research institute stated that data was collected on home price indexes, GDP by state, initial unemployment claims, unemployment rates, and the foreclosure rate 3. The reason behind the variables used in the Pew Research Center variables surrounds the perception of couples across the country. The center chose identifiable measures that would cause a decision for or against procreation at a point in time. While birth rates grew for most states listed 2003 to 2006 they declined afterwards. People understand that foreclosure rates, the possibility of losing a job, or hours worked 3 Livingston, Gretchen. U.S. Birth Rate Decline Linked to Recession. Pew Social & Demographic Trends. Pew Research Center. April 6, (November 2, 2010)

8 Recessionary Economy and Birth Rates 8 at an existing job could eventually affect them as well. In the face of this past recession people determined the marginal cost of having a child in the face of economic downturn outweighed the marginal benefit, or marginal utility, as stated by Dr. Becker. What s more interesting is the center includes the Adjusted R-squared value of 70 for the model they used. There are several documented reasons for variance that will not be displayed by the model. In an article published on the fertility in developed countries by Hanna Zlotnik, Hao Linna, and David Canning for The Economist several reasons existed 4. First, per capita income rose for women causing some females, whether single or married, to decide not to have children. Further, demand for children becomes more elastic as income rises for women. As women become more successful they may determine that they do not want to have children. Next, statistical studies may only measure the birth rate over the traditional child bearing years (ages 18-42). Some females above the age of 42 may have children and thus are not counted in some econometric data. Lastly, developed economies have generally had a lower birth rate in recent decades as life expectancy has increased, and lower infantile death rates have been reported with medical advances. Further, developed economies usually shift from an agrarian society to an industrial and then post industrial society. Agrarian societies tend to have higher birth rates as children are needed for labor. Authors from several texts caution the use of baby boomer years to evaluate birth rate trends, as the U.S. was 4 Hanna Zlotnik, Hao Linna, and David Canning. Fertility and Living Standards: Go Forth and Multiply a Lot Less. The Economist: World News, Politics, Economics, and Finance. October 29, (November 2, 2010)

9 Recessionary Economy and Birth Rates 9 the only country to see a significant increase in population and little data explains the increase. IV. The Empirical Model There are 2 main objectives for the 3 models illustrated below. The first objective is to illustrate the declining birth rate from 1975 through 2010 in Ohio. Secondly, the models should illustrate a larger decline in birth rate during recessions. Based on consumer demand, as income drops demand should shift lowering the quantity of children born. Considering the literature and the economic climate for the previous recession the models for birth rates are as follows: Y = β₀+ β₁ ( GDP) + + β₄ (home price index) + β₅ (imort) + β₆ (crime) + e Y = β₀ + β₂ (per capita income) + β₄ (home price index) + β₅ (imort) + β₆ (crime) + e Y = β₀ + β₃ (unemployment) + β₄ (home price index) + β₅ (imort) + β₆ (crime) + e The 3 models suggested for this project are linked by three important schemes of measurement. Based on consumer demand theory and the present global financial crisis, income, employment, and the housing market all affect the consumers demand at the margin. Birth rate measures childbirths per 1000 women between the ages of 18 and 41. Data is compiled through the Center for Disease Control National Center for Health Statistics (CDC NCHS) and published annually. Consumer demand theory is used to explain the rise in the birth rate based on economic conditions. Consumers, or parents, decide when and if they should have children based on the economy. A measure of the

10 Recessionary Economy and Birth Rates 10 economy using GDP, income, unemployment, and the housing market will display a change in elasticity of demand when consumers face different economic factors. As the economy becomes recessionary, the demand for an additional child will drop. Given a change in income, opportunity cost (in this case, the opportunity cost of an additional child) will rise or fall and the consumer (e.g., parents) will be forced to make a decision at their budget constraint. Thus, parents will determine if they can afford an additional child. Understanding that co-linearity may alter the effectiveness of each model s predictability of birth rates, our group will look at three separate variations. A Pearson Correlation table before running regression will also show problems before beginning. For example, foreclosure rate in Ohio and home price index may be correlated to such an extent that one will only be suitable in a regression model. V. Data Description Per capita GDP for Ohio is the best indicator of both income and unemployment. While its purpose shows the aggregate production per person in Ohio, it will be correlated with the aggregate per capita income since GDP can be calculated by both aggregate production and income. All else held constant, a rise in unemployment will most generally lead to a drop in per capita GDP and income. Less workers equates to less hours worked, lower income by the labor force, and a drop in production. This project looks at a short run Ohio economy, and does not allow for large structural

11 Recessionary Economy and Birth Rates 11 unemployment change. Thus, this model assumes that a larger unemployment rate is not correlated to large jump in efficiency due to the existing labor force or technology. The models show the expected signs. Initially a Pearson correlation table with determine which variables will be correlated to the dependant and which variables are correlated with each other as independents. Then we will begin to run the models looking at the RMSE term, R squared, f and t values. Using a plots prompt or ODS graphics we will ensure that the function is linear, allowing SAS to calculate OLS. If the variables do not display a linear relationship, we will alter the variables to create a linear model. This model will also allow for analysis of mean values. Since some members have statistical backgrounds some will work to explain the relevance of birth rates between years, while birth rates could also be analyzed for income, GDP, and changes in unemployment for a more comprehensive argument on the effects of economic conditions on the birth rate. Imort is a quantitative variable that explains the infant mortality rate in Ohio for each year, The infant mortality rate should be negative. As future parents expect a greater chance for infant death, they will choose to forego having children. This variable accounts for the change in the death rates for infants, usually explained through sicknesses. In a post-industrial state such as Ohio, we assume that if parents assume that their infant has an increased chance of dying, they will forgo the opportunity to have the child in the first place.

12 Recessionary Economy and Birth Rates 12 GDP is a measure of gross domestic product in the state of Ohio measured in millions of dollars from 1975 to present on a yearly basis. Dollars are normalized as 2010 dollars. As per capita GDP rises the birth rate should rise. As production rises income rises for consumers. Consumers will have the ability to spend their disposable income on more goods. Given consumers receive additional utility from children, the additional income will lower the opportunity cost to have children. Per capita income is a measure of income divided by the labor force in the state of Ohio measured in millions of dollars and observed yearly from Dollars are normalized as 2010 dollars. As per capita income rises the birth rate rises. As production rises income rises for consumers. Consumers will have the ability to spend their disposable income on more goods. Given consumers receive utility from children, the additional income will lower the opportunity cost to have children. Home Price Index is a measure of the median house price for Ohio through the year, on a yearly basis from 1975 to present. This variable is descriptive of both consumer assets and wealth. Since this model is geared to look at the current recession and add insight, the home price index will add a recession specific variable. Home prices are important because they have a direct impact on net worth of a consumer. This recession has highlighted the consumer bias towards using their homes as an asset. Consumers build wealth in payments on their mortgage. As the index falls, consumers lose net worth, and vice versa. More importantly, consumers understand the change in price within the housing market and a relative rise or fall will create a change in decision making at the margin when determining bearing children.

13 Recessionary Economy and Birth Rates 13 Unemployment rate is a measure of the labor force not employed, but seeking work in the state of Ohio. The data collected will be a yearly average, and encompass 1975 to As unemployment rises birth rates will fall. Disposable income will be lost with jobs, and less people will have the ability to pay for an additional child. Further, a rise in the unemployment may change sentiments and expectations as laborers worry about their own job security. Crime is a quantitative variable that accounts for the number of violent crimes in the state of Ohio from 1975 to 2009 on a yearly basis. Assuming that parents attempt to optimize their utility when deciding upon rearing children, an increasing rate of crime would increase the cost of that utility to the parent and may act as a deterrent to having additional children. As parents believe their children will be born into a more violent world, they may forego having children until the rate decreases. The three models are run as a robustness check for the measure of the economy. Income, GDP, and Unemployment are all measures for the economy, but are used interchangeably to argue that the decline in birth rate is more significant for the past recession. V. Results The OLS models are reported in the appendices with descriptive statistics. All three models were significant, but GDP proved to be the most statically significant. As a measure of robustness, the significance of variables used in all three models did not change and the parameter estimates remained similar. The model was not significant to prove that GDP, Income, or Unemployment influenced the birth rate in the short run.

14 Recessionary Economy and Birth Rates 14 The three models do depict a declining birth rate in Ohio for the past 35 years illustrated in figure E. Most observations fall within the 95 percent confidence lines. The second objective was to display the added decline in birth rates during the past recession. By comparing appendixes B, C, and D the signs seem counterintuitive. They are significant for the long run trend, but due to the one tailed test for the SR they are not significant for our research argument. The OLS used in this project predicts that a 1 billion dollar increase in GDP will lower the birth rate by one percent. We observed through statistical correlations and the past research by the Pew Research firm that the decline averaged 1-2 percent over the past two years. This was not significant enough to change the parameter estimates for GDP, income, or unemployment. At first glance the parameter estimates bear the wrong signs for the hypothesis, but the signs replicate the long run application of the model. For instance, as GDP rises the birth rate diminishes. However, in the short run through comparison of mean birth rates a lower per capita GDP lowers the birth rate. As income diminishes, in the short run people have fewer children. In the long run, another principle takes shape. A rise in living standards, or per capita GDP, lowers the birth rate. All variables were significant throughout to the 90 percent level. Illustrated in each table are the variable significance level and the predictability of the model. Change in GDP with all variables used explains 89 percent of the variance in birth rates. As GDP rises birth rates decline in the long run by percentage points.

15 Recessionary Economy and Birth Rates 15 Measures of the economy show that after 1975 the long run trend for declining birth rates cannot explain short run changes because of fundamental changes in the economy. Thus, improvements in medicine, women in the workforce, a service based economy all explain the long run trend. The microeconomic decision for children as a consumption good is better explained in the short run by comparing means of recession years vs. years directly before or after the relevant recession. The long run trend carries too much weight to explain shocks in the short run using OLS. Given the long and short run differences, a pronounced and longer enduring recession closer to the magnitude of the Great depression may be the only scenario causing a shift in variable signs. Thus, in the long run we could expect a loss in GDP to yield a decline in birth rate, or as living standards decline for a longer period of time the demand for children declines as well. Additionally, a long term effect to income (and therefore, the budget constraint) would yield a significant change to the model. VI. Conclusion The OLS models in the research show that birth rates are declining in the long run at a statistically significant level. All variables were significant at and above the 90 percent line; several were significant at the 99 percent level for the LR scenario but not our research question. However, the three models adequately illustrate the economy s role in child production. From the results two principles were explained, short and long run birth rates. The long run followed the work of Gary Becker, and the output was significant. The short run changes were important and followed Becker s theory for consumer demand.

16 Recessionary Economy and Birth Rates 16 However, there was not enough information to prove that the short run economic change directly affects the long run through OLS. Our group could not forecast the specific affects. Our group lacked econometric forecasting skills necessary to conclude that in the SR economic changes affects the birth rates. In order to understand trends we graphed the moving averages with Minitab located in appendices F and G. With the statistical software, when the unemployment rose above 8 percent the birth rate significantly declined. When the unemployment rate was below five percent the trend line shows a rise in birth rate against the LR OLS estimation. Note within the data observation 1 corresponds to 1975 and data point 35 is It is fair to conclude that in the SR pronounced economic changes like unemployment do lower the birth rate. There was one crucial limitation to this model. For the state of Ohio there is not enough data held in monthly observations to model the short run effectively. Unfortunately, one reason why states were not used in the Pew Research was the limited amount of data available. Ohio was one of the states not used for this very reason. Further, trends in similar states in the short run did prove to be significant. Future research can build on this analysis by including a state with monthly historical data. Unfortunately, for Ohio this data is not presently available. Future research can use these models to look at the long run and present economic situation in order to understand the change in birth rates. Economic forecasting in place of OLS will render better results and conclusions.

17 Recessionary Economy and Birth Rates 17 VII. Appendices A. Descriptive Statistics Variable Mean Median Std Dev Lower 95% (C.I.) Upper 95% (C.I.) Income un_oh GDP birth_rate Crime home_avg_an_apr imort N: 35 Note: The data was standardized for a yearly basis, with 35 observational years. B. OLS Regression Estimation for Ohio Birth Rate as dependant; Robustness model 1 of 3 GDP independent Variable Predicted Sign Parameter Estimate T statistic B GDP +SR, -LR Crime Home price Apr imort *** N: 35 R Sqr Adj:.8901 RMSE:.3102 F: Note: The individual statistic is significant at the 90%*, 95% **, 99% *** level. C. OLS Regression Estimation for Ohio Birth Rate as dependant; Robustness model 1 of 3 Income independent Variable Predicted Sign Parameter Estimate T statistic B *** Average Income +SR, -LR Crime Home Price Apr imort *** N: 35 R Sqr Adj:.8675 RMSE:.3426 F: Note: The individual statistic is significant at the 90%*, 95% **, 99% *** level. Income in 2010 dollars.

18 Recessionary Economy and Birth Rates 18 D. OLS Regression Estimation for Ohio Birth Rate as dependant; Robustness model 1 of 3 Ohio Unemployment independent Variable Predicted Sign Parameter Estimate T statistic B *** Ohio Unemployment +SR, +LR Crime Home Price Appr imort *** N: 35 R Sqr Adj:.7058 RMSE:.5105 F: Note: The individual statistic is significant at the 90%*, 95% **, 99% *** level. birth_rate 16 E. OLS Regression Estimation for GDP and Birth Rates in Ohio from 1975 to Linear Regression of Birth Rate and GDP (with 95% Confidence Limits) Note: Grey lines represent the 95 percent confidence line, while red represents the best fit line. This graphic represents the long run decline in birth rates with a rise in GDP (Ohio Economic Growth Path). *Figure supplied through SAS ODS Graphics GDP

19 Moving Average Moving Average Recessionary Economy and Birth Rates 19 F. Moving average Birth rates 1975 through 2009 Moving Average Chart of birth_rate UCL= _ X= LCL= Sample G. Moving average unemployment 1975 through Moving Average Chart of un_oh UCL=8.213 _ X=6.796 LCL= Sample

20 Recessionary Economy and Birth Rates 20 VIII. Bibliography Irma Adelman. "An Econometric Analysis of Population Growth." American Economic Review 53.3, pp June (November 1, 2010) Gary S. Becker. "Family Economics and Macro Behavior." The American Economic Review, pp March (November 2, 2010) Gary S. Becker, Robert J. Barro. A Reformulation of the Economic Theory of Fertility. The Quarterly Journal of Economics, Vol. 103, No. 1, pp February (November 2, 2010) Gretchen Livingston. "U.S. Birth Rate Decline Linked to Recession." Pew Social & Demographic Trends, Pew Research Center. April 6, (November 2, 2010) Kirk Dudley. "The Influence of Business Cycles on Birth Rates." The Population Council, Demographic and Economic Change in Developed Countries, National Bureau of Economic Research, pp (November 1, 2010) Hanna Zlotnik, Hao Linna, David Canning. "Fertility and Living Standards: Go Forth and Multiply a Lot Less." The Economist: World News, Politics, Economics, Business & Finance. October 29, (November 2, 2010) Dictionary.com. November 16, altruism?&qsrc= (November 16, 2010) Per capita income CPI Ohio GDP Unemployment Ohio Home Prices Foreclosure rate