Economist Writing Every Day

Gary Becker, the Nobel laureate in economics, applied economic reasoning to social circumstances and particularly to families. He argued that children are a normal consumption good, and people consume more children with higher incomes. However, he also emphasized a quantity-quality trade-off. More children in a family means fewer resources and attention for each child. Higher-income couples may opt to invest in classes, training, and spend more time with a unitary child rather than increasing the number of children.

However, goods have multiple attributes and children do not merely provide a stream of consumption value while in the household. They offer access to future resources when they become employed themselves. Having more children or higher-quality children increases the economic benefits that older parents can enjoy, such as more help with household activities and the ability to travel with their adult children. Old-age benefits such as social security now serve the function of insulating people from their prior investments in future consumption.

Are children an investment good? It’s hard to say. We would need a shock to the determinants of investment demand that do not also affect consumption demand. Clearly, if the cost of children rose, then that would lower the amount of children desired for both reasons (demand slopes down). However, if the marginal product of children changed, then that would affect only the demand for children as investment. And that’s exactly what happened across the US in the late 1800s and early 1900s.

Namely, compulsory schooling laws were enacted at different times across the US. This alone could reduce the amount of children demanded for either consumption or investment purposes. After all, if the opportunity cost of school attendance was time spent with parents, then the consumption value of children would have fallen. But, if the opportunity cost of school attendance was forgone wages, then the consumption of services that children provide would have been left mostly untouched. Rather, attending school came at the cost of helping to provide for the family.

Indeed, in 1820 children composed 23% of the manufacturing labor force. Similarly, in 1920 children contributed 23% of the average household’s income. Children were working and making real contributions to labor markets and household wellbeing. Compulsory schooling laws often pulled children out of the workforce and forced them to make their own investments in human capital. Research by Clay, Lingwall, & Stephens concludes that compulsory attendance increase years of education by about 7%. Of course, that’s not uniform across all students. Though these investments might have increased a child’s future potential earnings, the income earned while living at home – and within the grasp of influential parents – fell. From the parent’s perspective, the decision to have children became less attractive because the marginal revenue product of children fell.

Research that I am currently working on (using the latest in econometric methods, of course) seems to show that the number of children born each year starts to fall immediately after a state passes compulsory attendance policies. After all, investors are forward-looking and consider the future cashflows. Results are still preliminary, but the magnitudes appear to grow to a 50% reduction in the number of children born by 25 years following the legislation enactment.

What does this mean? First, it does not necessarily mean that people would have more children now if they didn’t have to send them to school. There is a lot of cultural and labor market inertia keeping kids in school. Rather, it probably means that the children we do have are more consumption goods than were the children of 100 years ago. We have the children who we want to enjoy rather than the children that we hope will produce for the family. Of course, the very patient among us might still invest in children with an eye toward distant economic resources. And attending school probably increases future earnings. In fact, now, it’s not obviously a less productive investment to send children to school rather than work. Back when people were more mobile and lived shorter lives, it’s understandable that those remote future earnings were heavily discounted.