The coming baby boom?

By Buttonwood

IT IS always interesting to see an argument that goes against the consensus, and that is true of the (privately-circulated) note from BCA Research, entitled "The Coming Baby Boom in Developed Economies". It starts with the bold statement that

Developed economies are about to experience a baby boom that will be bigger and longer-lasting than even the one that followed the Second World War.

before adding that

Faster population growth implies stronger aggregate demand in the near term and more rapid supply growth over the longer haul. Equities, housing and commodities should all benefit.

and, most intriguingly of all, dismissing worries about the US's long-term fiscal position on the grounds that government projections already underestimate fertility trends.

Our estimates imply a fiscal surplus of 4% of GDP by the end of the century, even if current entitlements are not scaled back.

There definitely has been a pick-up in the fertility rate in some countries - London is experiencing a baby boom that is putting pressure on primary school places. France has also managed to push up its birth rate. The UN is forecasting a rise in the total number of births in the developed world this decade of 2.5%, the first increase since the 1950s. Where BCA diverges from the consensus is its belief that this trend will both accelerate and be widespread across developed economies. The current fertility rate in the developed world is 1.65, well below the replacement rate; by 2050, BCA forecasts that will rise to 2.38 and by 2100, 2.98.

It is a big claim but BCA has some interesting statistics with which to back it up. It cites a paper from the Max Planck Institute, released earlier this year, which looks at the "cohort fertility" rates of adult women. This looks at women born in a particular year and measures how many children they have; it finds that American women born in 1979 are likely to have an average of 2.23 children, 10% more than those born in 1950. This improvement in fertility does not show up in the more commonly-used total fertility rate.

The difference between the two measures relates to the long-term trend for women to have children later in life; in their thirties rather than their twenties. Two effects ensue. First, the fertility rate declines in the short-term because today's twentysomethings are having fewer children in their twenties. That has a short-term effect on the total fertility rate. Secondly, females in previous generations who waited until their thirties tended to have one child, or none at all. Population forecasts tend to assume that future thirtysomethings will have the same problem. But medical improvements mean that women can have two or three children later in life. and the evidence suggests women want more children; BCA points to research that shows the average woman in the OECD has around half a child less than she would ideally desire. (In Japan and South Korea, this gap is as much as one child per woman.)

So what's going on? It seems that the relationship between fertility and household income has shifted. Increased prosperity used to lead to a decline in the fertility rate as parents did not need children as an insurance policy for their old age; and indeed, the modern child is very expensive to bring up. But now better-off people seem to be having more children; in the US, the fertility rate of wives whose husbands are in the top decile of income is back where it was a century ago. Having a lot of children may be a sign of status - BCA dubs this the "Brangelina effect" - or it may be that better-off women can afford the childcare help (and increased housing space) that children necessitate.

Interestingly, the proportion of childless highly-educated American women (those with phDs) aged 40-44 was just 23% in 2006-08, down from 34% in 1992-94. There was a similar (if less marked) fall in childlessness among those with a master's degree.

The figures also show that fertility and female employment rates are now positively correlated, whereas they were negatively correlated in 1980. BCA links this to gender equality - in countries where women earn nearly as much as men, they can afford to combine childcare with work. There may also be a copying effect - as women see that their friends and relatives cope with having children, they tend to follow suit.

Another obvious factor is net immigration. Immigrants tend to have more children than natives and although this trend reduces over time, it still can have a big effect in the short-term. Furthermore, BCA thinks convergence may be slower than before, in part because the level of intermarriage between natives and immigrants is lower than in previous eras.

Finally, BCA argues that the fertility rate might have picked up even more were it not for the recession, citing a Pew survey which found 22% of American women had put off having a baby because of the weak economy.

This is all intriguing and, if right, will certainly help with one of this blog's long-term worries - the cost of pensions. However, it is worth pointing out that a baby boom will add to the total dependency ratio over the next 15-20 years; today's workers will have to pay for their kids and their parents' pensions. Secondly, while better-off women may be having more children, that's not true of the poor; 15% of those failed to graduate high school are childless in their 40s, compared with 9% twenty years ago and even high school graduates have seen a rise in childlessness from 13% to 17%. There are a lot more women in those categories than there are phDs.

Furthermore, the official figures may show some recovery in the western economies but workers are still suffering a squeeze in their real wages, surely the crucial factor in determining whether you feel you can afford kids. An unequal society may see a baby boom in the financial elite but that won't be sufficient to move the overall rate as much as BCA projects.