Is Low Fertility a Problem for High-Income Countries, but a Boon For Low-Income Countries?

The perceived wisdom is that low fertility is bad for national wealth in high-income countries, but good news in low-income countries. A UN report found that 54 high- and middle-income nations are following pro-natal policies, at least in part, because of their putative economic advantages.[1]

So let’s start with the basics. The middle-aged (working) population supports the childhood and elderly population through public (e.g. education) and private (e.g. direct payment) transfers. A large elderly population supported by a relatively small working population is bad news for public finances.

But that’s not the end of the story according to a recent paper by Lee and Mason.[2] Public finances are only part of a country’s economy and it is important to consider also private inter-generational transfers. It is also important to factor in the costs of educating and bringing up children. As the proportion of older people rises, so private transfers from old to young increase and the costs of bringing up the next generation decrease.

The above study is based on detailed analysis in forty countries using standardised methods to estimate production and consumption of goods and services, along with public and private inter-generational transfers. The authors use the data to calculate the fertility rate that maximises material living standards overall. The results obtained from their model confirm the above point regarding the narrow issue of public finances in high-income countries. They are maximised by fertility rates of about 3 births per woman – well above the replacement rate. Similar effects are seen in middle-income countries, but in low-income countries low fertility rates (down to 1%) maximise public finances. This is because such a low replacement rate provides a big proportional reduction in the costs of rearing children.

So much for public finances, but what about the economy overall – is it true that living standards fall in high-income countries when fertility falls below the replacement rate of ~2.1%? In fact, the optimal fertility level is about 1.8 in high-income countries, falling to about 1.5 in low-income countries. To put this another way, the combined effects of inter-generational transfers and having a lower proportion of children to rear, exceed losses due to relatively smaller working-age populations, irrespective of whether the country has high or low per capita GDP.

What about immigration in high-income countries? To cut a long story short, us immigrants are chameleons, taking on the behaviour of our adoptive country. So we provide a short-term boost but fairly neutral effects in the long-term.

Of course there are many assumptions in these calculations notwithstanding the empirical source of data to populate the model. Nevertheless, the accepted wisdom that high fertility rates are bad news in low-income countries, is supported. However, in contrast to the prevailing view, modest reductions in population growth might actually benefit high-income countries. The paper quoted here is not an easy read but I strongly recommend it for your next long haul flight.

— Richard Lilford, CLAHRC WM Director

References:

  1. Department of Economic and Social Affairs: Population Division. World Population Policies 2013. New York: United Nations. 2013.
  2. Lee R, Mason A, members of the NTA Network. Is low fertility really a problem? Population aging, dependency, and consumption. Science. 2014; 346(6206): 229-234.
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