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Apparently Babies Are A Normal Good…

May 3rd, 2010 · 18 Comments
Decision Making · Econ 101

Now, I do understand that babies are technically produced rather than consumed, but I would hope that, in this age of medicine, the supply and demand for babies at least approximately equalizes. In this way, we can talk about them as either normal goods – goods where demand for them increases as income increases – or inferior goods – goods where demand decreases as income rises. (See here for a video refresher on the determinants of demand.) On a macroeconomic level, normal and inferior goods are roughly equivalent to cyclical assets, which rise in value during good economic times, and countercyclical assets, which rise in value during bad economic times, respectively.

Well, it appears that babies are in fact a normal good:

Fewer babies were born in 2008 than the prior year, and it appears to be linked to the recession, a new study shows.

The number of births in 25 states where data was collected fell to 2.29 million in 2008, down from 2.33 million a year earlier, according to the Pew Research Center.

The birth rate — the share of women between ages 15 and 44 who gave birth – also fell in 20 of the 25 states. The overall birth rate dropped 1.6% to 68.8 births per 1,000 women of childbearing age.

The researchers relied on state level data to help parse the relationship between births and economic trends in the region. The 25 states surveyed account for 54% of all women of childbearing age in the U.S. and the same percentage of babies born annually.

“The analysis suggests that the falloff in fertility coincides with deteriorating economic conditions,” the report says. “There is a strong association between the magnitude of fertility change in 2008 across states and key economic indicators including changes in per capita income, housing prices and share of the working-age population that is employed across states.”

I find this interesting on a number of levels. My initial gut reaction is to say “wow, I’m impressed that people are being responsible in assessing whether they have the appropriate resources to properly raise a child.” Furthermore, it certainly is the case (not that I would know personally) that there are a lot of immediate costs associated with newborn babies. On the other hand, the ability to raise a child from a financial standpoint depends on a family’s financial situation over the next 18 years or so, not just on today’s circumstances. This suggests that households either expect this recession dealie we’ve got going on to persist for a really long time or they are overweighting current conditions in their decision-making processes. In general, people tend to overestimate the degree to which the future is likely to look like the present. (Adjustable-rate mortgages, anyone?)

Economically speaking, contraception is a substitute for children (yeah, I went there), so if households see the recession as causing an effective price increase on children, the demand for birth control should increase as a result. Does this also mean that birth control pills count as an inferior good?

Update: So I was half kidding about the birth control thing, but apparently I wasn’t far off. Shortly after finishing this post, I came upon an article entitled “Is the Crappy Economy Causing Men to Neuter Themselves?”. Apparently there’s some empirical evidence that vasectomies are inferior goods or countercyclical assets or whatever. Ouch.

Tags: Decision Making · Econ 101

18 responses so far ↓

  • 1 Cyclone Bill // May 3, 2010 at 3:05 pm

    I was always under the impression that birth rates increased in protracted periods of economic decline and stagnation.

  • 2 gatoraustrian // May 3, 2010 at 3:15 pm

    It may not follow that birth control pills are inferior, as condoms would be a likely inferior substitute. But at the same time romantic dinners and movie tickets may be complementary to babies.

  • 3 econgirl // May 3, 2010 at 3:33 pm

    @ Cyclone Bill: Someone also brought this up on my Facebook page, and I think it’s a point worth noting. I don’t know offhand whether that is historically true or not. I would guess that this would likely be the case before the era of reliable contraception for the same reason that there used to be spikes in the number of births 9 months after particularly cold winters. 🙂

  • 4 Jacqueline // May 3, 2010 at 3:50 pm

    My research at the end of 2007, using historical data paired with some preliminary data on the (then new) current recession, supported this conclusion. Very interesting!

  • 5 Rev. Pfloyd // May 3, 2010 at 4:24 pm

    Around here, my anecdotal perspective seems to conclude that the lower your long-term income, the higher your birthrate. Maybe because that’s because children are subsidized. . . .

    😛

  • 6 walt526 // May 3, 2010 at 6:08 pm

    Not only are children normal goods, but I think that there is a good case to be that they are actually Veblen goods.

    IIRC, there is a pretty good discussion of how social norms constrained contraception during periods of economic hardship in one of the early chapters of Greg Clark’s (UC Davis) “A Farewell to Alms” (which even if you vehemently disagree with his underlining premise, is still a fascinating read).

  • 7 Ritesh Arora // May 3, 2010 at 6:12 pm

    I always thought babys take nine month to come into this world. This article is considering taking the data in 2008, for which people would have done “something” in early 2008 or in 2007, when actually people were exposed to rescession in late 2008. I seriuosly doubt the legitimacy of this argument.

  • 8 Dave // May 3, 2010 at 6:46 pm

    I think there are a few things going on here. First, the long-run trend is that with higher income levels people have fewer children. A student of mine did research on it this semester, looking at this very same issue. The theory is that the opportunity cost of working is higher for women, so they choose to work instead of staying home to take care of the kids. Compare birth rates in developed vs. developing countries and that’s what you find — you also find it when you look at the US over time. Thus, I think what you’re seeing is a short-run effect here.

    Second, 80% of the job loss in this recession has been incurred by men. You have an increasing number of families where the woman is working and the man is not. That might not be a situation where a woman is going to feel comfortable getting pregnant and leaving the workforce for even a short period of time, thus your reduction in birthrates.

  • 9 Scott Ritchie // May 3, 2010 at 8:09 pm

    If babies are a normal good then why do developed countries almost universally have lower fertility rates?

  • 10 Trent Rock // May 3, 2010 at 8:53 pm

    A graph that plotted====>real personal disposable income, birth rate, prophylactic sales and birth control sales would be sweet!!

  • 11 econgirl // May 3, 2010 at 10:28 pm

    In general, it’s important to recognize when the “all else being equal” concept holds and when it doesn’t. If you look at a cross-section of people, it is true that lower-income families have more children…but this is not to say that if you endowed them with a few hundred thousand dollars they would stop procreating. It’s more likely that income is correlated with things like religious beliefs that impact number of children. (And yes, children are subsidized, but I can’t imagine that it’s actually profitable to have an extra kid or two. If that is the case then someone should be calling social services on these people for not, since I can’t imagine that they are getting proper care.) That’s why these sorts of studies often look at changes over time rather than cross sections of the population, since that holds household characteristics roughly constant. The same principle holds when thinking about differences across countries, with the added wrinkle that lower birth rates are a side-effect of long-term economic development, whereas here we are looking at responses to more short-term business cycles.

    @ Ritesh: I’m not exactly sure when this recession thing officially started, but I do remember things not being so hot in late 2007.

  • 12 Howard // May 4, 2010 at 12:04 am

    Well, if you are talking _very_ short term, well, maybe, ok, people have less kids given less income. Over the long hall (last several thousand years, evolutionary time, etc) I think that Dave and Scott Ritchie are correct. Also, until very recently, most people were “religious” (believed in God, attended services, performed rituals, might be willing to kill others with different beliefs, etc), so I’m not so sure that there was much variation in religiosity, either within or between societies, until very recently.

  • 13 Ritesh Arora // May 4, 2010 at 12:04 am

    @econgirl :I understant that there is no particular date or timing for recession to start or end, but for this kind study should takes more thn atleast 5 years. If this is the case for this study, then I think its fine, but I guess this is not the case. In longer time span we can say that people took the decision of not having a baby based on their financial condition.
    I remember reading in Freakonomics about the effect of abortion policy. Effect was noticed over an extendend duration. For a human it takes time to realize/assess the actual situation . So to study a phenomenon we should have a larger duration.

  • 14 altereggo // May 4, 2010 at 1:35 am

    An article in the Economist the other week mentioned that almost a quarter of Indian women have had their tubes tied.

    It’s great that people are having children when they can afford to raise them:
    econ has found another reason to shout “suck it, Malthus!”

  • 15 Dave Jones // May 4, 2010 at 2:54 pm

    If you look at birth trends, historically, industrialization always precedes a drop in birth rate. Even now, wealthier societies tend to have fewer children, so it appears that babies are inferior goods. This makes sense, if you think about it: Prior to industrialization, it was necessary for a successor generation to be at least as large as the generation that preceded it; otherwise, widespread starvation would result. Massive baby production programs were, thus, necessary to ensure the survival of families and all of society, and this continues to be the case in unindustrialized societies today.

  • 16 econgirl // May 4, 2010 at 3:47 pm

    This all comes back to the comment that I made above in terms of the “all else being equal” point and the hazards of cross-country comparisons. Industrialization changes not only household income but also mortality rates, life spans, availability of contraception, institutional support and a whole host of other things that affect birth rates. Therefore, while it is true that more developed nations have lower birth rates, it’s not like you can drop a pile of cash on Sub-Saharan Africa and have them immediately stop making babies.

  • 17 AJP // May 5, 2010 at 2:38 pm

    There is certainly historical precedence for this effect: the baby boom. People didn’t have children during the Great Depression because they wouldn’t have been able to care for them, feed them, etc. Thus, after WWII ended and we came out of the depression, there was lots of pent-up demand and people started having lots of babies.

    It is also true, however, that as people move upward in socioeconomic status, they have fewer children. However, this doesn’t make babies inferior goods.

    Remember that an inferior good is defined by income elasticity, not income itself. People with less income having more children does not fit the definition of an inferior good – it is the change in how many babies they have in response to a change in their income that makes a good inferior or not. Thus, the article suggests that babies are normal, not inferior.

  • 18 joe // Dec 9, 2010 at 1:08 pm

    Remember the economy looking pretty good in 2007 when many of these these 2008 babies were conceived. Could it be that these mothers decided to have children when the going was good? You must account for lag in conception to birth.

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