Term papers writing service


What determines parental investment decisions in human capital of children in chile

Received 2008 Jul 23; Accepted 2009 Mar 16. Abstract Do low fertility and population aging lead to economic decline if couples have fewer children, but invest more in each child?

By addressing this question, this article extends previous work in which the authors show that population aging leads to an increased demand for wealth that can, under some conditions, lead to increased capital per worker and higher per capita consumption.

This article is based on an overlapping generations OLG model which highlights the quantity—quality tradeoff and the links between human capital investment and economic growth.

Fertility, Human Capital, and Economic Growth over the Demographic Transition

It incorporates new national level estimates of human capital investment produced by the National Transfer Accounts project. Simulation analysis is employed to show that, even in the absence of the capital dilution effect, low fertility leads to higher per capita consumption through human capital accumulation, given plausible model parameters.

Introduction Low fertility in Europe and East Asia is leading to important changes in age structure and to slowing or negative population growth. The immediate impact of low fertility is to reduce the number of children in the population and to increase the share of the population concentrated in the working ages, raising the support ratio and correspondingly raising per capita income. We refer to this phenomenon as the first demographic dividend; others use different language Kelley and Schmidt 1995 ; Bloom and Canning 2001 ; Mason and Lee 2006 ; Kelley and Schmidt 2007.

Later, as smaller cohorts of children reach the working ages, the share of the working age population declines, the share of the older adults increases, and the population ages. The support ratio falls, reducing per capita income. These shifts of the population age distribution have important macroeconomic consequences that feature prominently in discussions of the economic outlook in Europe and elsewhere.

In Europe, however, the share and sometimes absolute number in the working ages is in decline raising concerns that the economic gains in recent decades will be lost. While some consequences of the changing support ratios can be understood through straightforward accounting, others are subtler, including effects on accumulation of physical and human capital.

A large literature spanning many decades explores other effects of these demographic changes. The conventional view is that low fertility and slower population growth will lead to increased capital intensity and higher per capita income. In the standard Solow—Swan growth framework, low fertility leads to higher per capita consumption because slower labor force growth leads to capital deepening.

This is the case if the saving rate is given Solow 1956 or is golden-rule Deardorff 1976. Samuelson raised the possibility, however, that in a model with age distribution and a retirement stage, over some relevant range, lower population growth may reduce welfare because workers will have to support a larger number of elderly Samuelson 19751976.

In order to draw a simple parallel with the Solow—Swan model, a constant rate of investment in human capital inevitably leads to an increase in human capital per worker if labor force growth slows. A deeper understanding of these processes, however, requires that two important issues be addressed. The first is how investment in human capital affects economic growth.

The second issue, which receives more emphasis in this article, is how demographic change interacts with investment in human capital. The central idea, however, is as follows. The second contribution is to review previous research on the linkages between fertility, human capital, and economic growth so as to lay a foundation for the analysis that follows. The objective is to distill an important and somewhat unsettled literature to provide focus on the important issue emphasized here. This article will present new estimates of public and private spending on education and health for children for a cross section of countries, considering only expenditures and not time costs.

It will answer the simple empirical question of whether lower fertility at the national level is associated with higher human capital investment per child and whether this holds for both public and private sector investment in human capital.

We do not draw any inference about a causal relationship between fertility and human capital investment. Based on these estimates and a simple model, we will then simulate the effects of changing fertility and human capital over the demographic transition on per capita GDP and lifetime consumption, on the assumption that the estimated cross sectional relationship between fertility and human capital investments held throughout the transition and what determines parental investment decisions in human capital of children in chile hold in the future.

We show that based on reasonable parameter estimates an increase in human capital associated with lower fertility may offset the greater cost of supporting the elderly in the older population.

Because there is considerable uncertainty in the literature about the effects of education on growth at the national level, however, we cannot come to a definitive conclusion on this point. The number of workers in year t is equal to the number of children in the preceding period. Moreover, the number of retirees in year t depends on the number of workers in the preceding period and the proportion surviving to old age st: The total population is designated Nt.

Human capital is acquired during childhood and depends on human capital investment by parents during the preceding period: There is no physical capital in the model. Hence, income is equal to the wage. A what determines parental investment decisions in human capital of children in chile implication of this assumption is that the consumption of children, the consumption of retirees, and human capital investment are all funded via transfers from workers.

Income is allocated between two uses: Designating per capita consumption by Xt and Pt as the relative price of consumer goods and setting the price of human capital investment to 1the social budget constraint is Investment in human capital is not considered part of consumption. Consumption includes all other spending on children and consumption by workers and retirees. The budget constraint from the perspective of the average or representative worker or decision maker in this model is: In the basic quantity—quality tradeoff model of fertility choice Becker and Lewis 1973 ; Willis 1973a couple has the utility function U x,n,q where x is parental consumption, n is the number of children, and q is the quality of each of the identical and symmetrically treated n children.

In our model, X includes all consumption: In our model, quality q is human capital investment H. In pedagogical presentations of the model Becker 1991Ch.

  1. Abstract Do low fertility and population aging lead to economic decline if couples have fewer children, but invest more in each child? A large literature spanning many decades explores other effects of these demographic changes.
  2. The magnitude of the decline depends on the old age survival rate.
  3. Moreover, the number of retirees in year t depends on the number of workers in the preceding period and the proportion surviving to old age st. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.
  4. A deeper understanding of these processes, however, requires that two important issues be addressed.

Parents decide how to divide their income between own consumption and spending on children, and the analysis focuses on the allocation of total child spending between numbers of children and spending on each child, that is the quantity and quality of children.

We employ the same approach here. Workers allocate their income between consumption of all members of their family and human capital spending. Having done so, they select the number of children and human capital spending so as to maximize their utility. However, implicit in the decision is a weighing of current standards of living versus future standards of living. The greater is spending on human capital the lower will be current consumption and the greater will be future consumption.

The actual consumption during retirement of current workers is beyond their control, however. It depends on the decision of the next generation of workers what determines parental investment decisions in human capital of children in chile children about allocating resources between consumption and human capital investment, and allocating consumption across generations. The Support Ratio and the First Dividend Per capita income in this simple model is the product of the wage and the support ratio.

Letting the total wage bill be represented by Tt, and the support ratio by SRt: The support ratio is determined by fertility and old age survival. Using the demographic relationships in Eq. Holding the wage constant, a decline in fertility in the current period leads to a contemporaneous increase in the support ratio and in per capita income. In the following period, however, the number of elderly dependents increases and, thus, the support ratio and per capita income decline.

The magnitude of the decline depends on the old age survival rate. The higher the survival rate the greater the decline in the support ratio and per capita income. Given the fertility rate, an increase in the survival rate leads to a decline in the support ratio and per capita income. Wage and Income Dynamics Per capita income depends on changes in wages in addition to age structure.

The existence of the quantity—quality tradeoff means that a decline in fertility will lead to an increase in human capital in the same period and an increase in wages in the subsequent period. Substituting for human capital in Eq.

News and Views from the Global South

The growth rate of total wages is A decline in fertility has two effects on growth in total wages. The average wage increases while the number of workers declines relative to those values for the preceding generation. Considering a special case allows a more detailed analysis of the dynamics.

Suppose that g and h are both constant elasticity functions as follows: The growth of wages is given by Noting that we have the plausible result that for a given level of parental human capital and wages, lower fertility leads to higher wages in the next generation. Closely related to this result, we see that lower fertility leads to higher wage rate growth from generation to generation. We also see that the growth rate of wages is inversely proportional to the initial level of wages, for a given level of fertility.

The equilibrium level of wages, for a given level of fertility, is found by setting the growth ratio to unity: Sinceit follows from Eq. The growth rate of total wages and total income in this model is Fertility decline leads to more rapid growth in total wages if Empirical evidence on this point is discussed below. Consumption Human capital spending increases wages but at a cost——resources must be diverted from consumption to achieve higher productivity and consumption in future periods.

Thus, consumption is measured by subtracting human capital investment from total wages. Letting represent total consumption, the relationship between fertility and total consumption is The share of aggregate production that is consumed is given by In our constant elasticity special case, this becomes The consumption rate is either increasing or decreasing in F depending on the elasticity of human capital spending with respect to F.

The growth rate of consumption is given by The right-hand-side ratio captures the period-to-period change in the consumption ratio. Ifthe ratio is equal to 1 and the change in consumption is equal to the change in total wages.

Thus, to track consumption in the simulation analysis presented below, we use consumption per equivalent what determines parental investment decisions in human capital of children in chile Empirics Quality Expenditures and Human Capital In the literature on the quantity and quality of children Becker and Lewis 1973 ; Willis 1973all expenditures on children are combined and treated as investments in child quality.

In a later literature, all parental expenditures on children are viewed as raising future earning prospects for children which is the operational definition of quality Becker and Barro 1988. Our approach here differs from this tradition. The extended theoretical treatment of investment in child quality e. It would certainly be desirable to include parental time inputs in the production of human capital, but National Transfer Accounts, our data source, do not include time use and so we are not able to do so.

Furthermore, the literature on investment in education emphasizes the opportunity costs of the children who stay in school to receive further education, and often this is the only cost of education that is considered when private returns to schooling are estimated.

These opportunity costs are certainly relevant, but for now, we have included only direct costs in our measure. Increased investment in human capital can take place at the extensive margin by raising enrollment rates, which implies higher opportunity costs as in the traditional analysis.

RIGHTS-CHILE: All Children Now Treated As Equals

However, it can also take place at the intensive margin through greater expenditures per year of education, through variations in class size, complementary equipment, hours of education per day, or teacher quality, and pay rate. In East Asia, much of the private spending appears to be of this sort, as children are sent to cram schools or tutors, after the public school education is completed for the day.

Such increased expenditures do not necessarily have an opportunity cost of the sort measured in traditional studies, and the increase in years of schooling would underestimate the increase in human capital investment.

In Europe, on the other hand, education through apprenticeship may entail low costs and little lost time in the labor force. Cross-National Estimates of Human Capital Spending in Relation to Fertility The National Transfer Accounts NTA project provides the requisite data on age patterns of human capital investments per child and labor income for nineteen economies, rich and poor: Data are for various dates between 1994 and 2004.

More detailed information is available at www. For each country, we have age-specific data on public and private spending per child for education and health.