ARE CHILDREN NORMAL GOODS?
I finished a post last week with the question of whether children are normal goods. Below I want to lay out some economic arguments on this, before putting in an evolutionary twist that raises the question of whether we can rely on any of the economic analysis.
A normal good is a good for which demand increases with income. Cars, holidays and jewellery are examples of normal goods. The opposite is an inferior good, with demand decreasing as income rises. An example of an inferior good might be hamburger mince (as people move to steak) or other low-quality products. This change in demand for a good in response to changing income is known as an income effect.
There has been some debate over the years about whether children are normal goods, particularly given the ubiquitous pattern of fertility declining as a country’s residents get richer. However, determining whether children are a normal good is complicated, as we do not get to witness a simple increase in income without other conflating factors.
First, income is not the major input into children. Rather, time is the scarce resource, with that time balanced (crudely) between work, leisure and children. Gary Becker argued back in 1965 that using time was the right way to frame the problem.
Consider a sudden increase in your wage. This increases the relative price of leisure and children and would result in someone wanting to work more and to demand less children and leisure. This is known as a substitution effect. The income effect means that the worker does not need to work as much for the same income. This increase in income increases the time effectively available, and if children are a normal good, a person will have more of them. However, the substitution and income effects operate in opposite directions, making it difficult to determine whether that person will actually have more children. If we see them reducing the number of children they have, we cannot determine the direction of the income effect and whether children are a normal good.
Accordingly, the decline in fertility with wealth witnessed at a country level suggests that the substitution effect is strong and that the income effect, which would be operating in the opposite direction if children are a normal good, does not outweigh it. However, it also leaves open the possibility that children are an inferior good, with both the substitution and income effects contributing to the decline.