As women’s educational attainment and labor market participation have increased, so too have concerns about decreasing birth rates and below-replacement fertility levels. All OECD countries other than the US provide paid parental leave in order to reduce the cost of childbearing. However, the structure of parental benefits may affect different groups in different ways. This week’s WAPPP seminar featured Anna Raute, WAPPP Fellow and Assistant Professor in Economics at the University of Mannheim, as she presented her research on the effects of the 2007 German parental leave reform.
Highly educated and high-earning women tend to have fewer children than lower-educated and lower-earning women, leading to what researchers have called a “baby gap” between these two groups. For highly-paid women, having children is associated with a greater opportunity cost than for women who are less well paid. In Germany, this manifests in a stark difference in number of children born to highly-educated versus lesser-educated women, as well as a large gap in the percentage of childless women. Close to one-third of highly educated women in Germany never have a child, compared to 18% of lower-educated women (here meaning women who have completed a high school degree but no vocational training or tertiary education). However, in other countries with family policies, such as Sweden, this gap in childlessness or number of children is not quite so stark. The structure of family policies may affect these figures.
Prior to the 2007 reform, parents received a fixed sum of 7,200 euros per child. However, after the reform, parental benefits were linked to the mother’s pre-birth earnings. Rather than the flat payment, mothers could receive between 67-100% of their pre-birth earnings, up to 21,000 euros per child. Prior to the reform, lower-earning mothers were getting a much greater relative benefit from parental benefits than their higher-earning peers. By contrast, with the new reform, higher-earning women stood to benefit much more from wage replacement than from the flat payment, which may have decreased their perceived opportunity cost of having a child.
The key question, Professor Raute asks, is whether fertility post-reform exhibited differential changes across the income and education distribution. Much of the prior literature on parental benefits focuses on cash transfers and welfare programs that provide greater incentives for lower-income mothers than higher-income mothers. This study provides a critical window to examine whether high-earning and highly-educated women are less elastic, or whether they too react to financial incentives in terms of their fertility.
Nine months after the implementation of the law, there was a statistically significant increase in the average monthly birth rate per thousand mothers, as well as a small drop in the number of abortions. In addition, the rate of IVF between 2006 and 2011 increased by 33%. The increase in fertility nine months after the law’s implementation translates to an additional 2,300 children born per year.
Using German pension data, Professor Raute examined this increase in terms of income and education level. This birth data reveals that medium- and high-earners benefitted substantially from the new reform. While benefits for lower-earning mothers did not change substantially pre- and post-reform, medium-earning mothers received an additional 4,000 euros, on average, and high-earning mothers received an additional 8,000 euros. If the difference in these benefits affects fertility, we should expect to see a relative increase in fertility for women who are benefitting greatly from the reform versus those who are not benefitting as much.
For women who are below the median income, there is not a statistically significant change in the probability of having a child. By contrast, for women who earn above the median income, fertility increases for each income bracket. Overall, each additional 5,000 euros in expected benefits raises the probability of having a child in a given year by 6%.
Professor Raute observes the same effect when examining education. Post-reform, the average probability of having a child increases by 6% for medium-educated women and by 13% for highly-educated women.
Given the recency of the reform and the lag in available data, these are only short-term effects. Professor Raute examined women at the end of their fertility cycle in an effort to understand whether we might see a permanent effect on fertility and for which groups. Indeed, for women at the end of their fertility cycle, each additional thousand euros in benefits increases mean fertility level from pre-reform levels by 5.1%. This strong effect indicates that we might expect to see a permanent effect of the reform on completed fertility.
In addition, there is a significant increase in fertility for women ages 40-45. This effect seems to be driven by women who already have one child and decide that – now that it’s cheaper – they will have a second, as opposed to childless women deciding to have their first child due to the effects of the reform. Highly-educated women are also having their first children 4.8 months earlier, on average, which is correlated with a greater number of children overall.
Overall, these findings provide strong support for a discontinuous increase in overall fertility as a result of the reform, resulting in strong effects on fertility for women with higher earnings and educational attainment. The observed baby gap between highly-educated and lesser-educated women therefore seems to be narrowing.
Interestingly, the 2007 reform also increased paternity acknowledgement, in which unmarried fathers can opt to legally register as the child’s father, with all of the attached rights and obligations. In Germany, paternity acknowledgement is strongly associated with better outcomes for children.
Professor Raute hypothesizes two possible explanations for why the 2007 reform increased parental acknowledgement. It could be that as benefits to mothers increase, fathers have to contribute less to support the household, and therefore paternal acknowledgement is cheaper (the “cost channel”). Alternatively, the reform reserved two months of paid leave for fathers, which may have encouraged paternity acknowledgement (the “paternity leave channel”).
Looking at children born in the first few months of the reform, whose parents couldn’t have known about the new reform when they were conceived, paternity acknowledgement increased by 1.5 percentage points. However, this effect was driven primarily by women who were working prior to giving birth, who were entitled to a larger share of benefits under the reform. This effect implies that the cost channel, rather than the paternity leave channel, is responsible for the increase in paternity acknowledgement post-reform.