EUROPEAN PAPERS ON THE NEW WELFARE

Is the fertility decline a consequence of the growth of the welfare state? Evidence from historical data

1. Foreword

The demographic structures of many European and Western economies are changing substantially. Low fertility and longer expected lifetimes are behind this fundamental transformation. Both are presumed to have a substantial effect e.g. on fiscal policy. In fact, ageing and fertility decline are currently considered to be the main problems in Europe and other industrialised economies. A report by the European Commission (see Oksanen 2003, p. 11) goes even so far as stating that “the increase in public expenditure is mostly caused by declined fertility and increasing longevity…”
Both ageing and fertility decline are taken as ‘facts of life’, which cannot be affected by any policies. In other words, they are exogenous. Moreover, these changes are usually considered to be ‘problems’, which sounds somewhat surprising. At least an increase in the life-span is usually thought to increase individual’s lifetime utility and well-being. Why is it now a problem?
The exogeneity assumption might be true more with ageing, but definitely not with fertility as we argue below. But how does fertility change? Obviously, any change requires non-marginal change in institutions and relevant variables, but we cannot simply rule out all possibilities of affecting fertility behaviour even in the medium run. Both historical data and cross-country comparisons show that there are (have been) huge differences in fertility behaviour.
In this paper we try to summarize some key relationships which seem to exist between fertility and the key background variables. In particular, we pay attention to the size of the welfare state (and within the welfare state, the pension system). We present some empirical evidence that the fertility decline is related to the expansion of the government and its activities. Our evidence might help in designing policies, which will have less harmful effects on labour supply (retirement age) and fertility. If our thesis is correct, it would be dangerous for governments to try and solve the fiscal problems due to ageing with higher taxes and larger transfers, since fertility decline might still accelerate further, and make matters actually worse.
We proceed as follows. In section 2 we scrutinize the relationship between key determinants of fertility. In section 3, we delve deeper into the determinants of fertility by discussing how the relationships may change when we, instead of pair wise correlations, look at conditional correlations. Finally, some conclusions are drawn mainly for policy purposes in section 4.

We thank the Yrjö Jahnsson Foundation for financial support.
Mikko Puhakka: Department of Economics, University of Oulu, P.O. Box 4600, FIN-90014 Oulu, Finland, email: Mikko.Puhakka@oulu.fi.
Matti Viren: Department of Economics, University of Turku, FIN-20014 Turku, Finland, e-mail: matvir@utu.fi.


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