centre for market and public organisation using difference-in-difference methods to evaluate the...
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Centre for Market and Public Organisation
Using difference-in-difference methods to evaluate the
effect of policy reform on fertility:
The Working Families Tax Credit
Mike Brewer (Institute for Fiscal Studies)
Anita Ratcliffe (CMPO, University of Bristol)
Sarah Smith (CMPO and IFS)
The impact of welfare reform on fertility
• Government spending per child rose by 50% (in real terms), 1999 – 2003
– Working Families Tax Credit (WFTC)
– Means-tested benefits
– Child benefit
• Biggest increases for low-income families – equivalent to 10% income
Average spending per child (£ per week, 2003 prices)
0
5
10
15
20
25
30
35
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Change in child-contingent benefits, 1998 – 2002 Couples, one child
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9 10
Decile of income, households with children
Cha
nge
as a
% o
f in
com
e
Child_benefit FC_WFTC Income_support
Impact on fertility
• The policies were aimed at incentivising work and tackling child poverty, but might they also have affected childbearing?
Effect of reforms: Economic model of childbearing
• Higher incomes will increase demand for quantity of children OR quality
• Lower income volatility will increase demand for quantity of children
• Higher benefits reduce the “price” of children (increase fertility)
• Employment effect – if gain to work rises (falls) then opportunity cost rises (falls) and fertility falls (rises)
• Employment effect positive for lone mothers, but mainly negative for women in couples
Empirical strategy: Differences-in-differences
• How can we tell whether childbearing has been affected by the reform (and by how much)?
• “Before” versus “after” may be misleading because of other changes over time
• Missing data problem – what would childbearing have been in the absence of the reform?
• Solution – use a control group (not affected by the reform) to proxy for the change that would otherwise have taken place
Empirical strategy: Differences-in-differences
• Differences-in-differences, also known as “natural experiment”
• Compare change in childbearing among a treatment group (affected by the reform) with change in childbearing among a control group (not affected by the reform)
∆ childbearingT – ∆childbearingC = effect of the reform
Empirical strategy: Differences-in-differences
• Strengths
• Clear, simple, intuitive
• Potential weaknesses
• Plausibility of control
• Black box – estimate combined effect of a bundle of changes; little insight into mechanism
Choosing the treatment and control groups
• The treatment group must be affected by the reform and the control group must be unaffected (including spillover effects)
• The composition of the groups must be the same over time. Otherwise changes that are driven by selection effects will be wrongly attributed to the reform
– Cannot split by income, instead split by education
• Both groups must be affected by time-varying factors in the same way (or differential changes must be controlled for)
Treatment and control groups
• Education
– Treatment: Both male and female partner left school at/before compulsory school leaving age
– Control: Both male and female partner left school at 18+
Entitlement to child-contingent benefits, couples with children
Control Treatment
Proportion entitled to FC/WFTC or IS
Before .098 .237
After .141 .401
Mean weekly entitlementFC/WFTC, IS + child benefit
Before £29.71 £39.00
After £37.27 £56.76
Difference £7.56 (25.4%) £17.76 (45.5%)
Data
• Family Resources Survey 1995 – 2003
• Large sample, extensive information on education, income and other socio-demographic characteristics
• Derive the probability that a woman had a birth in the previous 12 months
– Step 1: Allocate children in household to natural mothers
– Step 2: Assign randomly-generated date of birth to children (based on their age) if none available.
– Step 3: Infer probability that a woman had a birth in previous 12 months based on date of interview and date of birth of child
• Use information on number and ages of children to derive (approximate) fertility histories
Comparison of estimated TFR with official measure
Annual total fertility rate = number of children a woman would haveif she had the age-specific birth rates in that year
• Identifying the effect of the reform relies on successfully controlling for everything else that might affect fertility in the treatment group
• Rich set of demographic controls
– Age, education, kids in household and age of kids in household, and interactions; region, housing tenure, ethnicity
– Average wages for treatment and control groups
• Control group intended to capture other (unobservable) time-varying characteristics, but control group has different fertility, and possibly different fertility trends
– Control explicitly for differential trends
Identification
Regression analysis
Dependent variable = birth in last 12 months
** indicates statistically significant at 5% levelControls include age, education, numbers and ages of children, region, housing tenure,ethnicity and wages
Women aged 20-45Data from 1995 – 2003
Women aged 20-45Data from 1995 – 2003
Treated (Low*post) .0143**(.0069)
. 0220(.0127)
Trend .0005
(.0025)
Differential trend -.0014(.0029)
itititititit uXLowPostPostLowBirth 321
itititititit uXTLowTLowPostPostLowBirth 54321
Regression analysis
Dependent variable = birth in last 12 months
** indicates statistically significant at 5% level, * at 10% levelControls include age, education, numbers and ages of children, region, housing tenure,ethnicity and wages
Women aged 20-45Data from 1995 – 2003
Women aged 20-45Data from 1995 – 2003
Treated_no children .0253**
(.0102)
.0333*(.0189)
Treated_ children .0113
(.0072)
.0192
(.0173)
Controlling for differential trends
No Yes
Some robustness checks
• Use longer time period (1990-2004) to control for quadratic trends
• Estimate effects of spurious reforms in 1995 and 1996
• Allow for reform to take effect from announcement as well as implementation
Conclusions
• The evidence suggests a significant increase in births (particularly first births) among women in couples affected by the reforms
• 1.4 percentage point increase in probability of a birth very roughly translates into 20,000 extra births (total births 670,000)
• Implied elasticity around 0.25; within range estimated by previous studies
• Is it plausible that such a large increase in child-contingent benefits would not affect fertility?