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Investments in Children’s Human Capital

Robert A. PollakWashington University in St. Louis

December 4, 2009

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Big Differences

Big differences in the amounts that different families invest in their children.

Big differences in children’s education outcomes:

test scores years of education; HS graduationWhat does economics have to say about these

differences?

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Implicit Assumptions in Mainstream Economics - 1

Focus on family investments.Parents as traditional nuclear family: married when the children are born and stay

married to each other.Becker Treatise on the Family, 1981, 1991Behrman, Pollak, and Taubman, From Parent to

Child, 1981, 1991.

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Family Structure

DivorceNonmarital fertility

70% of non-Hispanic black births nonmarital 48% of Hispanic births nonmarital

25% of white births are nonmarital

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Outcomes for Children

Children do better if they come from traditional nuclear families

Family structure correlated with mothers’ educationChildren do better if their mothers have more

educationIt is not clear that any of this is causal: Would children

do better if their unmarried mothers married their unmarried fathers?

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Two References

• McLanahan, Sara, "Diverging Destinies: How Children Fare Under the Second Demographic Transition," Demography, Vol. 41, No. 4, (November 2004), 607-627.

• Lundberg, Shelly and Robert A. Pollak, "American Family and Family Economics," Journal of Economic Perspectives, Vol. 21, No. 2, (Spring 2007), 3-26.

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Implicit Assumptions in Mainstream Economics - 2

Parents make the decisions: parents active; children passive decisions about preschool

(Some models in which children are active; decisions about medical school).

Alternative: “bargaining” between parents and children

Agency for children

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Explanations for Differences in Investments in Children - 1

Why do we see such big differences in the amount invested in children from different families?

Why do low SES families invest so little?Why do high SES families invest so much?(Fertility as background question: Why have

children at all? Below replacement fertility in Europe and Japan.)

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Explanations for Differences in Investments in Children - 2

* Differences in “Preferences”* Differences in Constraints

Productivity of time (if you can’t do math, you can’t help child with math)

Availability of time/ value of time/ wage Money (to buy market substitutes)

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Other Family Members: For example, Grandparents

Are they around? Compton and Pollak address this. The answer, for many families, is yes.

Do they play a role? We don’t know. The literature in economics and sociology pays little

attention to grandparents except when grandparents live with the grandchild and/or are primary caregivers. See Dunifon (JM&F, 2007)

Proximity: suppose grandparents live close to (e.g., within 30 miles) but not with grandchildren

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Adults Living Near Parents

Janice Compton and Robert A. Pollak, "Proximity and Coresidence of Adult Children to their Parents: Description and Correlates," University of Mich Retirement Research Center, WP 2009-215, October 2009.

Americans live surprisingly close to their parents.We focus on mothers, but for mothers and fathers who

live together, it doesn’t matter.We consider mothers who are Alive and Living in the

United States (ALUS)

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MEDIAN DISTANCES

Including coresidents (d≥0)

Excluding coresidents(d>0)

Unmarried Adults

Men 5 miles 15 miles

Women 8 miles 15 miles

Married Adults

Her Mother 20 miles 22 miles

His Mother 25 miles 25 miles12

Adults (≥25) with Mothers ALUS

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Why Do Adult Children Live Close to their Mothers? - 1

Who benefits from proximity?What is the relationship between proximity and transfers of money? Of services (“time transfers”)?Adult children may benefit from close proximity and time transfers when they are young and have young children.Mothers may benefit from close proximity and time transfers when they are elderly, disabled, and widowed.

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Why Do Adult Children Live Close to their Mothers? - 2

We assume that the financial and psychic costs moving are high enough that proximity should be analyzed within a life-cycle framework.

A life-cycle framework implies that we cannot understand proximity by looking at the current needs.

We discuss this “why” question and the “who benefits” question later.

.

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Most Americans Marry Someone Born in the Same State

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Percentage of Couples Born in the Same State

All Couples

2000 59.21990 58.91980 61.1

U.S. Census (IPUMS) data. Sample includes all couples in which both spouses are 25 years of age or over and born in the U.S.

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Education and Couples’ Birth State

Table 2: Couples’ Birth State

Low-Power Couples

Part-Power: She has college degree

Part-Power: He has college degree

Power Couples

All

Percentage of Couples from same birth state

2000 64.1 56.8 54.0 45.9 59.2

1990 62.8 54.8 52.5 45.1 58.9

1980 64.2 55.8 53.1 47.9 61.1

Percentage of Sample

2000 62.4 8.5 12.3 16.8 100.0

1990 69.3 6.2 12.0 12.5 100.0

1980 75.6 4.1 11.2 9.1 100.0

U.S. Census (IPUMS) data. Sample includes all couples in which both spouses are 25 years of age or over and born in the U.S.

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Proportion of Couples Born in the Same State

0

10

20

30

40

50

60

70

1980 1990 2000

Low Power Couples Part-Power: She has College DegreePart-Power: He has College Degree Power Couples

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Proportion of Couples Born in the Same State

0

10

20

30

40

50

60

70

1980 1990 2000

Low Power Couples Part-Power: She has College DegreePart-Power: He has College Degree Power Couples

9.1 12.5 16.8

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Data: NSFHNational Survey of Families and HouseholdsWave 2 (1992-1994)We use the adult child and his or her spouse as unit

of observation– Distance to his mother, distance to her mother– Transfers to and from both mothers: time transfers

and monetary transfersMost previous studies used the mother and her

children as unit of observation.Migration: of adult child; of his mother; of her

mother. We plan to look at this.

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Proximity as Active Research Topic

Conference at University of Michigan: “Proximity, Coresidence and Intergenerational Transfers” May 2009

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Proximity and Coresidence - 1If distance were the right metric, coresidence would be the limiting

case of close proximity. But distance isn't the right metric. Living next door vs coresidenceTheoretical:

discontinuity in costsdiscontinuity in privacy

Empirical: Data do not support treating coresidence as limiting case of close

proximity.

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Proximity and Coresidence - 2

Implications for empirical work:Use Multinomial logit/probitDo not use Tobit, ordered logit/probit

–They assume one set of regressors–They may give misleading results

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Correlates of Proximity and Coresidence

Coresidence: Very few married couples live with either his mother or her mother.

Proximity: Strong education gradient: couples with more education live farther from his mother and her mother.

Age gradient: older children live farther awayTime transfers: close proximity associated with

more time transfers (in both directions).

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Education, Proximity and Transfers

Education is a strong predictor of proximity:Adults with a college degree are much less

likely to live near their mothers.

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Some Facts about Education and Proximity

• Strong Education Gradient

Low-Power Couples

Part-Power: She has college degree

Part-Power: He has college degree

Power Couples

NSFH Wave 2. Lives within 30 miles ofNeither mother 18.9 25.5 35.8 49.4Her Mother 17.4 23.2 13.6 15.9His Mother 13.9 16.4 15.3 16.3Both Mothers 49.9 34.8 35.3 18.4

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More Facts about Education and Proximity

• Strong Education Gradient

Low-Power Couples

Part-Power: She has college degree

Part-Power: He has college degree

Power Couples

2000 U.S. Census. Lives in birth state ofNeither 22.6 26.1 36.2 40.1Hers 12.1 12.8 13.3 13.5His 11.9 14.4 11.8 13.9Both 53.3 46.7 38.7 32.5

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Education, Proximity and Transfers - 1

Education is a strong predictor of proximity– Adults with a college degree are much less

likely to live near their mothers.– College educated more likely to migrate

(wider job market, may have gone to college away from home).

– Less likely to need transfers.

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Education, Proximity and Transfers - 2

Education is positively related to transfers of both time and money. – Adults with a college degree are much more likely to give

and receive transfers from their mothers.– Selection – since college educated more apt to move away

from home, those who stay are those who are more likely to give/receive transfers.

– Strategic behavior of mothers – knowing that college educated have greater opportunities elsewhere, may transfer more to them to ‘bribe’ them to remain.

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Next Project

Labor supply and Intergenerational Transfers– Focus on women– Labor supply and proximity

• Can use proximity rather than transfers• Impact of close grandchildren on retirement• Impact of close grandmothers on labor supply

of daughters.

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Education, Proximity and Transfers - 3

Education of mothers has an independent effect on proximity. – Adult women are less likely to live near mothers with a

college degree. – Mothers more likely to have migrated away from home

herself - less extended family around– Demonstration effect– Mothers better able to identify and obtain market

resources for her care. May have less need for non-market family care.

– Mothers more likely to be in the labor force, may be less likely to provide child care.

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ARE FAMILIES PARETO EFFICIENT?

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What Can We Learn from Family Migration?

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Family vs Household vs Individual

• The economics of the family beyond the household

• "household production" • “Treatise on the Family”• Ellickson, The Household: Informal Order

around the Hearth, 2008

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What We Want to Explain

• Migration and Location• Proximity and Coresidence• Who lives with whom is endogenous• Who lives near whom is endogenous

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Long-term Care of Disabled Elderly Parents

• Which child will be the primary caregiver? Engers and Stern (2002 IER)cooperative game and two-stage game

• Coresidence with disabled elderly parentPezzin, Pollak, and Schone (2007 CESifo

Studies) Three-person, two-stage game: children decide whether to invite coresidence; parent decides which invitation to accept

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Modeling Family Migration

• Players • Feasible Set• Preferences• The Game

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Players

• Two-person vs three-person vs n-person games• Coalitions• Boundaries of the family not sharply defined:

– “extended family” • Family trees are bushy • Bernheim and Bagwell (1988 JPE)

"Is Everything Neutral?"

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Feasible Set

• Coresidence• Proximity

– Residential location vs – Cities as locations

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Preferences

• Why care about location?– Wages, prices, amenities, friends, family

• Why care about proximity?long-term care; child care;proximity to grandchildren;my sons’ locations affects my utility

• "Externalities" within the familyinterdependent preferences

• Proximity as a "family public good"

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Specifying the Game

• Describing vs inventing the game• Cooperative vs noncooperative games• Konrad et al. specify noncooperative game• Without binding agreements, two-stage games

likely to yield Pareto inefficient equilibria

side payments?binding agreements?dynamics

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Norms

• About caregiving responsibilities• About coresidence and proximity

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Norms

• Distribution• Pareto efficiency• Property rights interpretation: Coase• If you are the child whom norms designate as

responsible for providing care, is it ok for you to pay your sibling to provide care?

• Law vs norms: Coase vs Ellickson• Ellickson (1991 Order without Law: How

Neighbors Settle Disputes)

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Remaining Work

Sorting out causal relationship from observational data.Which adult children are in close to parents is

endogenous.What is the effect on outcomes for children (e.g.,

education) of being in close proximity to grandparents.

Controlling appropriately for parents’ educational attainment, is being in close proximity to grandparents protective for children?