The visible hand in economics

The birth rate vs the growth rate

Posted on: February 19, 2008

Stats NZ reports a marked increase in the NZ birth rate. There are three ways to view this: first, you could use it as Quest does to suggest that maths and equations are stupid and we should just trust the politicians’ instincts. Unfortunately for Quest, there is no statistical evidence for that position :P

The Standard claims that an increasing fertility rate is a signal of the good economic times brought about by the Labour government. This connection seems a bit results driven to me. Particularly so when the correlation between per-capita GDP and fertility is strongly negative worldwide. It may be the case that Labour’s policies have encouraged people to have children, but that’s hardly the same as signalling a rosy future for the NZ economy.

Finally, one might ask what economic theory has to say on the issue. While the theory on growth economics has a patchy empirical record, it does have an explanation for the negative correlation between fertility and GDP per capita. Essentially, higher fertility rates mean that the resources of the economy have to be spread across more people. Those people do create value but, since productivity has decreasing marginal returns, they don’t create as much extra capital as they consume. Thus, higher birth rates lead to an increase in GDP, but a lower GDP per capita in the long run. So perhaps the increased birth rate doesn’t bode so well for NZ after all.

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10 Responses to "The birth rate vs the growth rate"

I think the Standard article isn’t so narrowly focussed on economic growth as you are making it out to be. It argues that National’s spectrum of policies made life more uncertain and less prosperious for many, thereby manking having a family less attractive (lowered the utility gain from having a family, I suppose you might put it), and Laobur’s spectrum of politices has reversed that.

As did the 4th Labour Govt’s policies, yet the birth rate went up…

go figure

Wat, I realise that the Standard article isn’t as narrow as the aspect of it that I’ve briefly addressed here. After reading through it a few times I felt that it covered a very broad spectrum of things in very few words. I’ve chosen to talk specifically about the suggestion that “…the birth-rate has bounced back on the back of …renewed confidence…” because it seemed relevant to my post about growth. There is no doubt that implementing policies which give people an incentive to have babies are likely to increase fertility rates. Although, as insider points out, that’s not equivalent to a positive correlation between socialist policies and birth rates.

Patchy empirical record indeed, i suspect that fertility-growth regressions are particularly non-robust if restricted to developed countries. Plus I suspect there is little relationship between GDP/capita and population in developed countries, which is another clue that the relationship can’t be too strong.

Stagnant population is probably bad (even though it implies rising capital/labour ratios), mainly because it implies problems for pay-as-you-go transfer systems. Is rising population in NZ good? I’ll be optimistic and say yes, citing network effects, thresholds, economies of scale, and the fact that NZ seems quite underpopulated to begin with.

I think you’re misinterpreting my post a bit CPW. It’s not the population that the growth theory refers to, it’s the fertility rate. Similarly, it’s not the short term growth rate of the economy that it deals with so much as the long run potential growth rate.

There could well be positive effects of the type you mention (although endogenous growth theory has a worse empirical record than the Solow-Swan model I referenced). However, they tend to go to the level of GDP, not the per-capita level.

Population vs GDP/capita isn’t important for growth theory but, interestingly, it is significantly negative in OECD countries anyway ;)

http://micpohling.wordpress.com/2007/08/18/oecd-population-vs-gdp-gini/

[...] economists growth bias 19 02 2008 Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither Rauparaha or myself defined what [...]

Am I? Population would seem to be somewhat dependent on fertility. I was just making the assumption that countries with high populations probably had high population growth rates in the past. Plus the lack of relationship between population and gdp/capita is a concern when we know that a lot of factors (land, resources) are more or less fixed.

Can we just say that growth theory is basically an abysmal failure empirically, and we don’t really have any results at all that one would stake one’s life on? :-) I’d still be more optimistic about a country with a growing population than a shrinking one.

I realize you have just given me the first google hit you found, but I wouldn’t say “significantly negative” when the regression cited isn’t actually statistically significant until the decision is made that the USA is an outlier and Luxembourg isn’t. If threw out Luxembourg and whatever the poorest country in the OECD is (?) you’d get a pretty flat line.

Checking the correlation you cited between fertility and gdp/capita, again I don’t know if I see much a relationship with incomes over 15k, and we’re still got the problem of causality to deal with.

I think the Malthusian argument alone probably explains most of the relationship we see in the total sample.

Well, arguing over statistics isn’t really my thing: they look negative to me, but I’m no econometrician so your analysis is probably far more robust than my eyeballing :)

I certainly wouldn’t call growth economics an empirical failure though. I think that the conditional convergence result of Mankiw, Romer and Weil is fairly convincing. It provides substantial evidence that the long-run predictions of exogenous growth theory are more than just fluff. Endogenous growth theory isn’t there yet, but it’s still a fairly young field and there are some very smart people working on it, so I wouldn’t want to give up on it.

I don’t know the topic well enough to comment, but read this just the other day (about Mankiw):

And his most famous paper, “A Contribution to the Empirics of Economic Growth” of 1992, with David Romer, of the University of California at Berkeley, and David Weil, of Brown University, is generally considered to have failed in its defense of the “augmented Solow model,” meaning one in which human capital as well as capital and labor are sufficient to explain variations in growth.

The source had links.

Hmmm, I can’t claim a great familiarity with the field but, as I remember, MRW show that the conditional convergence prediction of the augmented Solow model holds. I don’t recall them suggesting that the Solow model explains long run growth. It’s an exogenous growth model so that would be a bizarre conclusion, to say the least. I only had time to read the abstracts, but Bernanke’s paper doesn’t seem to necessarily conflict with MRW. If it says that you need endogenous growth models to explain long run growth then it would seem to address a different topic from MRW.

Temple’s paper seems to have more direct conflict, but it’s hard to tell from the abstract which doesn’t say much about exactly what he did. It would be surprising if the Solow model were the last word in growth, since it doesn’t actually explain long run growth. However, that doesn’t mean that its prediction of conditional convergence is incorrect and MRW is wrong. I was under the impression that the inability of a number of endogenous growth models to replicate the conditional convergence prediction was a stumbling block for many of them. Is that vaguely true?

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