Investments in Children’s Human Capital

1. Investments in Children’s Human Capital Robert A. Pollak Washington University in St. Louis December 4, 2009

2. 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 graduation What does economics have to say about these differences?

3. 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, 1991 Behrman, Pollak, and Taubman, From Parent to Child, 1981, 1991.

4. Family Structure Divorce Nonmarital fertility 70% of non-Hispanic black births nonmarital 48% of Hispanic births nonmarital 25% of white births are nonmarital

5. Outcomes for Children Children do better if they come from traditional nuclear families Family structure correlated with mothers’ education Children do better if their mothers have more education It is not clear that any of this is causal: Would children do better if their unmarried mothers married their unmarried fathers?

6. 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.

7. 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

8. 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.)

9. 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)

10. 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

11. 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)

12. Adults (≥25) with Mothers ALUS 12

13. 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. 13

14. 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. . 14

15. Most Americans Marry Someone Born in the Same State Percentage of Couples Born in the Same State 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. 15

16. Education and Couples’ Birth State Table 2: Couples’ Birth State 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. 16

17. Proportion of Couples Born in the Same State

18. Proportion of Couples Born in the Same State

19. Data: NSFH National Survey of Families and Households Wave 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 transfers Most 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. 19

20. Proximity as Active Research Topic Conference at University of Michigan: “Proximity, Coresidence and Intergenerational Transfers” May 2009 20

21. Proximity and Coresidence - 1 If 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 coresidence Theoretical: discontinuity in costs discontinuity in privacy Empirical: Data do not support treating coresidence as limiting case of close proximity. 21

22. Proximity and Coresidence - 2 Implications for empirical work: Use Multinomial logit/probit Do not use Tobit, ordered logit/probit • They assume one set of regressors • They may give misleading results 22

23. 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 away Time transfers: close proximity associated with more time transfers (in both directions). 23

24. 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. 24

25. Some Facts about Education and Proximity Strong Education Gradient 25

26. More Facts about Education and Proximity Strong Education Gradient 26

27. 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. 27

28. 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. 28

29. 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. 29

30. 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. 30

31. ARE FAMILIES PARETO EFFICIENT? 31

32. What Can We Learn from Family Migration?

33. 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 33 33

34. What We Want to Explain Migration and Location Proximity and Coresidence Who lives with whom is endogenous Who lives near whom is endogenous 34

35. 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 parent Pezzin, Pollak, and Schone (2007 CESifo Studies) Three-person, two-stage game: children decide whether to invite coresidence; parent decides which invitation to accept 35 35

36. Modeling Family Migration Players Feasible Set Preferences The Game 36 36

37. 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?" 37 37

38. Feasible Set • Coresidence • Proximity • Residential location vs • Cities as locations 38 38

39. 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 family interdependent preferences • Proximity as a "family public good" 39 39

40. 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 40 40

41. Norms About caregiving responsibilities About coresidence and proximity 41 41

42. 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) 42 42

43. 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?