Babies are Normal Goods

When income rises, the demand for most goods increases, and when income falls, consumers buy less. Economists call these ‘normal’ goods. There are some goods, however, where purchases change in the opposite direction of income. Classic examples of ‘inferior’ goods are macaroni and cheese, used cars and public transit.

A recent study by the Pew Research Centre and reported in the Globe and Mail looked at the effect of income, GDP, unemployment rates and claims for jobless benefits on fertility rates in women aged 15-44. Using births per 1000 women as their dependent variable, the researchers found a significant positive correlation with income and GDP. After GDP fell during the recession of 2007-2008, fertility rates fell from 2008-2009. The suggestion is that the decline in income made women decide not to conceive and that reduced the number of births 9 months later.

The study was conducted in the U.S. and the results were more pronounced for Hispanics and blacks who suffered greater unemployment than did whites. The researchers also found that the effect was more prevalent in states that were hit hardest by the recession, and occurred later in states that went into recession later.

Evidence from previous recessions tends to indicate the fertility rates recover after the recession is over. What we are witnessing is an intertemporal substitution effect. Women are still having children, but they are postponing pregnancy when incomes fall. Not surprisingly, the effect of income changes decreased with age. There was no appreciable effect on women age 40-44 where the intertemporal choice is constrained by menopause.

The evidence suggests that births rise and fall with income and we must therefore conclude that babies are normal goods.