By David Bunzl (BSc Economics With a Placement Year)
[This piece is one of the top-scoring submissions from the “Government, Welfare and Policy” module for third-year undergraduates. It exemplifies the best of student work, showcasing their ability to engage and inform with standout blog-style writing. Enjoy one of this year’s top-marked essays, a testament to the students’ passion and creativity!]
Introduction
Since the 1960s, high-income countries have experienced declining birth rates. Most are below the 2.1 total fertility rate (TFR), which is the average number of children a woman has in her lifetime, needed to offset the mortality rate and maintain population levels. The average TFR across OECD countries is 1.5 as of 2022, less than half the average in the 1960s (OECD, 2024b). Figure 1 illustrates this point and outlines projections for fertility rates up until the year 2100. We can see that not even the most optimistic of the 60 sample trajectories have TFR reaching 2.1. Meanwhile, the median trajectory sees TFR remaining relatively flat at around 1.6. In this essay, we will examine the consequences of declining fertility rates and compare the effectiveness of government policies aimed at raising the fertility rate.
Figure 1: High Income Historical and Forecast Fertility Rates (Source: United Nations, 2024)
Why Falling Birth Rates Are A Problem
To examine the challenges facing falling birth rates, we will focus on South Korea (SK), a country with a TFR of 0.78, the lowest in the world. Whilst low fertility rates affect most high-income countries, South Korea’s extreme case means consequences are more imminent and, therefore, easier to demonstrate. If TFR remains at 0.78, 100 South Koreans will have 39 kids (). In four generations, there will be just five kids for every 100 Koreans today. Figure 2 shows that number of children born each year is expected to continue falling.
Whilst a declining population may not seem inherently negative, it is demography that is particularly concerning. Using the UN’s low forecast for fertility rates in SK (which in the past decade has over-estimated fertility rates), over 65s, in 2060, will make 46% of the population. This means that the old-age dependency ratio, the ratio of over 65 compared to the working population, will be less than 1 (less than one working-aged person for every retired age person).
Current welfare systems are not sustainable under these circumstances. For example, pension schemes collect funds from working individuals and their employers, which are withdrawn at retirement. The combination of more withdrawals and fewer contributions diminishes the size of the fund. SK’s pension system is valued at around $730 billion. If these trends continue, the fund will be depleted by 2060 (Choi & Kim, 2016). Healthcare will also experience strain as an ageing population significantly increases healthcare costs (Chen et al., 2023).
Poverty will increase as people over 65 are more likely to fall into poverty than any other age group (OECD, 2023). As of 2021, more than 39% of individuals over 65 in SK live below the poverty line (OECD, 2025). Since the population of those over 65 is expected to more than double by 2060, the proportion of the population living below the poverty line will also rise.
Government Policies
Given the severity and prevalence of the fertility crisis, most high-income countries have implemented various family policies to address the issue. These policies generally fall into three categories: cash incentives and tax breaks, childcare services, and parental leave.
As Figure 3 shows, when it comes to family support, cash incentives are widely popular among many governments, with the average exceeding 1% of GDP. Examples include the Child Benefit programme in the UK and the baby bonus scheme in Korea. In this type of policy, governments directly pay parents for having children, either as a lump sum (baby bonus) or as a form of income (Child Benefit). To understand the economic rationale for why this would boost fertility rates, we need to turn to the theory outlined by Gary Becker. Gary Becker argued that “children can be considered a consumption good and an increase in income or a decline in the cost of children would affect both the quantity and quality (expenses) of children” (1960). The government’s direct payments to parents for having children lead to higher income for parents; this, in turn, increases the demand for children and pushes up the TFR. Tax breaks work in much the same way. They increase the real income of parents by lowering the tax burden, thus increasing the demand for children.
Now, looking at services, these are primarily childcare policies or Early Childhood Education and Care (ECEC). We can see from Figure 3 that services, on average, account for 1% of GDP. In theory, increased availability, quality, and affordability of ECEC decrease the need for parents to forego free time or work and, therefore, income when raising a child. This means that not only is the opportunity cost of having a child reduced, as parents lose less free time but also the income of parents increases as they are able to continue working. If we once again consider having children to be a consumption good, this will push up the demand for children and increase the TFR.
Parental leave has two components: length and pay. Most governments set a minimum number of weeks of work that generally differs between mothers (maternal leave) and fathers (paternal leave). This allows them to care for their child around the baby’s birth whilst ensuring the security of their job. This is also often accompanied by some form of pay. For example, in the UK, mothers receive Statutory Maternity Pay (SMP) for up to 39 weeks (GOV.UK, 2024). SMP is given by employers but subsidised by the government. So, in theory, parental leave decreases the cost of having a child by ensuring job security whilst increasing income, pushing up demand for children, and raising the TFR.
How Effective Are The Policies
Figure 3 shows that France spends more than any other OECD country, in comparison to GDP, on family policy. France also maintains one of the most stable high fertility rates in the OECD, with a TFR of 1.79. Korea ranks near the bottom of the list and faces the lowest TFR of 0.78. This suggests a positive link between government spending and fertility rates. However, we cannot determine the effectiveness of each form of expenditure. Therefore, to achieve this, we will examine each individually.
Figure 4 shows the result of regression analysis using data from 2002 to 2019 across various OECD countries. The results show the impact of each independent variable on fertility rates, measured in units of standard deviations. The model controls for fixed differences across countries and over time.
Figure 4 shows that fiscal incentivesincrease fertility rates more cost-effectively than other government spending at a 95% confidence level. Hungary, for example, spends proportionally much more on cash benefits and tax breaks than most other countries (see Figure 3). In 2020, it raised its TFR to 1.5 from 1.25, matching the level from 1995 (OECD, 2024a). However, numerous studies have suggested that the long-term effects of these policies are minimal at best (Skirbekk, 2022).This is because, although fiscal incentives boost fertility rates in the short term, the benefits do not persist over time. Multiple studies conducted in France, Spain, and Switzerland found that once the policy was lifted or access was restricted, the increase in fertility was wiped out (OECD, 2024b). In Spain, for example, following a 3% rise in TFR due to the implementation of the fiscal incentive programme, TFR fell 6% once the programme stopped. Governments should, therefore, refrain from using cash incentives unless they plan on maintaining the programme indefinitely.
Spending on ECEC, as shown in Figure 4, has a significant positive impact at the 99% confidence level. This is mirrored in countries such as Germany and Norway, where increased access showed positive effects (Rindfuss et al., 2007; Rindfuss et al., 2010). However, some countries, such as Korea, substantially increased their funding for ECEC but have seen no real positive outcome (Jeong et al., 2022). However, this was not just on ECEC but on all government interventions and likely highlights other factors, such as changing social norms on gender roles (OECD, 2024b). In general, ECEC programmes are a good form of government intervention. This is because they directly address one of the major drivers of lower TFR, the cost to Mothers. Mothers still do the lion’s share of the work when it comes to child-rearing, so policies that decrease the burden are 3 times more cost-effective (Kindermann & Doepke, 2016).
The effect of paid leave on fertility rates is debated. However, a review of 23 studies by Thomas et al. (2022) found that parental leave significantly impacted fertility rates, increasing, on average, the likelihood of parents having another child by up to 24% when measuring the total effect. This positive effect is supported in Figure 4, which shows that spending on parental leave has a strong impact on fertility rates at the 99% confidence level. The length of maternity leave is also shown to have a small positive effect at the 95% confidence level, but the length of paternal leave has no impact. Paternal leave seems to vary more across countries, which is likely why it doesn’t have an impact. For example, paternal leave had no impact in Spain, Korea, and Norway. It has been suggested that one reason for paternal leave in Spain and Korea is that as fathers become aware of the non-pecuniary cost of having a child, they are less enthusiastic about having another child (OECD, 2024b). In totality, however, paternal leave increases equity or at least begins to change social norms of child-rearing responsibilities, which is a key factor in low fertility (Kindermann & Doepke, 2016). Therefore, governments should consider increasing subsidies for paternal leave and extending both maternal and paternal leave to promote equality if they want to boost fertility rates.
Conclusion
In conclusion, governments are concerned about low fertility rates, as they pose a significant threat to current welfare systems. To boost these rates, they should consider more cost-effective policies that focus on mothers; this includes spending on ECEC and implementing policies that promote equitable distribution of child-rearing responsibilities, such as parental leave.
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