Theories
of the Demographic Transition
Surveys:
Theories:
·
The Gender Wage Gap
·
The Rise in the Return to
Human Capital
·
The Rise in Life Expectancy
·
Evolution of Preferences
Overview:
The
demographic transition that swept the world in the course of the last century
has been identified as one of the prime forces in the movement from an epoch of
stagnation to a state of sustained economic growth. The unprecedented increase
in population growth during the early stages of industrialization was
ultimately reversed. The rise in the demand for human capital in the second
phase of industrialization brought about a significant reduction in fertility
rates and population growth in various regions of the world, enabling economies
to convert a larger share of the fruits of factor accumulation and
technological progress into growth of income per capita.
The
evolution of population growth in the world economy has been non-monotonic. The
growth of world population was sluggish during the Malthusian epoch, creeping
at an average annual rate of about 0.1% over the years 0-1820 (Maddison, 2001). The Western European take-off along with
that of the Western Offshoots (i.e., United States, Canada, Australia and New
Zealand) brought about a sharp increase in population growth in these regions.
The world annual average rate of population growth increased gradually reaching
0.8% in the years 1870-1913. The take-off of less developed regions and the
significant increase in their income per capita generated a further increase in
the world rate of population growth, despite the decline in population growth
in Western Europe and the Western Offshoots, reaching a high level of 1.92% per
year in the period 1950-1973. Ultimately, the onset of the demographic
transition in less developed economies in the second half of the 20th century,
reduced population growth to an average rate of 1.63% per year in the period
1973-1998.
The
timing of the demographic transition differed significantly across regions. The
reduction in population growth occurred in Western Europe, the Western
Offshoots, and Eastern Europe towards the end of the 19th century and in the
beginning of the 20th century, whereas Latin America and Asia experienced a decline
in the rate of population growth only in the last decades of the 20th century.
The
demographic transition in Western Europe occurred towards the turn of the 19th
century. A sharp reduction in fertility took place simultaneously in several
countries in the 1870s, and resulted in a more than a 30% decline in fertility
rates within a 50 year period. Over the period 1875-1920, Crude Birth Rates
declined by 44% in England, 37% in Germany, and 32% in Sweden and Finland. A
decline in mortality rates preceded the decline in fertility rates in most
Western Europe. It began in England nearly 140 years prior to the decline in
fertility and in Sweden and Finland approximately 100 years prior to the
decline in fertility. The decline in fertility outpaced the decline in
mortality rates and brought about a decline in the number of children who
survived to their reproduction age.
A
similar pattern characterizes mortality and fertility decline in less developed
regions. Total Fertility Rate over the period 1960-1999 plummeted from 6 to 2.7
in Latin America, from 6.14 to 3.14 in Asia, and declined moderately from 6.55
to 5.0 in Africa, along with a sharp decline in infant mortality rates.
A. The Decline in
Infant and Child Mortality
The
decline in infant and child mortality rates that preceded the decline in
fertility rates in many developed countries, with the notable exceptions of
France and the US, has been a dominating explanation for the onset of the
decline in fertility. Nevertheless, this viewpoint appears inconsistent with
historical evidence. While it is highly plausible that mortality rates were
among the factors that affected the level of fertility along human history,
historical evidence does not lend credence to the argument that the decline in
mortality rates accounts for the reversal of the positive historical trend
between income and fertility.
The
mortality decline in Western Europe started nearly a century prior to the
decline in fertility and was associated initially with increasing fertility
rates in some countries and non-decreasing fertility rates in others. In
particular, the decline in mortality started in England in the 1730s and was
accompanied by a steady increase in fertility rates until 1820. The significant
rise in income per capita in the Post-Malthusian Regime apparently increased
the desirable number of surviving offspring and thus, despite the decline in
mortality rates, fertility increased significantly so as to reach this higher
desirable level. The decline in fertility during the demographic transition
occurred in a period in which this pattern of increased income per capita (and
its potential effect on fertility) was intensified, while the pattern of
declining mortality (and its adverse effect on fertility) maintained the trend
that existed in the 140 years that preceded the demographic transition. The
reversal in the fertility patterns in England as well as other Western European
countries in the 1870s suggests therefore that the demographic transition was
prompted by a different universal force than the decline in infant and child
mortality.
Furthermore,
most relevant from an economic point of view is the cause of the reduction in
net fertility (i.e. the number of children reaching adulthood). The decline in
the number of surviving offspring that was observed during the demographic
transition is unlikely to follow from mortality decline. Mortality decline
would have led to a reduction in the number of surviving offspring if the
following implausible conditions would be met: (i)
There exists a precautionary demand for children,
i.e., individuals are significantly risk averse with respect to the number of
surviving offspring. (ii) Risk aversion with respect to consumption is smaller
than risk aversion with respect to fertility. (Evolutionary theory would
suggest the opposite). (iii) Sequential fertility (i.e., replacement of
non-surviving children) is modest.
B. The Rise in the
Level of Income Per Capita
The
rise in income per capita prior to the demographic transition has led some
researchers to argue that the demographic transition was triggered by the
asymmetric effects of the rise in income per capita on households income and on
the opportunity cost of raising children. Becker (1981) argues that the rise in
income induced a fertility decline because the positive income effect on
fertility was dominated by the negative substitution effect that was brought
about by the rising opportunity cost of children. Similarly, he argues that the
income elasticity with respect to child quality is greater than that with
respect to child quantity, and hence a rise in income led to a decline in
fertility along with a rise in the investment in each child.
This
theory suggests that the timing of the demographic transition across countries
in similar stages of development would reflect differences in income per
capita. However, remarkably, the decline in fertility occurred in the same
decade across Western European countries that differed significantly in their
income per capita. In 1870, on the eve of the demographic transition, England
was the richest country in the world, with a GDP per capita of $3191 (measured
in 1990 international dollars), (Maddison,
2001)). In contrast, Germany that
experienced the decline in fertility in the same years as England, had in 1870
a GDP per capita of only $1821 (i.e., 57% of that of England). Sweden's GDP per
capita of $1664 in 1870 was 48% of that of England, and Finland's GDP per
capita of $1140 in 1870 was only 36% of that of England, but their demographic
transitions occurred in the same decade as well. The simultaneity of the
demographic transition across Western European countries that differed
significantly in their income per capita suggests that the high level of income
reached by Western Europeans countries in the Post-Malthusian regime had a very
limited role in the demographic transition.
C. The Rise in the
Demand for Human Capital
The
gradual rise in the demand for human capital in the second phase of the
Industrial Revolution (and in the process of industrialization of less
developed economies) and its close association with the timing of the
demographic transitions, has led researchers to argue that the increasing role
of human capital in the production process induced households to increase
investment in the human capital of their offspring, ultimately leading to the
onset of the demographic transition.
Galor
and Weil (1999, 2000), argue that the acceleration in the rate of technological
progress gradually increased the demand for human capital in the second phase
of the Industrial Revolution, inducing parents to invest in the human capital
of their offspring. The increase in the rate of technological progress and the
associated increase in the demand for human capital brought about two effects
on population growth. On the one hand, improved technology eased households'
budget constraints and provided more resources for the quality as well as the
quantity of children. On the other hand, it induced a reallocation of these
increased resources toward child quality. In the early stages of the transition
from the Malthusian regime, the effect of technological progress on parental
income dominated, and the population growth rate as well as the average quality
increased. Ultimately, further increases in the rate of technological progress
that were stimulated by human capital accumulation induced a reduction in
fertility rates, generating a demographic transition in which the rate of
population growth declined along with an increase in the average level of
education. Thus, consistent with historical evidence, the theory suggests that
prior to the demographic transition, population growth increased along with
investment in human capital, whereas the demographic transition brought about a
decline in population growth along with a further increase in human capital
formation.
Galor
and Weil's theory suggests that a universal acceleration in technological
progress raised the demand for human capital in the second phase of the
Industrial Revolution and generated a simultaneous increase in educational
attainment and demographic transition across Western European countries that
differed significantly in their levels of income per capita. Consistent with
the theory, the growth rates (as opposed to the levels) of income per capita among
these Western European countries were rather similar during their demographic
transition, ranging from 1.9% per year over the period 1870-1913 in the UK,
2.12% in Norway, 2.17% in Sweden, to 2.87% in Germany. Moreover, the
demographic transition in England was associated with a significant increase in
the investment in child quality as reflected by years of schooling. Moreover,
international trade and its differential effects on the demand for human
capital had an asymmetric effect of the timing of the demographic transition
(Galor and Mountford, 2006).
Evidence
about the evolution of the return to human capital over this period is scarce
and controversial. It does not indicate that the skill premium increased markedly
in Europe over the course of the 19th century. The lack of clear evidence about
the increase in the return to human capital over this period is not an
indication for the absence of a significant increase in the demand for human
capital. Technological progress in the second phase of the Industrial
Revolution brought about an increase in the demand for human capital, and
indeed, in the absence of a supply response, one would have expected an
increase in the return to human capital. However, the significant increase in
schooling in the 19th century, and in particular the introduction of public
education that lowered the cost of education, generated a significant increase
in the supply of educated workers. Some of this supply response was a direct
reaction of the increase in the demand for human capital, and thus may only
operate to partially offset the increase in the return to human capital.
However, the removal of the adverse effect of credit constraints on the
acquisition of human capital (e.g., Galor and Zeira, 1993 and Galor and Moav, 2006), as reflected by the introduction of public
education, generated an additional force that increased the supply of educated
labor and operated towards a reduction in the return to human capital.
C1. The Decline in
Child Labor
The
effect of the rise in the demand for human capital on the reduction in the
desirable number of surviving offspring was magnified via its adverse effect on
child labor. It gradually increased the wage differential between parental
labor and child labor inducing parents to reduce the number of their children
and to further invest in their quality (Hazan and Berdugo, 2002). Moreover, the rise in the importance of
human capital in the production process induced industrialists to support
education reforms (Galor and Moav,
2006) and thus laws that abolish child labor (Doepke,
2004; Doepke and Zilibotti,
2005), reducing child labor and thus fertility.
C2. The Rise in Life
Expectancy
The
impact of the increase in the demand for human capital on the decline in the
desirable number of surviving offspring has been reinforced by improvements in
health and life expectancy. Despite the gradual rise in life expectancy prior
to the demographic transition, investment in human capital was rather
insignificant as long as a technological demand for human capital had not
emerged. The technologically-based rise in the demand for human capital during
the second phase of the Industrial Revolution and the rise in the expected
length of productive life have increased the potential rate of return to
investments in children's human capital, reinforcing the inducement for
investment in education and the associated reduction in fertility rates. (Galor and Weil, 1999; Moav, 2005; Soares, 2005).
C3. Evolution of
Preference for Offspring's Quality
The
impact of the increase in the demand for human capital on the decline in the
desirable number of surviving offspring may have been magnified by cultural or genetic
evolution in the attitude of individuals toward child quality. Galor and Moav (2002) propose
that during the epoch of Malthusian stagnation that characterized most of human
existence, individuals with a higher valuation for offspring quality (in the
context of the quantity-quality survival strategies) gained an evolutionary
advantage and their representation in the population gradually increased. The
agricultural revolution facilitated the division of labor and fostered trade
relationships across individuals and communities, enhancing the complexity of
human interaction and raising the return to human capital. Thus, the trait of
higher valuation for quality gained the evolutionary advantage. This
evolutionary process was reinforced by its interaction with economic forces. As
the fraction of individuals with high valuation for quality increased,
technological progress intensified, raising the rate of return to human
capital. The increase in the rate of return to human capital along with the
increase in the bias towards quality in the population reinforced the
substitution towards child quality, setting the stage for a more rapid decline
in fertility along with a significant increase in investment in human capital
and a transition to sustained economic growth.
D. The Decline in the
Gender Gap.
The
rise in the demand for human capital and its impact on the decline in the
gender gap in the last two centuries could have reinforced a demographic
transition and human capital formation. Galor and Weil (1996, 1999) argue that
technological progress and capital accumulation complemented mental-intensive
tasks and substituted for physical-intensive tasks in industrial production. In
light of the comparative physiological advantage of men in physical-intensive
tasks and women in mental-intensive tasks, the demand for women's labor input
gradually increased in the industrial sector, decreasing monotonically the wage
deferential between men and women. In early stages of industrialization, wages
of men and women increased, but the rise in female's relative wages was
insufficient to induce a significant increase in women's labor force
participation. Fertility, therefore, increased due to the income effect that
was generated by the rise in men's absolute wages. Ultimately, however, the
rise in women's relative wages was sufficient to induce a significant increase
in labor force participation. It increased the cost of child rearing
proportionally more than households’ income, generating a decline in
fertility and a shift from stagnation to growth.
E. The Old-Age
Security Hypothesis
The old-age security hypothesis
(Caldwell, 1976) has been proposed as an additional mechanism for the onset of
the demographic transition. It suggests that in the absence of capital markets
that permit intertemporal lending and borrowing,
children are assets that permit parents to smooth consumption over their
lifetime. The process of development and the establishment of capital markets
reduce this motivation for rearing children, contributing to the demographic
transition. The significance of the decline in the role of children as assets
in the onset of the demographic transition is questionable. The rise in
fertility rates prior to the demographic transition, in a period of
improvements in the credit markets, raises doubts about the significance of the
mechanism. Furthermore, cross-section evidence from the pre-demographic
transition era indicates that wealthier individuals, that presumably had a
better access to credit markets, had a larger number of surviving offspring.
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