3.1 Introduction
In this section Australian estimates of the cost of children are presented and summarised. The Australian research has largely focussed either on the needs question or the equivalent living standards approach. There is a very large International literature on the costs of children which is not considered in detail in this paper, although Appendix Table A3 provides the equivalence scales of several important international studies, including the estimates of the US Department of Agriculture which provides the guidelines used by many of the US States child support schemes.
Studies of the costs of children have generally presented the costs in one of two ways. As a dollar cost (usually at a particular family or household income) or using equivalence scales. Equivalence scales show how much additional income is needed to maintain living standards as the number of children increases. For example, if the reference family is a childless couple then they have an equivalence scale of 1.00. If the equivalence scale for a couple with one-child is 1.20 then this implies that a couple with one child needs 120% of the income of the childless couple to enjoy the same standard of living. For example if a childless couples needs $100 to achieve a certain standard of living and equivalence scale for couple with one child is 1.2, then a couple with one child would need $120 to maintain the childless couples living standards. This implies expenditure on children of $20 at an income of $120.
In this paper the costs of children are presented as a percent of income. This approach has been used because it allows comparisons between estimates of the costs of children and for the results of different studies to be readily compared and averaged. It also has the advantage of being consistent with the current Child Support Formula and the way in which the majority of child support formulae around the world are presented. It is simple exercise to convert these percentages to dollar figures for any given income level.
While it is conventional to compare estimates of the costs of children using equivalence scales caution does need to be exercised in interpreting the results. For example, conversion of budget standards estimates of the costs of children to achieve a certain standard of living to an equivalence scale requires the conversion of the dollar costs to a percent of income. The level of income which the costs of children are expressed relative to will affect the percentage costs of children.
3.2 Sensitivity of the costs of children to estimation method
Before summarising the results of the Australian studies the sensitivity of the costs of children to the estimation method used is illustrated using the studies of Lancaster and Ray (1998) and van de Ven (2003) who use single Australian data sets to estimate the costs of children using a number of different methods. Lancaster and Ray (1998) illustrates the sensitivity of estimates of the costs of children to the estimation method by applying eight different methods to the pooled 1984 and 1988-89 Household Expenditure Surveys.
19 A summary of Lancaster and Ray’s estimates is shown in Table 1. The main point to be taken from these estimates is that they are highly variable For example, the equivalence scale estimate of the cost of one child varies from 1.08 when estimated using the Barten Almost Ideal Demand System (AIDS) to 1.33 when estimated using the Rothbarth method.
Table 1. Equivalence scale estimates of the costs of children by Lancaster and Ray(1998)
| |
Number of children |
| 1 |
2 |
3 |
| Engel |
|
|
|
Food excluding takeaway food |
1.22 |
1.50 |
1.83 |
All food |
1.21 |
1.45 |
1.75 |
| Rothbarth |
|
|
|
Adult clothing |
1.15 |
1.32 |
1.52 |
Adult education |
1.33 |
1.76 |
2.33 |
| Demand system methods |
|
|
|
Complete demand system - Barten AIDS |
1.08 |
1.16 |
1.24 |
Price Scaled AI |
1.21 |
1.42 |
1.63 |
Price Scaled LES |
1.12 |
1.24 |
1.36 |
Price Scaled GAIDS |
1.12 |
1.23 |
1.35 |
Notes: Estimated using the pooled 1984 and 1988-89 Household Expenditure Surveys.
Source: Lancaster and Ray (1998).
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Van de Ven (2004) similarly uses several different methods of estimating the costs of children using a more recent Household Expenditure Survey and finds a similar degree of variability in the estimated costs of children (Table 2) as do Lancaster and Ray (1998). Furthermore, there is no clear pattern to the estimates. For example, van de Ven finds that the Engel method produces higher cost estimates than does the Rothbarth method. While this is consistent with the findings of international research, Lancaster and Ray (1998) demonstrate that the Rothbarth method can produce higher cost estimates than the Engel method.
Table 2. Equivalence scale estimates of the costs of children by van de Ven (2003)
| Methodology |
Number of children |
| |
1 |
2 |
3 |
4 |
| Engel |
1.24 |
1.50 |
1.78 |
2.06 |
| Rothbarth |
1.06 |
1.18 |
1.32 |
1.47 |
| Demand system – fixed price effects |
1.18 |
1.36 |
1.54 |
1.70 |
| Demand system - demographic dependent price effects |
1.12 |
1.26 |
1.39 |
1.52 |
Notes: The Engel estimate uses all food and non-alcoholic beverages. The Rothbarth estimate uses adult expenditure on food taken outside the home as the adult good. Estimated using the 1993-94 Household Expenditure Survey.
Source: van de Ven (2003).
3.3 The average of Australian estimates of the costs of children
In a detailed survey of the literature on equivalence scales twenty years ago Whiteford (1985: 130) concluded that ‘While there are therefore many good reasons for rejecting nearly all available equivalence scales, the problem remains that equivalence scales are unavoidable in many important areas of social research and social policy, and some sort of choice must therefore be made. … Rather than choosing one discredited approach, I would opt for the average of all the discredited approaches!’
That there is no objective procedure for measuring the costs of children and that taking the average of all approaches is a valid approach to estimating the costs of children for policy purposes still holds despite the large number of studies which have been taken in the two-decades since Whiteford’s original study. In this section the results of the majority of Australian studies since 1985 (when Whiteford conducted his review) are averaged. Thus this section presents the results of a similar exercise for post-1985 Australian studies. This type of analysis is sometimes described as meta-analysis and in this paper is used as a benchmark for individual studies as well as providing one means of obtaining consensus estimates of the costs of children in Australia.
Table 3 presents the average of all post-1985 Australian equivalence scale estimates
20 and the average of the pre-1985 studies (from Whiteford 1985). Also presented in Table 3 is the average of post-1985 studies which use the Iso-prop and Rothbarth methods. The Taskforce also commissioned two new studies of the costs of children by Henman (2005) and Percival and Harding (2005) which use the latest available data. The results of the Henman and Percival and Harding studies are also presented in Table 3 to facilitate comparison with the findings of other Australian studies.
A number of points can be made about the average costs of children presented in Table 3. First, estimates from the post-1985 Australian studies are higher than the pre-1985 Australian studies. This is true for couple families with one, two and three children. Second, the average of studies which used the Iso-prop and Rothbarth methods is higher than the average of all post-1985 studies. Third, for the post-1985 studies there are no economies of scale evident between the first and second child and for the third-child there are diseconomies of scale. There are strong economies of scale for the fourth child. This is consistent with the pre-1985 average which shows very slight economies of scale for the second child and diseconomies of scale for the third child.
21While, on average, there are no economies of scale shown it is probable that the marginal expenditure on children does decrease as the number of children increase because of the budget constraint. That is, families do not have enough income to keep increasing total expenditures on children as the number of children increases. Most of the Australian studies are apparently addressing the equivalent living standards (iso-welfare) question and are therefore asking how much income is needed to maintain living standards rather than what families actually spend.
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Table 3. Equivalence scale estimates of the costs of children in Australia Number of children
| |
Number of children |
| 1 |
2 |
3 |
4 |
| Equivalence scale value |
| Pre-1985 Australian studiesa |
1.16 |
1.30 |
1.48 |
_ |
| Post-1985 Australian studiesb |
1.19 |
1.38 |
1.59 |
1.66 |
| Post-1985 Iso-prop and Rothbarth method studies |
1.22 |
1.45 |
1.72 |
|
| Henman (2005)c |
1.23 |
1.46 |
1.61 |
1.79 |
| Percival and Harding (2005)d |
1.15 |
1.26 |
1.35 |
1.42 |
Notes:
- The pre-1985 Australia average is that calculated and reported in Whiteford (1985). The geometric mean is reported. Whiteford does not present the average of equivalence scales for four children.
- The detailed equivalence scales used to construct the average of the post-1985 estimates of the costs of children are shown are shown in Appendix Table A1. Not all studies provide an estimate of the costs of children for 4 children and therefore the average for 4 children does not include all of the studies. There is relatively little difference between the mean and the geometric mean for the post-1985 studies.
- Equivalence scale is for the “modest but adequate” budget standard averaged across gender and age of children and Australian capital cities. However the base income used for a childless couple family is for Sydney since the figures for childless couples in other cities is not estimated by Henman (2005). The budget standard for the childless couple is calculated for the case where both parents are working full-time. A number of assumptions were required to convert the Henman budget standard estimates to an equivalence scale and hence the estimates are only very broadly indicative of his results.
- Equivalence scale is for an average income and averaged across age of children.
Given the general similarity of the average of the Iso-prop and Rothbarth Studies and the average of all post-1985 studies, the average of the post-1985 studies can be used as the ‘best’ estimate of the costs of children derived from the recent Australian research. The equivalence scale is normalised to 1.00 for a childless couple with children and is 1.19 for a couple with one child, 1.38 for two children, 1.59 for three children and 1.66 for four children. It must be stressed that the average will be affected by the addition or exclusion of particular studies. In addition, for some of the studies, different assumptions about the income level and age and gender of children will result in equivalence scale estimates which differ to those used in this paper.
The most recent estimates are those which have been produced for the Taskforce by Henman (2005) and Percival and Harding (2005). Consistent with the expectation that the budget standard estimates will tend to produce higher estimates of the costs of children than other methods, Henman’s (2005) estimates are higher than the average of all Australian studies. Percival and Harding’s (2005) results suggest that for an average income couple with one child, the equivalence scale estimate is 1.15, two-children is 1.26, three children is 1.35 and four children is 1.42. This estimate for one child is lower than the average for post-1985 studies of 1.19. The Percival and Harding estimate for two, three and four children are also lower than the average of other Australian studies.