The Ministerial Task Force on Child Support has been asked to provide advice on whether changes to the Child Support Scheme (CSS) are warranted. As part of that process, the Task Force commissioned NATSEM to estimate the costs of children in Australia in 2005-06.
It must be appreciated that, as in so many areas of economics, there is not consensus about the best way to estimate the costs of children and any estimates can only be interpreted as providing a rough guide to the costs of children in Australia today. At least three different methods have been used in the past decade to estimate the costs of children in Australia. The basket of goods or budget standards approach involves specifying what is needed (in terms of the goods and services that contribute to material consumption) by particular households living in a particular place at a particular time in order to achieve a specified standard of living. After each item has been identified, it is then costed and summed, to arrive at the total budget required to reach the given standard. This method thus involves experts trying to identify what children need, rather than what parents actually spend on their children. Generally, the budget standards method appears to result in higher estimated costs of children than many other methods (Harding and Percival, 1999, p. 87). The budget standards approach has been used by Saunders (1999) and new estimates have been prepared for the Task Force using this methodology by Dr Paul Henman (Henman, 2005).
A second possible method is called the Extended Linear Expenditure System (ELES) — sometimes also known as the Barten-Gorman method. This method involves estimating a utility function and demand equations from a sample survey that contains details of the expenditures of families. The equations attempt to estimate how much parents actually spend on their children, and families with the same level of utility are assumed to be equally well-off. International research suggests that the estimates of the costs of children produced by this method tend to be relatively low, especially for third and fourth children. For example, some overseas studies using this method have found that four children cost their parents less than three children (Merz et al, 1993). An Australian study using the ELES methodology by Valenzuela also found that the marginal costs of the second and third child were quite low and concluded that parents devoted the same proportion of their income to their children, irrespective of whether they were rich or poor (1999).
This study uses a third possible approach, often termed the expenditure survey or equivalent standard of living approach. This method compares the household expenditure of a couple with children with that of a couple of the same age without children who have an equivalent standard of living. The difference in the expenditure of the two households represents the costs of the children. The precise details of the methodology are explained in more detail in Section 2 below. As McDonald explains, ‘this method indicates how much parents actually spend on their children, even though the amount spent might be considered inadequate or excessive by the objective standards of the basketof-goods method (1999, p 20). As spending on children is necessarily constrained by family income, ‘when we observe that a family has spent a certain amount on their children this may not be determined so much by some objective measure of how much children cost but rather by the amount that the family has available to spend on the children’ (McDonald, 1999, p 20).
As the above discussion makes clear, there is no single ‘right’ answer to the costs of children. Estimating the costs of children is inherently difficult, as many items of family expenditure are often shared among all family members or incurred indirectly by parents. In practice, it is also likely that there are wide variations in the amounts that parents spend on their children, both as family incomes vary and as the sense of what it is proper to spend varies.
The purpose of this study is to estimate the private costs of children in Australian one and two parent families and to compare them to selected public costs. In the study, the costs of children were taken to be money expenditures — that is, the amounts that parents actually spent on their children. Thus, the indirect costs of children — caused, for example, by mothers reducing their hours of paid labour force participation — were not taken into account in any way.
In Section 2 of the paper we outline the methodology used to estimate the direct costs of children. In Section 3 we present estimates of the direct costs of children in families with two co-resident parents and, in Section 4, in families with one parent. In Section 5, the study is summarised and concluded.