Summary

In all facets of life, people must make decisions about how to allocate scarce resources. Potential parents must decide how many children to have and how much to invest in the future of each child. This decision is known as the “quantity-quality” trade-off. At the most fundamental level, when individuals invest more in the human capital of each child and have fewer children, they raise the future per capita earnings power of the next generation. Developing countries have high rates of fertility, which place a great burden on governments and aid agencies hoping to alleviate poverty and deprivation. In these settings, policies inducing parents to have fewer children and invest more in the education of each child will have positive effects beyond those captured by short-term costbenefit analysis.

Rich countries face the opposite problem, of falling fertility and rising numbers of older dependents. Countries can make up the shortfall in public revenue by encouraging high skill immigration, which has positive effects also on sending countries by raising the return to human capital accumulation.

For much of human history, differences in per capita income across the globe were negligible because increases in productivity were used to support larger populations. This negative feedback loop between productivity and population, as described by Malthus, began to unravel at the turn of the nineteenth century in parts of Western Europe. Fertility began to lag behind increases in productivity, leading to higher living standards. Eventually, fertility rates began to fall as incomes continued to rise. This process led to a rapid increase in the living standards of Western Europe and its offshoots as well as a corresponding rise in the degree of global inequality. Understanding this demographic transition is essential for devising policies to help spur economic and demographic change in developing countries.

Having fewer children but investing more in their education produces a more educated workforce, drives up living standards, and increases technological progress. Meanwhile, increased technological progress raises the return to human capital investment, inducing parents to substitute toward child quality. This relationship between fertility and economic growth is the basis of Unified Growth Theory. The rising importance of human capital also lowers the return to child labor and increases the earning power of women, reinforcing this pattern. Understanding these links, therefore, provides important insights into the most effective ways to influence fertility and growth through public policies.