Measuring the 'Real' Cost of Children: A Net Wealth Approach

Abstract

Estimates of the cost of raising children in Australia are typically based on the additional expenditure incurred by parents compared to non-parents, and generate estimates in the vicinity of $10,000 per year per child, and much more depending upon assumptions regarding child-care costs. This paper questions the basis upon which children are considered to be a ‘cost’. The fact that people switch expenditure from other goods and services to child-related goods and services does not mean that their utility declines. Based on a utility maximising framework, an alternative and intuitively appealing method of estimating the cost of children is proposed: if children are a ‘cost’ then couples who have children should end up with lower net wealth than comparable couples without children or with fewer children. Data from the Household, Income and labour Dynamics in Australia survey are used to model married couples’ wealth in 2002 and change in wealth between 2002 and 2006 conditional upon the number children living with them. Even though this ‘net wealth’ approach accounts for lower labour force participation and earnings of those with children (notably mothers), which is ignored in the expenditure based methods, the estimates suggest that children ‘cost’ at most $1,300 per annum, and may even lead to an increase in net wealth. The estimates do have significant social policy implications, but apply only to married couples. The methodology is not applicable for setting guidelines for maintenance payments in the case of separated parents.