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For many years, Family Matters has provided updated estimates of the cost of raising children. In issue No.53, we carried two papers which calculated new sets of estimates based on two different methodological approaches. We now follow these up with this article by researchers from the National Centre for Social and Economic Modelling, who develop a third approach.

These estimates described here come out mid-way between the other two. The calculations take account of family income and family size, and are expressed in terms of percentage differences - which should allow readers to update cost estimates as new family expenditure data are released in future waves.

But unfortunately, as in so many other areas of economics, there is no single 'right' answer to this question. How much children are estimated to cost is in part a function of the method used to estimate those costs.

In the last issue of Family Matters, two different estimates of the costs of children were presented, based on two different methodologies (see attachment). This article presents a third set of estimates, based upon yet another methodology.

Why is it so difficult to work out how much children cost? It seems easy to compare the weekly spending of a couple with one child and a couple without children and assume that the difference between their total spending represents the costs of the child.

But there are at least two problems here. First, what proportion of the spending of the couple with a child on 'indivisible' goods - housing, cars, refrigerators - should actually be attributed to the child? And, second, the total spending of the couple with a child doesn't tell us about the financial sacrifices that the couple are making for their child - and thus about what the child is really costing them.

For example, before they had their first child, a couple might have been spending a significant amount each week on fine wines and restaurant meals. Now that they have a baby, the same couple are likely to have reluctantly abandoned their wine cellar for disposable nappies and baby foods, while leisurely restaurant meals have become a faint memory! So if we simply compare the total spending of this couple before and after they had their baby, we will reach entirely the wrong conclusions about how much the child is actually costing them each week.

How can we measure the costs of children?

Economists have devoted many hours to trying to get around these problems. One ingenious method, a variant of which is used in this study, is to compare the total spending of two couples that are believed have the same standard of living but differ because one couple has a child and the other does not. So how then does one measure 'standard of living'?

Many studies of the costs of children have used the Engel estimator to gauge 'standard of living', as first proposed by Ernst Engel more than one hundred years ago. The central concept is simple: as family income falls, a family devotes a greater proportion of its total weekly spending to food. So Engel suggested that the proportion of a family's total spending that was devoted to food could be considered a reliable proxy for a family's standard of living. Thus, suppose we had a couple without children who were spending $500 a week and devoting 30 per cent of this to food. And then we found an otherwise similar couple who had one child and were also spending 30 per cent of their total weekly expenditure upon food, but whose total weekly spending was $600 a week. Then Engel suggested that this would mean that the cost of the child was $100 a week ($600 minus $500).

This method has an intuitive appeal. In the real world around us it seems clear that rich families spend less of their budget on food than poor families, so that the proportion of total spending devoted to food might appear a reasonable and practical way of working out a family's standard of living.

But the method has been extensively criticised for over-stating the real costs of children, because there are fewer economies of scale in food consumption than in many of the other goods and services that children consume. For example, it is not possible to feed to a second child a hamburger already consumed by a first child! But it is possible for a second child to ride a bicycle that a first child has outgrown.

As a result, subsequent studies have often extended beyond food and used a wider basket of goods and services as a proxy for the standard of living of a family. And that is what we have done here. So our indicator of the standard of living of a family is the proportion of total expenditure devoted to:

• food at home;
  
• fuel and power;
  
• household non-durables for use inside the home (for example. disposable nappies!) ;
  
• postal, telephone and telegram charges; and
  
• personal care products and services (for example, shampoo).

As expected, the direct costs of children increased with the age of the child and with the level of family income. The lowest direct costs of $52 a week were estimated for children aged between zero and four years living in families in the bottom quintile (with average gross incomes of $410 a week). The highest costs of $280 a week were estimated for 15 to 17 year old children living in top quintile families. Wealthier families were found to spend a greater amount on their children, whatever their ages. Generally speaking, families in the top quintile spent more than twice as much on their children as families in the bottom quintile.

Table 1. Estimated average costs of a single child, by age of child and quintile of gross family income, Australia 1993-94

For families, the costs of a child as a proportion of their combined income ranged between a little over 9 per cent (for a child aged 0 to 4 years in a top quintile family with a gross income of $1700) to 31 per cent (for a child aged 15 to 17 years in a bottom quintile family with an income of $410 per week).

Interestingly, as Figure 1 illustrates, there is much less variation in the direct costs of children by quintile for older children which, in turn, means that the proportion of family income devoted to spending on older children falls sharply as family income increases. Top quintile families with a child aged 15 to 17 spent only a little more than twice as much as bottom quintile families on comparable children. As a result, expenditure on older children aged 15 to 17 years fell sharply from 31 per cent of gross family income for bottom quintile families to 17 per cent of income for top quintile families.

In contrast, top quintile families with a young child aged 0-4 were estimated to spend about three times as much on their child as bottom quintile families (Table 1). As a result, expenditure on younger children as a percentage of income showed relatively little variation between the quintiles, ranging from 9 to 13 per cent of gross income.

Table 2. Estimated average costs of children, by number of children and gross family income quintile, Australia, 1993-94

Table 3. Estimated average marginal costs of children, by number of children and gross family income quintile, Australia, 1993-94

How do our results compare with those produced using the other two methods and published in the last issue of Family Matters? Table 4 attempts to compare the results that the three methods would achieve for low and modest income families in 1993-94, with weekly expenditure at the levels shown in the Table. It should be noted that this is only an indicative comparison. For example, the budget standards were originally estimated for February 1997 and we have simply deflated the levels back to 1993-94 dollars using the Consumer Price Index, in order to compare the results with the 1993-94 estimates generated by the other two methods. Also note that our earlier results were presented for families at a given income level. In contrast, the results below are for families at a given expenditure level.

While the ELES methodology indicates that a low income couple with three children require only 33 per cent more income than a couple without children to achieve the same material standard of living, our results suggest that the same three-child couple requires 65 per cent more income than the couple without children. The budget standards approach suggests that a low income couple with three children requires 73 per cent more income than a couple with no children to achieve the same standard of living (Table 5).

As a comparison with Table 5 shows, these implicit social security equivalence scales are more generous than those Valenzuela's ELES method suggests are needed. And they are less generous than those suggested by the budget standards method. But they are reasonably close to the equivalences suggested by our Iso-Prop estimates, although still a little lower.

Concluding comments

In this study we have estimated the direct costs of children in Australian two parent families, with the costs of children being defined as parental expenditures on children up to 17 years of age. The level of expenditure was determined by comparing the expenditures of couple families with and without children at the same 'material standard of living'. The measure of the material standard of living was the proportion of total expenditure spent upon a basket of goods that included food consumed at home and fuel and power. It is important to note that no account was taken of the indirect costs of children (for example, the forgone earnings due to mothers working part time rather than full-time).

We found that younger children cost less than older children, and that high income families spent more on their children each week than low income families.

But when we looked at spending as a proportion of total family income, then parental spending on children declined as family income increased.
Our estimates were lower than those derived using the budget standards methodology in the previous issue of Family Matters. But, especially for two and three child families, they were markedly higher than those derived using the Extended Linear Expenditure System. The ELES estimates suggested that in a modest income family consisting of two parents and three children, only 25 per cent of total family expenditure would be devoted to the children's needs and the remaining 75 per cent would be devoted to the parents. Parents will have to decide for themselves whether that seems a realistic proportion.

This just underlines the important conclusion that there is no 'right' answer about how much children actually cost their parents. In large part, the methodology used to answer this question affects the estimates achieved.

References

Merz, J., Garner, T., Smeeding, T., Faik, J. & Johnson, D. (1993), 'Two scales, one methodology: Expenditure Equivalence Scales for the United States and Germany', All-University Gerontology Center, Syracuse University, Syracuse, New York.

McHugh, M. (1999), 'The costs of children: Budget Standards Estimates and the Child Support Scheme', Discussion Paper No 103, Social Policy Research Centre, University of NSW, Sydney.

Percival, R., Harding, A. & McDonald, P. (1999), 'Estimates of the costs of children in Australian Families 1993-94', Report prepared for the Department of Family and Community Services, National Centre for Social and Economic Modelling, Canberra, May.

Percival, R. & Harding, A. (1999), 'The public and private costs of children in Australia, 1993-94', Discussion Paper, National Centre for Social and Economic Modelling, University of Canberra (forthcoming).

Saunders, P. (1999), 'Budget Standards and the costs of children', Family Matters, no 53, Winter, pp. 62-70.

Valenzuela, M.R. (1999), 'Costs of children in Australian households', Family Matters, no 53, Winter, pp. 71-76.

Whiteford, P. (1985), A Family's Needs: Equivalence Scales, Poverty and Social Security, Research Paper no. 27, Development Division, Department of Social Security, Canberra.

Readers are reminded that the Australian Institute of Family Studies has discontinued publication of its hitherto regular Lovering and Lee Costs of Children Update column in Family Matters.

The first article, by Peter Saunders (1999), of the Social Policy Research Centre, used the budget standards method to estimate the costs of children. A budget standard is calculated by 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.

The second article, by Rebecca Valenzuela (1999), of the Melbourne Institute of Applied Economic and Social Research, used a method 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 - in this case, the 1993-94 Household Expenditure Survey conducted by the Australian Bureau of Statistics. 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 the ELES method tend to be relatively low, especially for third and subsequent 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). Valenzuela also found that the marginal costs of the second and third child were quite low. She also concluded that parents devoted the same proportion of their income to their children, irrespective of whether they were rich or poor.

This study uses a third method, often termed the Iso-Prop method. Like the ELES method, this method also involves using the 1993-94 Household Expenditure Survey and econometrics to estimate how much children cost their parents. But instead of assuming that families with the same estimated level of utility have the same standard of living, this method assumes that families that devote the same proportion of their total expenditure to a specified basket of basic goods and services have the same standard of living.

This method appears to produce estimates that are lower than the budget standards estimates but higher than the ELES estimates. The methodology is described in more detail in this article (and in Percival, Harding and McDonald 1999).

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