András Gábos Ph.D.

András Gábos (TÁRKI Social Research Institute, Budapest)

Welfare states provide public transfers for families that reduce the “private costs” of children.[1] What are the costs associated with raising a child and why a society should consider redistributing financial resources to children and their families?

Costs associated with children can be summarised as follows:

1. Direct costs that occur due to the presence of children and that are mainly related to consumption (for food, clothing, services, etc.).

2. Indirect costs that include

a. non-paid household work which is associated with the presence of children in the family,

b. forgone earnings (opportunity cost) due to mothers’ withdrawal from the labour market following birth,

c.  reduced levels of life-cycle earnings, being further associated with losses in pension rights in a long-run.

These costs may vary by different household characteristics, such as age of child, number of children, household composition, socio-economic status of parents, etc.

Two main reasons might be distinguished why a society should redistribute resources towards families. Governments could promote

1. horizontal equity by redistributing between those without and with children,

2. vertical equity by redistribution between those with high and low incomes.

Further, there are specific policy objectives related to the redistribution aiming horizontal equity. Governments could promote

1. public investment in human capital formation of future generations, acknowledging that better-educated and more healthy children benefit the society as a whole,

2. higher levels of fertility by providing material incentives for parental  decisions,

3. well-being and well-becoming of children,

4. labour market participation of women, gender equity and reduced work-family conflicts.

Distinguishing between these reasons is mainly analytical. In reality, there are strong interdependencies between these objectives and often trade-offs between the underlying processes. Also, societies being complex, universal policies might have heterogeneous effects in all these areas. Every policy design should take into account that following only one objective could produce negative outcomes in terms of the others. For example, incerasing income support to reduce poverty might negatively affect labour market participation, while incentives for increased labour market participation might reduce fertility, unless other policies (e.g. child care services) are introduced or improved.

Hereinafter, we briefly describe the level and structure of child-related public expenditure (Section I), the role of child-related benefits within the income structure of families (Section II), and we also deal with the role of transfers in tackling child poverty (Section III).[2]

Public transfers that are granted to families on the right of raising children includes[3]:

• compensation for direct and indirect costs of children in forms of benefits and tax relief,

• services: education, child care and health care,

• organization/regulation of specific working and employment conditions for parents.

In this Section we provide an overall picture on the role of families in government policies, by focusing on transfers that are classified in general as child-related benefits and which include compensation for direct and indirect costs of children and child-care services, but not expenses on education and health.

Table 1 in the Annex summarises the main figures that characterise the magnitude and the structure of governmental expenditure on child-related benefits in the European countries. European governments spend about 2% of their GDP in average on child-related benefits, which counts for about 8% of all social protection transfers (including pensions). However, this figures hide considerable cross-country variations.

Nordic countries, as well as some Continental European countries spend around 3% of their GDP (Iceland, Sweden, Austria, Germany, Hungary), or even more (3.7% - Denmark, 3.4% - Luxembourg) on child-related benefits, while the Southern countries (Italy, Malta, Spain, Portugal) and some New Member States (Bulgaria, Lithuania, Latvia, Romania, Slovakia) only slightly above 1%.

Important cross-country differences might be also observed when comparing the role of cash and in-kind benefits within child-related transfers. The share of ink-kind benefits, including expenditure on institutional child-care services, is highest (around or even more than half of all expenses) in the Nordic. The same pattern could be observed in the Southern countries, but at much lower levels of total expenditure. In-kind benefits play only a marginal role in some of the New Member states (Bulgaria, Cyprus, Czech Republic, Estonia, Latvia, Malta, Romania, Slovakia) and in Ireland.

As emphasised earlier, governments could promote either horizontal or vertical equity when put in place or maintain family policies. In practice a mixed strategy is often followed, governmental preferences might be detected (among other tools) by comparing the role of universal and means-tested benefits within the cash expenditure. Means-tested benefits are related to vertical equity, ensuring by definition that resources are going to those with low income.[4]

In general, non means-tested benefits count for a considerably higher share of all cash transfers in most of the European countries (1.1% against 0.3% for EU-27 average). The same pattern could be observed in most countries, but at the same time there is a considerable cross-country variation. For example, EUROSTAT report that all child-related benefits in Malta are mean-tested; while in a relatively large group of countries (Belgium, Cyprus, Denmark, Estonia, Finland, Latvia, Lithuania, Luxembourg, the Netherlands, Sweden, Slovakia) no cash benefits are classified as means-tested at all. In a few countries means-tested benefits plays an important role (Ireland – 0.9% of GDP, Slovenia – 0.8%, France, Iceland, Poland – 0.6%) and in some of them their role is substantial compared to non means-tested benefits as well (e.g. Poland, Portugal, Slovenia). However, relatively high levels of means-tested benefits are often associated with low levels of total spendings.

Families’ budget consists of three main sources: employment incomes (including self-employment), capital incomes (including inter-hosuehold transfers) and public transfers. Therefore, the extent at which a society redistribute income between social groups via the tax-benefit system is only one (albeit important) determinant of the relative share of social transfers within families’ disposable income. Among others, labour market attachment of family members and the general level of earnings in a country also play a role in this respect. One might be aware of all these factors when drawing conclusions on the role of social transfers in families’ life.

The average share of child-related benefits[5] within the disposable income of households with children shows great variation across the European Union (see Figure 1): the lowest figure is observed in Greece and Italy (1%), while the highest in Hungary (23%), but for most of the countries this figure varies between 5-15%, with an EU-25 (excluding Malta) average of 8%.

In general, the level of family transfers appears to be the least generous in the Southern countries and in some New Members States (Cyprus, Lithuania, Poland).  Higher than EU-average figures characterise Continental European countries, the UK and Ireland, as well as a few New Member States (Estonia and the Czech Republic next to Hungary) The New Member States show considerable differences in this respect, with the income share of transfers ranging from 3% in Poland to 12% in Hungary. Some countries with high levels of macro expenditure (Scandinavian countries or France) score around the EU-25 average due to high levels of employment among parents and therefore high shares of market incomes at household level.

Results presented in Figure 1 inform us also about the differences between policy designs in the Member States of the European Union. In countries where the share of child-related benefits is low, other social transfers (excluding pensions) plays an important role (e.g. in Greece, Spain, Italy, the Netherlands), while only a marginal role in others (e.g. Estonia, Luxembourg, Hungary, Latvia). One might also observe that the same levels of child-related benefits within the household income might be associated with very different shares of other social transfers (excluding pensions) and vice versa. For example, in Estonia and the UK the same share of child-related benefits is observed within the disposable income of families (11%), but while in Estonia it is supplemented by other social transfers by only 3%, in the UK is more than doubled, resulting in a total of 25% share.

Figure 1 The role of social transfers within the income structure of families in the European Union, 2006 (as % of total disposable household income)

Note. Units of analysis are households. Malta is not included in the analysis due to the lack of data.

Figure 2 The role of social transfers within the income structure of large families in the European Union, 2006 (as % of total disposable household income)

Note. Units of analysis are households. Malta is not included in the analysis due to the lack of data. Countries are ranked by the difference between the figures of large families and of all households with children.

As one might expect, the share of child-related benefits is higher compared to the average figure among households with dependent children. This is the case in almost all European countries, excepting Spain, Denmark and Ireland (see Figure 2). Large families are usually specifically targeted by governments, but a larger income share of child-related benefits could emerge even without such preferences, simply as a consequence of the interaction between family structure and labour market participation of its adult members. Child-related benefits received by large families are higher than average by the greatest extent in the Continental European countries (Luxembourg, Austria, Belgium, France) and some New Member States (Hungary, Latvia, Lithuania, the Czech Republic).

About every fifth child in the European Union is at risk of poverty, which means that they live in households with low income relative to the accepted living standard in their countries.[6] Lowest figures are observed in the Nordic countries and Slovenia (10-11%), while the highests in the Southern counries (Greece, Spain, Italy) and Poland (23-25%, see Figure 5). Continental European countries (with the exception of Luxembourg) also perform well, among them the extent of poverty being lower than EU-25 average. Also, in some New Member States (Cyprus, the Czech Republic) children are at lower than or similar to (Estonia, Hungary) EU-25 average risk of poverty. On the other hand, then Anglo-Saxon countries (the UK, Ireland) and two of the Baltic States (Lituania and Latvia) score higher than average in this respect.

Household composition and human resources possessed by parents (e.g. labour market attachment and education) are the main factors that determine the level of child poverty in a counry. In most of the Member States, children of young parents, those living with single parents, in large families and jobless hosuehold are most likely to be at risk of poverty. On the other hand, in many countries children living in ‘2 adults with 2 dependent children’ families and in in-work households count for the highest share of poor children (EU Task-Force 2008).

In statistical terms, living in a large family positively affects children’s’ odds to be at risk of poverty, which means that in all EU Member States large families experience higher than average levels of income poverty. The poverty rate among children in ‘2 adults with 3 or more dependent children’ households is 24% in the EU-25 (excluding Malta). Once again, huge cross-country variations can be observed behind these aggregate figures: country level figures vary between 13% (Germany, Finland) and 47% (Latvia and Portugal). Figure 4 clearly depicts those countries where families with 3+ children in worse position relative to average, albeit at different levels of overall children poverty rates. The gap between the poverty rates of children in large families and of all children is the largest in Latvia, Lithuania and Portugal (countries with relatively high overall rates), followed by countries like Italy, Spain and Poland (with highest overall rates) and further by the other Visegrad countries (Hungary, the Czech Republic and Slovakia, with medium level overall rates).

A number of studies rely on counterfactual assumptions to assess policy effects.[7] The most common method is to calculate the difference between two poverty rates, one based on the total disposable income of households and the other on income without transfers. Despite the serious limitations of this method[8], we are relying hereinafter on that to assess the poverty reduction impact of child-related benefits among children.

If child-related benefits did not exist, the poverty rate among children would be 7 percentage points (pp) higher in the EU as a whole (see Figure 4). The overall poverty reduction impact of transfers varies greatly across countries, ranging from 0 in Spain to 18 pp in Hungary. Child-related benefits have the strongest impact on child poverty in the Nordic (except Denmark) and some Continental countries (Austria, Luxembourg, France, Germany), as well as in Hungary and the Czech Republic from the New Member States. These transfers have a very limited impact on child poverty in the Southern countries (Greece, Spain, Italy, Portugal) as well as in some New Member States (Lithuania, Cyprus, Latvia, Poland) and, somewhat surprisingly, in Denmark.

In almost all European countries (with the exception of Spain and Portugal), the poverty reduction impact of child-related benefits is above average for children in large families. In the EU as a whole, poverty rates of these children would be 14 pp higher if child-related benefits were withdrawn. The largest effects compared to the average impact have been estimated for Hungary, Austria (13 pp difference between the figure for large families and the average impact for children), Germany (10 pp), and France and Luxembourg (9-9 pp), while the lowest for Greece, Spain, Denmark and Italy.

Björklund, A. 2007. Does a family-friendly policy raise fertility levels? Swedish Institute for European Policy Studies, Report No. 3., Stockholm: SIEPS.

Del Boca, D., R. Aaberge, U. Colombino, J. Ermisch, M. Francesconi, S. Pasqua and S. Strom (2003): Labour market participation of women and fertility: the effect of social policies. Paper presented at the FRDB CHILD conference. Alghero, June 2003.

EU Task-Force on Child Poverty and Child Well-Being (2008): Child poverty and child well-being in the EU. Current status and way forward. Brussels: European Commission, Directorate-General for Employment, Social Affairs and Equal Opportunities, Social Protection Committee.

Figari, F., A. Paulus and H. Sutherland (2007): Supporting families with children through taxes and benefits. Research note produced for the European Commission by the Social Inclusion network of the European Observatory on the Social Situation and Demography.

Gábos, A (2007): Policies for reducing child poverty: a review of the literature. In: Network on Social Inclusion and Income Distribution: European Observatory on the Social Situation (SSO). Research paper on child poverty and ethnic minorities.

Gauthier, A. H. and J. Hatzius. 1997. Child-related benefits and fertility: an econometric analysis, Population Studies 51(3): 295–306.

Jaumotte, Florence, 2003, Female labour force participation: Past trends and main determinants in OECD countries. Economics Department Working Papers. No. 376. Paris: OECD.

Letablier, M-Th., A. Luci, A. Math and O. Thévenon (2009): The costs of raising children and the effectiveness of policies to support parenthood in European countries: a literature review for the European Commission, Directorate General for Employment, Social Affairs and Equal Opportunities.

Paulus, A., F. Figari and H. Sutherland (2009): The effect of taxes and benefits on income distribution. In: T. Ward et al (eds.): European inequalities. Social inclusion and income distribution in the European Union. Budapest: TÁRKI.

Sleebos, J. E. 2003. Low fertility rates in OECD countries: facts and policy responses, OECD Social, Employment and Migration Working Papers 15.

Notes:

† This paper was prepared for the World Congress of Families V, Amsterdam, 10-12 August 2009.

[1] For a detailed survey on costs of children Letablier et al. (2009) prepared for the European Commission.

[2] For fertility effects of child-related public transfers see Gauthier and Hatzius (1997), Del Boca et al  (2003), Sleebos (2003), and Björklund (2007). For the effects of benefits on labour market outcomes see Del Boca et al (2003) and Jaumotte (2003).  

[3] Following the EU Commission Communication of May 2007 cited by Letablier et al. (2009).

[4] An income test is applied as an eligibility criteria.

[5] Child-related benefits in this context consists of: income maintenance benefit in the event of childbirth, birth grant, parental leave benefit, family or child allowance and other cash benefits paid independently from family allowances. Similarly, social transfers (excluding pensions) cover unemployment benefits, sickness benefits, disability benefits, education-related allowances, housing allowances and other benefits in the area of social exclusion and also include child-related benefits. For an analysis including not only the benefit, but also the tax side of the system see Figari, Paulus and Sutherland (2007, 2009) based on EUROMOD.

[6] According to EUROSTAT the poverty threshold is set at the 60% of the national equivalised median income. EU-25 (excluding Malta) average at-risk-of-poverty rate has been 19.1% according to the EU-SILC 2007 results.

[7] For a review of the literature on the effectiveness of income supports in reducing child poverty see Gábos (2007).

[8] First and most importantly, this method cannot control for behavioural responses. Withdrawing any kind of social transfer or changing any parameter of the tax system would, in practice, lead to alterations in the behaviour of household members. Secondly, the data sources used for such analyses do not always enable different types of transfer to be distinguished. Thirdly, household income surveys are not able to capture the full complexity of national tax and benefit systems.

Figure 3 At-risk-of-poverty rates in the European Union – estimates for all children (aged 0-17) and for those in large families, 2006 (as % of all children)

Note. Units of analysis are children. Malta is not included in the analysis due to the lack of data. Countries are ranked poverty rate for all children.

Figure 4 Poverty reduction impacts of child-related benefits among children in the European Union, 2006 (the difference between at-risk-of-poverty rate before and after transfers expressed in percentage points)

Note. Malta is not included in the analysis due to the lack of data. Countries are ranked by overall poverty reduction impact of transfers among children.

Annex:

Table 1. Family/child-related social benefits in Europe, 2006 (as % of GDP)

Source: EUROSTAT.

*Figures are shown also for Switzerland, Iceland and Norway, but these countries do not enter the EU-27 average.