Birth Quake: The Baby Boom and Its Aftershocks

by Diane J. Macunovich

Overview

Between 1965 and 1985, the Western world and the United States in particular experienced a staggering amount of social and economic change. In Birth Quake, Diane J. Macunovich argues that the common thread underlying all these changes was the post-World War II baby boom—in particular, the passage of the baby boomers into young adulthood.

Macunovich focuses on the pervasive effects of changes in "relative cohort size," the ratio of young to middle-aged adults, as masses of young people tried to achieve the standard of living to which they had become accustomed in their parents' homes despite dramatic reductions in their earning potential relative to that of their parents. Macunovich presents the results of detailed empirical analyses that illustrate how varied and important cohort effects can be on a wide range of economic indicators, social factors, and even on more tumultuous events including the stock market crash of 1929, the "oil shock" of 1973, and the "Asian flu" of the 1990s. Birth Quake demonstrates that no discussion of business or economic trends can afford to ignore the effects of population.

Product Details

ISBN-13:	9780226500928
Publisher:	University of Chicago Press
Publication date:	02/15/2010
Series:	Population and Development Series
Sold by:	Barnes & Noble
Format:	eBook
Pages:	314
File size:	2 MB

About the Author

Diane J. Macunovich is a professor of economics at Barnard College.

Read an Excerpt

Birth Quake: the Baby Boom and Its Aftershocks

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By Diane J. Macunovich

University of Chicago Press

Copyright © 2002 Diane J. Macunovich
All right reserved.
ISBN: 0226500837

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Population Growth and Relative Cohort Size

The Easterlin, or "cohort size," hypothesis posits that, other things constant, the economic and social fortunes of a cohort (those born in a given year) tend to vary inversely with its relative size, approximated by the crude birth rate in the period surrounding the cohort's birth.... The linkage between higher birth rates and adverse economic and social effects arises from what might be termed "crowding mechanisms" operating within three major social institutions--the family, school and labour market.

The New Palgrave: A Dictionary of Economics, s.v. "Easterlin hypothesis"

The idea behind this book is a deceptively simple one: there are economic and demographic "feedback effects" in which the pattern of population growth is affected by economic conditions, and the economy, in turn, is affected by various aspects of population growth and resultant population age structure. The idea is deceptively simple in the sense that, although there seems to be an intuitive acceptance that such interactions occur--after all, what is an economy but a collection of people?--there is still considerable disagreement about their form and extent.

The economic-demographic feedback model has a long history, going back in most people's minds two hundred years to the 1798 publication of An Essay on the Principle of Population by T. R. Malthus. This treatise is often credited with creating the popular perception of economics as "the dismal science" because of its dire predictions regarding the "iron law of wages." Malthus believed there was a direct connection between wages and fertility rates. People tended to have more children when wages--in the form of crop pro-duction--rose: in years with particularly good weather conditions, for example. But he warned of an inverse relationship between labor force size and wage rates. That is, increased fertility rates produced more workers, whose "excess supply" in turn reduced per capita crop production given the relatively fixed availability of land for cultivation. This led to the depressing idea that society could never experience long-term economic growth, because as soon as economic conditions improved people would have more children, which would then make them poorer on a per capita basis.

Malthus's ideas were extremely influential at the time, generating heated debates about society's responsibility to the poor: if the poor were aided economically, would they simply have more children, thus negating any beneficial effects of society's largesse? But over the next century, as Europe experienced unprecedented economic growth despite large population increases, analysts came to feel that Malthus's model was inappropriate in an industrial age, given the production-enhancing effects of capital (e.g., machinery and fertilizer) and the potential for technological change. Most came to accept Adam Smith's notion that population growth enhances economic growth because it enables increased specialization and hence increased productivity.

Malthus's economic-demographic model fell out of favor and was later replaced by "growth" models focused on capital:labor ratios, in which population growth was treated as exogenous--that is, unaffected by economic conditions--and growth depended primarily on the availability of capital and technology. Malthus's model was revived in the middle of the twentieth century, as fears of "population explosion" were generated by rapid population increases in the developing world, but this revival was spurred largely by non-economists, such as Garrett Hardin and Paul Ehrlich. Countering these non-economists' views, economist Julian Simon has argued convincingly that technological innovation is actually a function of population size, both in the sense that a larger population contains more geniuses than a small one (given adequate investment in education) and that population growth creates increased motivation for technological innovation as communities find themselves with increasing numbers of mouths to feed. Similarly, some influential economists have suggested population decline as a significant factor in economic dislocations like the 1930s Depression--and population growth as a factor in the phenomenal economic growth during the Industrial Revolution.

But nearly all of this literature on economic and demographic "feedback effects" concentrates on the rate of population growth, rather than changes in that rate. Changes in the rate of growth--like the "birth quake" of the post-WWII baby boom--cause changes in population age structure, and it's these changes in age structure that are the primary focus of this book. Why? Because people's behavior differs substantially over the life cycle, and if there is any "lumpiness" in the age structure of the population because of "on and off" birth rates, it will emphasize the effects of behaviors associated with some stages in the life cycle and minimize others. The baby boom has often been referred to as the "pig in the python": this is a highly appropriate metaphor. Imagine that pig-digesting python stretched out in the sun along a bumpy road: he'll look fairly normal if the pig's position happens to coincide with a low point in the road, but as the pig passes over a high point, the python's bizarre shape is accentuated. That's been the situation of the Western world during the past fifty years. Given a relatively "flat" age structure, the different behaviors as people age will tend to cancel each other out, with approximately equal proportions of the population in the "spending" and "saving" periods of life, for example. But any lumpiness produces fluctuations between high and low overall savings rates, as well as a host of other economic and social indicators. One group of researchers has demonstrated the marked effect of such changes on the phenomenal rise of the Asian Tigers, as well as the pre-1914 Atlantic economy.

This "compositional" effect is, however, an aspect of changing age structure that's pretty widely known and accepted. Marketing analysts have constantly stressed this issue as baby boomers have moved from mini-skirted, flower-bedecked teens to pin-striped, at-tache-toting executives. Even more interesting is the idea that age-specific behavior might change if a disproportionately large part of the population passes through a given age range; this is where the work of economist Richard Easterlin stands out. He introduced the concept of "relative cohort size"--the size of a birth cohort relative to the size of its parents' birth cohort--and hypothesized that changes in relative cohort size might produce dramatically different age-specific economic outcomes and subsequent behavior. His very aptly titled book Birth and Fortune suggested that members of relatively large birth cohorts might be economically disadvantaged throughout life, leading them to make very different lifestyle choices than those in smaller birth cohorts.

Easterlin--like Malthus, a demographic economist--provided an explanation for the twentieth-century baby boom and bust in more developed economies that put a twist on the old Malthusian perspective. Fertility rates, he said, do respond positively to economic conditions, but not in the absolute sense assumed by the Malthusians. Instead, fertility rates respond to what Easterlin termed "relative income" or "relative economic status." His model incorporated economic-demographic feedback effects within a framework of economic growth by assuming that people's desired standard of living increases with each generation as an economy grows and develops. Thus, although per capita income rises with economic development, individuals' consumption aspirations increase, as well. If consumption aspirations rise as rapidly as incomes, people will not feel any wealthier despite their higher incomes (their relative income doesn't rise), and fertility will not increase. And if, as some analysts suggest, consumption aspirations rise even faster than income because of the marketing efforts of profit- and growth-oriented firms (relative income falls), then fertility will fall even as absolute income rises.

And, Easterlin maintained, economic conditions do respond negatively to population growth rates as Malthus suggested, but here again, with a twist. The negative effect of an increase in the fertility rate will be experienced approximately twenty years later, as that increased fertility rate translates into an increased labor force growth rate, but will be experienced only by the new labor force entrants, rather than by society generally. Why? Because new young workers are "imperfect substitutes" for older, more experienced workers: for the most part, they can't take the place of older workers. The older workers perform different types of jobs and are needed to train and supervise the younger workers: the labor market requires both types of worker, but in relatively fixed ratios. Easterlin's concept of relative cohort size describes not just the size of a birth cohort relative to that of its parents, but also the number of younger workers relative to the number of older workers. He suggested that if relative cohort size increases, the wages of younger workers--which always tend to be lower than those of older, more experienced workers--will fall even further relative to those of the older group. Thus Easterlin spoke in terms of "relative wages"--the wages of younger relative to older workers--and emphasized that it was these relative wages that would respond negatively to increased fertility rates, with about a twenty-year lag.

But perhaps the most intriguing aspect of Easterlin's model was his method of relating these two phenomena--the effect of relative income on fertility and the effect of relative cohort size on relative wages. He suggested that individuals' consumption aspirations--the basis for converting absolute to relative income--are probably influenced strongly by the standard of living experienced in their parents' homes when they were growing up. And the "older workers" against whose wages the younger workers' wages fall are--in the aggregate--the parents of the younger workers. Thus, if relative wages fall because relative cohort size increases, then relative income--income relative to material aspirations--will also fall, leading to lower fertility rates.

In Easterlin's model the large relative cohort size of the baby boomers (born between 1946 and 1964) reduced their relative wages, which in turn reduced their fertility and produced the baby bust. The numbers work out perfectly: Easterlin presented graphs and calculations indicating that the decline in fertility rates that began in the United States in the late 1950s corresponded directly with the entrance of the baby boom into the labor market and family formation stage. And the baby boom itself--the product of fertility rates that had begun to rise in the late 1930s--was produced by the relatively small cohorts that resulted from the decline in fertility rates through the 1920s and 1930s. Baby bust produced baby boom, which in turn produced baby bust.

It is important to note that the twists Easterlin introduced into Malthus's model produced a twist in its prognostications, as well. Although economic growth increases per capita income, it also raises the standard of living and in doing so raises expectations regarding future living standards. This tempers any fertility-enhancing effect of rising absolute income. Fertility rates in a developed economy might rise temporarily as a result of some shock to the economic system, but at most this would produce a series of population cycles, rather than any period of sustained fertility increase. Unlike Malthus's model, in which population growth sows the seeds of economic deterioration and then stagnation, Easterlin's model suggested that economic growth sows the seeds of population stabilization.

But Easterlin's model, too, was destined to fall into disfavor. Like Malthus, he seems to have formalized his model on the eve of a turn in socioeconomic trends that was diametrically opposed to the model's predictions. Population growth accompanied by strong economic growth heralded Malthus's treatise, while Easterlin faced declining relative cohort size accompanied by an unanticipated further deterioration in the economic circumstances of young workers. The 1980s constituted a baptism by fire for Easterlin's hypotheses.

As a result, although relative cohort size measures were fairly widely used in analyses by social scientists prior to about 1985, in studies of the U.S. economy and even in fertility analyses, relative cohort size measures are becoming increasingly scarce. Social scientists continue to use absolute measures of income without attempting to quantify or control for the effects of changes over time in material aspirations. In this book I attempt to demonstrate that, once again, analysts may have overreacted in their purge of demographic variables and certainly err in their omission of psychological measures such as consumption aspirations. The world is not as simple as Malthus's model suggested, but neither is Easterlin's model as simple as most characterizations (including the one above) would have us believe. A close examination of historical data suggests that his model provides an excellent framework for interpreting a wide range of puzzling phenomena that have occurred over the past three decades in the United States--especially in the two decades since the first edition of Birth and Fortune.

The U.S. baby boom and bust, with its pronounced longer-term fluctuation as well as its occasional sharp year-to-year changes (see figure 1.1), provides an ideal laboratory for testing the economic and demographic feedback effects that are the focus of this book. Unfortunately we have just the one baby boom and bust cycle in the postwar period, but later chapters will show that the characteristic peaks and troughs that mark the otherwise smooth rise and then decline in fertility rates (like those during and after WWII in the 1940s and during the Vietnam War in the late 1960s) provide additional means of identifying economic-demographic relationships. Figure 1.1 presents two of many potential measures of relative cohort size that will be discussed in chapter 3. The population age ratio presented there is formulated specifically to capture the age groups most significantly affected by imperfect substitutability between older and younger workers in the labor market.

The purpose of this book is to show that, when a few more complicated interactions are accounted for, it is perhaps even more true now than when Easterlin wrote that "what is striking is the way in which a variety of developments--developments often regarded as puzzling or surprising--form a coherent picture when approached from this theoretical viewpoint." The sheer weight of evidence across a wide range of variables is simply too strong to dismiss. The strength of the relationships demonstrated here, and the consistent picture they describe, lend a coherence and credibility far beyond the simple sum of the individual parts.

What are these more complicated interactions incorporated in the work presented here, in testing the relative cohort size model? There are four that seem essential: women's changing role in society; immigration or international trade effects (or both); the Vietnam War; and the possibility of asymmetry in relative cohort size effects. Each of these is discussed briefly below, and then in more detail in later chapters.



Continues...

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Table of Contents

Preface
Acknowledgments
Overview: The Birth Quake and Its Aftershocks

Part 1.Defining Concepts and Terms

1.Population Growth and Relative Cohort Size

2.Male Relative Income and Its Significance

3.Defining Variables: Relative Cohort Size and Relative Income

Part 2.First-Order Effects of Changing Relative Cohort Size

4.Patterns of Male Relative Income over the Years

5.First-Order Effects of Relative Cohort Size: Long-Term Trends
in Unemployment, Relative Income, and Returns to College

6.Effects of Relative Cohort Size on Inequality and the Overall
Structure of Wages

Part 3.Second-Order Effects of Changing Relative Cohort Size

7.Women's Roles: Labor Force Participation and the Emergence
of the "Career Woman"

8.Boom and Bust Cycles in College Enrollment Rates

9.Effects of Changing Male Relative Income on Marriage
and Divorce

10.The Dissappearance of the Marriage Wage Premium

11.Relative Cohort Size and Fertility: The Boom Turns into a Bust

12.Relative Cohort Size Effects—Even in Developing Countries

Part 4.Third-Order Effects of Changing Relative Cohort Size

13.Aggregated Demand Effects of Changing Population
Age Structure

14.Population-Induced Economic Slumps

15.Macroeconomic Correlations: GDP Growth, Inflation,
Saving Rates, and the Stock Market

16.Conclusion

Appendix A: Expectations in the Williams College Class of 1999
Appendix B: Data for Figure 4.1
Notes
References
Author Index
Subject Index