You are in an archived section of the AIFS website. Archived publications may be of interest for historical reasons. Because of their age, they may not reflect current research data or AIFS' current research methodologies.

Family Matters No. 27 - November 1990

The costs of children: A review of methods and results

Peter McDonald

Abstract

The difficulties of estimating the direct costs of children are examined. There are essentially three ways in which the direct costs of children have been estimated: the opinion survey approach; the budget or basket-of-goods approach used by Lovering (1984); and the expenditure survey approach used by Lee (1989). Two tables, one based on Lee (1989) and the other on Lovering (1984) provide estimates of the costs of children. The author argues that the cost of a child is not an objective fact but varies according to tastes and preferences and according to the amount of money that parents have to spend on their children.

The Institute receives many inquiries about the costs of children. The information is sought by parents, courts and government and non-government agencies dealing with issues such as child maintenance, fostering and, even, failed vasectomies. The expectation of most of those who inquire is that the cost of a child is a fairly straight-forward matter and, therefore, should be easily obtained. This is far from being the case; estimating the cost of a child is a complex and highly imprecise exercise. Therefore, estimates of the cost of children should be used with caution.

Conventionally, the costs of children are divided into two types: direct and indirect. Direct costs are the additional costs that a household has because of the presence of children. Indirect costs, on the other hand, refer to the loss of income that a household experiences because one or both parents spends time out of paid employment or takes a lower-paying job in order to look after the children. This paper deals only with the direct costs of a child; indirect costs have been addressed for the Institute by Beggs and Chapman (1988).

Measures of the Costs of Children

There are essentially three ways in which the direct costs of children have been estimated: the opinion survey approach; the budget or basket-of-goods approach; and the expenditure survey/ equivalent standard of living approach.

Opinion surveys

With the opinion survey approach, the researcher simply asks a representative sample of families how much it costs to keep their children. The data so obtained would then be analysed according to the ages of children and the number in a family

This method has been little used and it is easy to see why this is so. If you have children, can you give an estimate of how much they cost? Do not forget that because you have children, you may have needed a bigger car or a second car and you use cars more often and therefore have them serviced more often. Do not forget that because you have children, you may have needed a bigger house and its maintenance costs will be greater. Do not forget that children mean that your fuel and telephone bills are higher, and remember all those health and education costs. And did you buy the video for yourself or for the children, and what about the freezer and the larger refrigerator and washing machine? And do your furniture and household goods need to be replaced more often?

This is a sample of some of the prompts that the researcher may give to you on the doorstep. Little wonder that the opinion survey approach is regarded as being unlikely to produce reliable estimates.

Basket-of-goods approach

With the basket-of-goods or budget approach, the researcher specifies a standard 'basket' of goods that a child of a given age (and sex?) would need. This can be done at various levels - for example, the bare minimum, a comfortable level, and even an indulged level.

The method has two main difficulties: what should be included in the basket, and how much do the items in the basket cost? Returning to those earlier questions: what proportion of a car do we attribute to a child, what proportion of the furniture and household goods, what proportion of the fuel and telephone bills, how much of the petrol and car repair costs? The costs of children are not simply a matter of food, clothing and bus fares. And even then, whose standards of food and clothing do we use? And how do we take account of the fact that the costs of travel to school may vary greatly between children in different localities.

Despite these problems, the basketof-goods approach is likely to be far better than top-of-the-head guesstimates on the doorstep. The most detailed study using the basket-of-goods approach ever conducted in Australia was done at the Australian Institute of Family Studies by Kerry Lovering (1984). Lovering overcame the problems of those basket items which are difficult to calculate by simply leaving them out of the basket. Her basket does not include the child-related costs of housing, transport, school fees and uniforms, child care, medical and dental expenses. It does include food, clothing, fuel, household provisions, costs of schooling other than fees and uniforms, gifts, pocket money and entertainment. Even for the items included, the development of standards provided great difficulty. For example, comparison with other research to be discussed below would suggest that Lovering's standard for clothing was on the low side.

Limitations aside, the Lovering study has provided the best estimates available in Australia of the costs of children over the past seven years. The Institute updates the Lovering estimates each quarter on the basis of changes in the consumer price index.

The Lovering estimates are always provided to users with the accompanying footnotes which point out which costs are and are not included in the estimates. It is remarkable, however, how often the footnotes are ignored and the Lovering estimates are taken as the full costs of a child. The Lovering estimates are not the cost of a child but only part of the costs of a child. No attempt has yet been made in Australia to estimate the full costs of a child using the basket-of-goods approach.

Expenditure survey approach

The expenditure survey/equivalent standard of living approach (Espenshade, 1984) attempts to obtain estimates of the total costs of children including all those costs left out of the Lovering estimates. Basically, the method compares the household expenditure of a couple with children with that of a couple of the same age without children who have an equivalent standard of living. The difference in the expenditures of the two households represents the cost of the children.

Comparison between couples of the same age is specified so as to reduce the difference in tastes or needs that old couples would have compared to young couples. However, couples' tastes and needs also vary by characteristics other than age, such as education and occupation. It is desirable that these characteristics are also taken into account, but expenditure survey samples are sometimes of insufficient size to permit such detailed analysis.

The key to this approach, however, is the specification of what constitutes an equivalent standard of living. After investigation of several possible measures, Espenshade (1984) concluded that the best of the measures examined was the proportion of total current consumption that was spent on food consumed at home. That is, two households of differing composition will have the same standard of living if they spend the same proportion of their total household expenditure on food at home. Thus the cost of children is the difference in expenditures between a couple with children and a couple without children who both spend the same proportion of their consumption on food at home. The accuracy of the method is thus highly dependent upon the assumption that these two families have the same standard of living - a relatively loose assumption.

This approach has been applied in Australia by Donald Lee of Deakin University working under contract to the Institute. Dr Lee (1989) used the 1984 ABS Household Expenditure Survey to make his estimates. His methodology allows for the costs of children to be estimated according to the numbers and ages of the children in a family and the income levels of both parents. The inset presented here shows Lee's results updated to the June Quarter 1990 for a one-child, single-income family with an income of $578.01 per week (male average weekly earnings for this quarter were $554-60 per week). The Lee estimates from 1984 have been updated to 1990 using the change in average weekly earnings between May 1984 and May 1990 rather than the change in the consumer price index. This is done because the Lee estimates are derived for a family with a given income level: in contrast, the Lovering estimates should reflect the changing costs of a basket of goods and hence are updated using changes in prices rather than changes in earnings.

Constraint of Family Income

Discussion of the relationship of costs of children to the income of parents gives rise to a fundamental difficulty related to estimates of the costs of children: the money that families spend on their children is in most cases very likely to be determined by how much money they have. So when we observe that a family has spent a certain amount on their children, this may not be determined so much by some objective measure of how much children cost but rather by the amount that the family has available to spend on the children. The lower the family income, the more likely that money spent on children is constrained by the income level. Furthermore, families on the same income level will have less to spend per child the more children that they have.

This indicates an important difference between results obtained by using the basket-of-goods method and the equivalence survey method. The basket-of-goods method indicates how much parents would spend on their children if the child was to enjoy the fruits of the basket specified by the researcher. In this sense, it provides an 'ideal' or desirable costing- In contrast, the expenditure survey method indicates how much parents actually spend on their children, even though the amount spent might be considered inadequate or excessive by the objective standards of the basket-of-goods method.

A difficulty with the basket-of-goods approach is that because it deals with desirable expenditure on a child, it becomes difficult conceptually to consider what happens when the number of children in a family increases while the parents' income remains the same. That is, the basket-of-goods approach has difficulty accommodating the constraint on expenditure of the level of family income.

The basket-of-goods approach also has a difficulty when it comes to assessing the effect on expenditure on children of family type. That is, what are the relative costs of children in one-parent and two-parent families? This is a problem also for the expenditure survey approach because, in practice, the number of one-parent families in expenditure surveys is too small for valid analysis.

With these reservations in mind, it is useful to consider some of the relativities regarding costs of children that emerge from the study conducted by Donald Lee using the expenditure survey approach.

Impact of Child's Age

The Lee study provides comprehensive costs of children across all areas of expenditure based on the diaries of expenditure kept by Australian families who participated in the 1984 Household Expenditure Survey. For reasons as yet unknown, the cost estimates for children aged 14 years and over obtained using this database appear to be too low and so the relativities to be discussed here will refer only to children up to their fourteenth birthday. Results showing the relative costs by age group are set out in Table 1. In the table, the average annual cost of children up to their 14th birthday is taken at the standard cost (1.00), while the costs at specific ages are shown relative to this.

Table 1: Relative costs of children by age of child and income level of parents, based on the Lee study (one child families only)
  Income level of parents
(dollars per week in 1984)
Age group of child $250 $400 $600 $800* $1000*
0-1 1.01 1.01 1.01 1.01 1.01
2-4 0.81 0.83 0.84 0.86 0.87
5-7 0.88 0.89 0.90 0.91 0.92
8-10 1.09 1.08 1.07 1.06 1.06  
11-13 1.21 1.20 1.18 1.16 1.15
Average  
0-13 1.00 1.00 1.00 1.00 1.00
*Data refer to two-income families where the wife earns $400 per week. Lower levels of income refer to one-income families.
Source: Derived from results of Lee (1989).

The data suggest that while costs of children rise with the age of the child (except for the higher costs at ages 0 and 1), the rises are not dramatic. Furthermore, there is almost no variation in the pattern of costs by age of child as income rises. Thus, in broad terms, it could be said that the Lee data support the flat allowances for children under the age of 13 years in the social security system. The non-recognition of age of child in the Child Support Scheme formula is also supported by these data, at least for the pre- teenage years.

Effect of Family Income

What impact does the family's level of income have on the costs of children? The Child Support Scheme formulae apply a constant percentage of the noncustodial parent's income up to a limit of two- and-a half times average weekly earnings. This would imply that child costs increase proportionally as income increases. Family allowances provide flat rates of benefit as income rises, with the effect that these benefits would meet a higher proportion of the costs of children in lower income families. This can be justified by the principle of vertical equity (Brownlee and McDonald 1989).

The Lee data (Table 2) show that the dollar costs of children are in fact relatively 'flat' compared to rises in family income. Children in poor families cost proportionally more, and children in rich families proportionally less than those in middle income families. For example, children in families whose incomes are only 63 per cent of the average (AWE in 1984 was approximately $400 per week) cost 78-84 per cent of the costs of children in average families. On the other hand, families with two and a half times the average income only spend 53-56 per cent more than the average on their children.

The pattern of costs of children by income does not vary according to the numbers of children.

Table 2: The relative costs of children(a) according to the level of family income based on the Lee study
  Relative costs of children
Family income level
($ per week in 1984)
Number of children $250 $400 $600 $800* $1000*
1 0.83 1.00 1.22 1.41 1.56
2 0.78 1.00 1.22 1.40 1.54
3 0.84 1.00 1.21 1.39 1.53
Relative level
of income
0.63 1.00 1.50 2.00 2.50
(a) Costs used in this table are the total costs of a child from birth to the 14th birthday.
*Data refer to two-income families where the wife earns $400 per week.
Lower levels of income refer to one-income families.
Source: Derived from Lee (1989).

Effect of Numbers of Children

The Lee study also allows us to examine whether the numbers of children in a family have any bearing on the cost of children. Table 3 shows that two children cost about 55 per cent more than one child, while three children cost about twice the cost of one child. We cannot say, however, the extent to which this is due to a notion that children come cheaper in numbers or simply that, at a fixed income level, parents are constrained to spend less per child as the number of their children increases. (An analysis later in the paper examines which particular expenditure items contribute to the reduced costs as numbers of children increase.)

Table 3: The relative costs of children(a) according to the number of children in the family based on the Lee study
  Relative costs of children
Family income level
($ per week in 1984)
Number of children $250 $400 $600 $800* $1000*
1 1.00 1.00 1.00 1.00 1.00
2 1.46 1.56 1.56 1.55 1.54
3 2.01 1.98 1.97 1.96 1.94
(a) Costs used in this table are the total costs of all children from birth to their 14th birthdays.
*Data refer to two-income families where the wife earns $400 per week.
Lower levels of income refer to one income families.
Source: Derived from Lee (1989).

Types of Expenditure: One-child, Average Income Families

The actual expenditure on the child in one-child families with incomes a little above average weekly earnings is shown by type of expenditure in the inset table relating to the Lee estimates.

Transport is the largest of the expenditure types. This does not refer simply to expenditure on public transport but also includes the additional expenses that one-child couple families have compared to couples with no children in purchasing and running private vehicles. Food is second ranked closely followed by recreation. Besides holidays and outside entertainment, recreation includes such items as toys, television, sound equipment, home computers, records and cassettes, books, newspapers, sporting and camping equipment and pet food. This helps to explain the apparently high level of recreation expenses related to children.

When these results are compared with those obtained by Lovering (1984), it is encouraging that both methods produce similar results in respect of the costs of food for a child in a one-child family. For example, Lovering found food costs for children in May 1983 ranged from $13 per week for a 5 year- old child to $27 for an 11 year-old in middle-income families. As at June 1984, the Lee study obtained results of $16 per week for a 2-4 year-old child to $25.46 for an 11-13 year-old child.

On the other hand, the costs of clothing were much lower in Lovering's standard basket than the expenditures on clothing indicated by the Lee study. For example, costs of clothing for a child in a middle-income family in May 1983 ranged from $4.55 per week for a 2 year-old to $ 5.25 per week for an 11 year-old. The Lee estimates showed a range for June 1984 of $8.69 per week for a 2-4 year- old to $13.44 per week for an 11-13 year-old. While the Lovering costs exclude school uniforms, this is unlikely to account for this difference.

Overall, as indicated by the two tables shown in the inset, for middle income families, the Lee estimates of total expenditure on the one child in a one-child family are about two and a half to three times the part-costs of one child according to Lovering's standard basket.

Types of Expenditure According to Family Income Level

Do the relative expenditures on types of costs related to children vary as the family income level changes? This issue is addressed by the data in Table 4.

Table 4: The effect of family income on types of expenditure related to children (one-child families)
  Expenditure (relative to a family
with income of $400 per week)(a)
Types of expenditure $250 $400 $600 $800* $1000*
Food 0.91 1.00 1.11 1.20 1.26
Clothing 0.86 1.00 1.17 1.31 1.41
Transport 0.85 1.00 1.18 1.31 1.40
Recreation 0.83 1.00 1.21 1.37 1.49
Housing,fuel,util 0.84 1.00 1.19 1.33 1.43
Household goods/ser 0.80 1.00 1.28 1.52 1.71
Other (incl.education) 0.67 1.00 1.55 2.10 2.58
All costs 0.83 1.00 1.22 1.41 1.56
(a) Costs used in this table are the total costs of all children from birth to their 14th birthdays
*Data refer to two-income families where the wife earns $400 per week. Lower levels of income refer to one-income families
Source: Derived from Lee (1989)

Not unexpectedly, expenditure on food is relatively inelastic to changes in income. At the other end of things, household goods and services and, particularly, 'other' expenditure (probably reflecting private school fees) were the most elastic expenditure types. At the extremes, families with incomes of $1000 per week compared to families on $250 per week spent 40 per cent more on food for the child, but 111 per cent more on household goods and 299 per cent more on 'other' costs. Wealthier families thus are in a position to spend on the more expensive, discretionary items of child expenditure and they do so.

Table 5 presents these data in a different way by placing the seven types of expenditure in rank order for each income level.

Table 5: Rank order of types of expenditure on children at various income levels (one-child families)
  Rank order of expenditure type (a)
Types of expenditure $250 $400 $600 $800* $1000*
Food 2 2 3 5 5
Clothing 6 7 7 7 7
Transport 1 1 1 1 1
Recreation 3 3 2 2 3
Housing,fuel,util 5 5 6 6 6
Household goods/ser 4 4 4 3 4
Other (incl.education) 7 6 5 4 2
(a) Costs used in this table are the total costs of all children from birth to their 14th birthdays.
*Data refer to two-income families where the wife earns $400 per week. Lower levels of income refer to one-income families.
Source: Derived from Lee (1989).

At every income level, costs of transport retain the first ranked position in child costs. Food, on the other hand, drops from second to fifth ranking as income increases. 'Other' costs move from the lowest ranking for low income families to the second ranking for high income families. It should be noted that these estimates do not include costs from age 14 years onwards. The effect of education costs, particularly private school fees, is likely to be even more significant at these older ages.

Types of Expenditure According to Number of Children in Family

As observed above, costs of children decline in relative terms as the number of children in the family increases. Table 6 shows in which types of expenditure these savings are made.

All types of expenditure produce some reductions per child as the number of children increases, but the basic expenditures (food and clothing) are clearly the items upon which the reductions are least. Contrary to popular images, 'hand-me-down' clothing contributes very little to the relative savings in clothing expenditure for families with more than one child. Mirroring the conclusions in the last section dealing with income, Table 6 shows that the largest reductions occur in the more discretionary types of expenditure, household goods, recreation and 'other' expenditure. Thus increases in the number of children in a family have similar effects on expenditure patterns as declines in family income.

Table 6: Relative expenditures on different types of costs of children(a) according to the number of children in the family (families with income of $400 per week in 1984)
Types of Expenditure Number of children in family
  1 2 3
Food 1.00 1.73 2.38
Clothing 1.00 1.61 2.09
Transport 1.00 1.56 1.96
Recreation 1.00 1.51 1.84
Housing, fuel/utilities 1.00 1.53 1.88
Household goods/services 1.00 1.48 1.79
Other (incl.education) 1.00 1.49 1.87
All costs 1.00 1.56 1.98
(a) Costs used in this table are the total costs of all chidren from birth to their 14th birthdays
Source: Derived from Lee (1989).

Conclusion

The analysis in this paper shows that the cost of a child is not an objective fact but varies according to tastes and preferences and according to the amount of money that parents have to spend on their children. In particular, the data indicate that families spend what they can on their children irrespective of any 'objective' costing that may be placed on a child by a researcher using an approach like the basket-of-goods approach. On the other hand, the basket-of-goods approach has the advantage that it Is easily understood, and users of the data are able to directly assess whether they regard the contents of the basket as appropriate or not. The expenditure survey approach, in contrast, is dependent upon the single assumption, the validity of which is difficult to assess, that households which spend the same proportion of their consumption on food at home have the same standard of living

The Institute is continuing Its research efforts in this field and is cooperating with other bodies which also have an interest in research on the costs of children.

References

  • Beggs, J. and Chapman, B. (1988), 'The forgone earnings from childrearing in Australia', Centre for Economic Policy Research, Australian National University, Canberra.
  • Brownlee, H. and McDonald, P. (1989), 'Proposals for the treatment of families in the tax system: an assessment of equity and efficiency', Paper presented at the Third Australian Family Research Conference, Ballarat, 26-29 November, Australian Institute of Family Studies, Melbourne
  • Espenshade, T. (1984), Investing in Children: New of Parental Expenditures, The Urban Institute Press, Washington.
  • Lee, D. (1989), A program for calculating the direct costs of children based on the 1984 ABS Household Expenditure Survey, floppy disk, Australian Institute of Family Studies, Melbourne.
  • Lovering, K. (1984), Cost of children in Australia, Working Paper No.8, Australian Institute of Family Studies, Melbourne.