Israel: Financial Incentives Boost Birth Rates
A 2007 study (Do Financial Incentives Affect Fertility by Alma Cohen, Rajeev Dehejia, and Dmitri Romanov) investigates how fertility in Israel responds to changes in the child subsidy, leveraging significant policy shifts between 1999 and 2005. Using detailed individual-level panel data, the authors separate the "price effect" of subsidies on the marginal child from the "income effect" of subsidies for existing children. This study provides compelling evidence of how financial incentives shape fertility decisions across income and ethnic/religious groups.
Background and Policy Context
Many countries facing declining fertility rates have adopted pro-natalist policies, including child subsidies. However, the impacts of these financial incentives remain contested, with limited evidence from individual-level data and plausibly exogenous policy variation.
Israel presents a unique setting to study these questions, with its combination of high-income and low-income subpopulations and a generous child subsidy that has undergone substantial changes:
The subsidy, introduced in 1959, varies by parity and has been expanded over time to cover all children under 18.
In 2001, the subsidy for 5th and higher-parity births rose 33-47% (the "Halpert Law").
2003 the subsidy was cut substantially, especially for 3rd and higher-order births.
Data and Methods
The authors construct a unique individual-level panel covering 1999-2005, with data from Israel's Central Bureau of Statistics. Key features include:
Fertility histories and detailed controls for married women under 45 with at least 2 children.
Treatment variable: present value of the marginal child subsidy (by parity and year).
Instrumenting for net household income using changes in the subsidy for existing children.
Variation in child subsidy amounts across parities and years enables the separation of price and income effects.
The researchers estimate both the overall effect of the subsidy and the effects of income, ethnicity, religiosity, and age. A differences-in-differences design exploits variation in subsidies over time and across parities.
Key Findings
A $34 increase in the monthly subsidy for a marginal child raises the probability of pregnancy by 0.78 percentage points (a 7.8% increase).
The implied benefit elasticity is 0.15, and the price elasticity is -0.422.
The price effect is significant across all religious/ethnic groups but is largest for high-fertility ultra-Orthodox Jewish and Arab Muslim populations.
The price effect is also present for older women (35-45), suggesting impacts on completed fertility, not just timing.
Consistent with theory, the price effect is small and insignificant for the top-income decile.
The income effect is small in magnitude and negative for low incomes but positive for middle/high incomes.
Without the 2003 cuts, Israel would have seen nearly 12% more births in 2004.
Contributions and Implications
This paper makes several key contributions:
Leveraging administrative panel data and sharp policy changes to identify price and income effects.
Showing significant fertility responses to subsidies, even among high-fertility religious groups.
Demonstrating that the price effect dominates any income effect.
Quantifying heterogeneity by income, ethnic/religious group, and age.
The results imply that child subsidies can be an effective tool for raising short-run fertility across diverse populations. The stronger effects for lower-income and higher-fertility groups also suggest that subsidies could reduce income disparities in childbearing.
At the same time, the very small income effects indicate that boosting household income alone, absent a change in the price of childbearing, is unlikely to increase fertility substantially. For developing countries, this suggests that the fertility-reducing effects of economic growth may be limited without policies directly altering the cost of children.
The study's findings are highly relevant as societies grapple with very low fertility rates and their economic consequences. Further work should examine longer-run effects on completed fertility, impacts on child outcomes, and the welfare implications of child subsidies. However, this paper provides compelling evidence that the "price" of childbearing is a key driver of fertility decisions.