Letter from Germany - where have all the babies gone?

In Germany, the problems posed by low fertility have become more pressing than in most other European countries. In this essay Ray Rees, Professor of Economics at the University of Munich, discusses a number of policy innovations which might encourage both an increase in female participation in the labour market as well as an increase in fertility.

Since the early 1960’s, when innovations in the technology of birth control made it possible for women to determine, more or less, their own fertility, there has been a steady decline in fertility rates in virtually all OECD countries. At the same time, there has been a steady increase in female labour force participation. For any one of these countries therefore there is a strong, inverse empirical association between fertility and female labour supply. It is easy to rationalise this: increasing wages and employment opportunities for women increase the opportunity costs of having children.

But the countries differ widely in the slope of this relationship. Some, like the Scandinavian countries, France, the UK and the US have relatively steeper female employment growth and relatively flatter fertility declines, others, in particular Germany, Italy and Spain, have much steeper fertility declines and slower growth in female labour supply. This has resulted in recent years in a cross-country association between fertility and female participation that is in fact positive. Just looking at the differences in how the tax and social security systems in these countries treat working wives, in the cost and availability of pre-school child care, the incentives for mothers to rejoin the work force after the birth of children, and the organisation of the school system, leads very quickly to the conclusion that there is considerable scope for a country to influence just how negative the relationship is, and offers the hope to those countries suffering the adverse consequences of low fertility and low female labour supply that they could, by making the appropriate policy changes, have more of both.

Germany is very much a case in point. The problems posed by low fertility have become pressing. Population ageing, which is presenting severe problems in financing Germany’s generous pay-as-you-go pension system, is much more a result of fertility decline than of increasing longevity. Labour economists are forecasting future shortages of skilled young workers. Effects on the conditions of demand and supply of local public goods are already being felt: younger workers are migrating to the higher growth areas leaving empty schools and inadequate funding for social infrastructure behind them, especially in eastern Germany.

As a result, ‘family policy’ has moved to centre stage in political discussion. The Minister for Families, Ursula von der Leyen, who herself has seven children, has proposed replacing the traditionally defined spheres of a wife’s activities, Kinder, Kirche und Küche (children, church and kitchen), by a new triumvirate, Kinder, Kirche und Karriere (children, church and career). She represents what can be thought of as the more progressive side of the debate, which is concerned with the question not of whether to support having more children, but of how. The view represented by Minister von der Leyen, and supported by Prime Minister Angela Merkel, emphasises making it easier for women to combine family and career, while the other side, which consists mainly of senior male members of the two centre-right parties, the Christian Democratic Union (CDU) and its Bavarian counterpart the Christian Socialist Union (CSU), prefers to encourage larger families while retaining as far as possible the ‘traditional marriage’, in which the wife works exclusively at home. It is easy to distinguish one side from the other by the positions they take on the following four policy issues.

Child subsidies: Should fertility be subsidised by a large lump sum payment per child (raising the existing Kindergeld), or by considerably expanding and subsidising the currently scarce and expensive day care facilities for pre-school children? The point about the former is that it pays women to remain at home and have children. The latter allows substitution of professional for maternal child care, and so facilitates work outside the home. Two key points about this are that it increases family income, and so is likely to increase family size for that reason (all the evidence suggests that children are a normal good); and that it expands the tax base, and so permits a higher level of gross expenditure on family support, for a given amount of net public expenditure.

Joint vs. individual taxation: Germany (as well as the US) has a system of income splitting, in which husband and wife’s earnings are added, divided by two, and then taxed on a progressive marginal rate schedule. In most other countries in the world, including the UK, the two earnings are taxed on separate progressive schedules. Under the former system, the marginal tax rate on the first euro of the wife’s earnings is equal to that on the last euro of the husband’s, which is often a significant disincentive to a wife taking a job. Given the econometric studies which show that female labour supply elasticity is about four to five times as high as that of male workers, and cross elasticities are negligible, straightforward Ramsey arguments support the case for a lower marginal tax rate on women. Moreover, it can be shown that, in effect, this system redistributes income away from households where the wife works a significant number of hours per year toward households in which she works very little, if at all, outside the home. This can often be regressive. Consider two households, in one of which the husband alone earns 60,000 euros a year, the other of which has the two partners working, and earning that in total. They pay the same tax. Yet the (untaxed) value of the output of household goods produced by the wife in the first household could be considerable, the cost of these goods bought on the market out of taxed income by the second household (especially child care) equally so. Finally, the fact that under a progressive marginal rate tax system, a wife's earnings may push her husband into a higher tax bracket provides a further disincentive. Currently, some brave souls are suggesting a move to individual taxation. The response from the grandees in the CDU and CSU (especially the latter) has been: No Way! (Nicht mit uns!).

All day schools: Currently in Germany children typically go to school only in the mornings. A working mother either has to be at home from midday, or arrange for some kind of child care. There is now a policy of moving toward all-day schools, which of course involves issues other than purely family policy. For example, the teachers’ unions are against it, partly because their members may well have part-time afternoon jobs (sometimes doing paid additional coaching). But the poor showing of German children in recent international comparative tests, for example PISA, has led to strong public support for all-day schooling on educational grounds. Nevertheless, there is still a groundswell of opinion arguing that it is placing much too great a burden to require a child to attend school all day, which of course to British ears may sound a little strange.

Tax relief for child care costs: A measure has recently been introduced allowing expenditures on child care, up to a certain limit, to be set against tax. In its original form, this was to be available only to families where both parents worked. After considerable pressure, again particularly from the CSU, this was changed to give tax relief on child care also to families with non-working wives (though in the latter case for a restricted age group of children). Since this extended the coverage of the scheme, while its total cost was held constant, this diluted the contribution per family.

To give an idea of how the political struggles on this issue can sometimes border on the absurd: Minister von der Leyen recently introduced a proposal under which for ten months after the birth of a child, the mother receives from the state 60 per cent of her previous earnings, up to a maximum of 1600 euros per month. If then the father took a further two months off from work to look after the children, the payment would be continued. The leaders of the CSU regarded this as an unacceptable attempt to dictate who in the family should look after the children — the difference between a command and an optional incentive was not apparent to them. The end result of the political horse trading was that the payment to the mother would be made for twelve months, and then would continue for a further two months if the father took over. Since this obviously just represents an extension of the period of support, with no change in principle, Mrs von der Leyen was quite happy to walk away with this ‘compromise’.

Anyone who has read Alison Pearson's brilliant novel I Don't Know How She Does It will know that combining family and career in the UK is by no means easy, and yet on several of the above issues the UK is well ahead of Germany. This is reflected in the fact that in Germany, around 52 per cent of households with children under six have only the husband working, while in the UK the figure is about 33 per cent, in Sweden 25 per cent. Women in Germany are well-educated and well-trained (significantly more than half of all university graduates in Germany are female). The participation rate, which of course is a zero-one variable, conceals the fact that actual working hours and female labour supply overall are much lower in Germany than in most other comparable countries, because of the high prevalence of part-time working. There is a large human resource pool of well-qualified women, needing only the introduction of the right policies to enter the labour market. And there is every indication that the right policies would also help to find all those missing babies.

Page Options