Having a baby changes everything – an economist’s perspective on having kids

I’ve been pretty lazy lately with posting on Byte Size since our son was born last year, but I am finally getting over that initial parenting hump and finding time to write. But as you would expect, this post is being written very quietly, in the dead of night, while he sleeps.

The new father in me is blending with the economist in this post to consider the costs and benefits of having a baby.

To be clear – cost-benefit analysis (CBA) by itself is not a good way to decide whether to have a baby. There are far more human ways of determining that sort of life-changing event. Plus it is exceptionally difficult to understand what costs and benefits will actually occur for you and your child specifically. Also what costs/benefits matter to parents choosing to have children would differ considerably. Historically, having lots of kids could have been for religious/cultural reasons, or as part of an insurance policy for old age. That sort of thing isn’t as relevant in modern economies.

As an economist who has spent a lot of time in the health sector, it’s sort of just fun to think about.

The cost per child was estimated at approximately ~$285,000 to the age of 18, that’s a lot of trips to Hawaii, so why not consider what would make it it is worthwhile?

CBA is a standard tool for determining whether a decision or investment is a good idea. The decision/investment in this case is the baby. CBA is holistic, incorporating financial and non-financial factors, and different stakeholders such as my wife and I, grandparents and wider communities. Normally CBA is applied to something like building a new road, but it’s pretty good at evaluating abstract decisions too.

Typical CBA spits out a benefit-cost ratio (BCR) to determine if the investment is worthwhile. A BCR of greater than 1 in theory means the benefits are greater than the costs. This CBA is pretty loose and just considers at a high-level the main costs and benefits of raising a child from the perspective of a new parent.

Cost of raising the child ie food, home etc.
Parental benefits payments
Lost salary from spouse taking time off work for one year and reducing work time
20 hours of free early childhood education per week for ages 3-5
Public schooling – 13 years in NZ
Less time to spend on hobbies
Greater life satisfaction
Reduced loneliness in old age

Some of these things are fairly easy to put dollars to. On the cost side, existing estimates place the cost of raising a child at ~$16,000 per year, and the value of lost income is about $62,000 per annum based on the NZ median income.
Parental benefits in NZ are $661.12 per week for 26 weeks, so $17,189. 20 hours of early childhood education for 2 years is worth about ~$9,400 per year based on a rate of $9 per hour for daycare. Public spending on education was around $7,000 per pupil in 2019, though it is probably much more than that now.
Healthcare is also provided by the govt in NZ for all citizens. Kids get free primary care until age 13 (about $50 a pop), plus of course the birth and any time in intensive care. NZ spent about $4,700 per head on healthcare in FY22, though this is an average, it’s higher for the very young and very old.

Overall from a $$$ perspective of course the decision to have a kid isn’t going to be fully compensated by the freebies one might get. But actually, I was surprised by the size of the financial benefits – particularly the free education and healthcare. Of course, having a baby is not really a financial decision

It goes without saying that the main reasons for or against having a child are non-financial. Not to say that the financial side isn’t important, but it’s a much more wholistic decision.

The ‘non-financial’ bits around love, time, satisfaction and how one feels about being a parent really drive the decision to have a family. We have certainly found that the benefits outweigh the costs – even at 3.30 am when he’s wide awake and ready for playtime and we would rather be asleep!

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