The estimated costs of children in Australian families 2005-06
Richard Percival and Ann Harding1
NATSEM-National Centre for Social and Economic Modelling, University of Canberra
- 1. Introduction
- 2. Methodology
2.1 Estimating the direct costs of children
2.2 Data source
2.3 Definition of expenditure - 3. Estimated costs in couple families
3.1 Costs of children by age
3.2 Costs of children by number of children - 4. Estimated costs in sole parent families
4.1 Costs of children by age
4.2 Costs of children by number of children - 5. Summary and conclusions
- Appendix: Detailed description of methodology
- Endnotes
- References
1. Introduction
The Ministerial Taskforce on Child Support (the Taskforce) was asked to advise on whether changes to the Child Support Scheme are warranted. As part of that process, the Taskforce commissioned NATSEM to estimate the costs of children in Australia in 2005-06.
As in so many areas of economics, there is no consensus about the best way to estimate the costs of children. Estimates can only be interpreted as a rough guide. At least three different methods have been used in the past decade to estimate the costs of children in Australia. One method is the basket-of-goods or budget standards which specifies what is needed (the goods and services that contribute to material consumption) by households living in a particular place at a particular time to achieve a specified standard of living. After each item is identified, it is costed and summed, to arrive at the total budget required to reach a given standard. This method involves experts trying to identify what children need, rather than what parents actually spend on their children. Generally, this method appears to result in higher estimated costs of children than many other methods (Harding & Percival 1999, p. 87). It was used by Saunders (1999) and new estimates were prepared for the Taskforce using this methodology by Dr Paul Henman (Henman 2005).
Another method is the Extended Linear Expenditure System (ELES)-sometimes known as the Barten-Gorman method. This involves estimating a utility function and demand equations from a sample survey that contains details of family expenditures. The equations attempt to estimate how much parents actually spend on their children, and families with the same level of utility are assumed to be equally well-off. International research suggests that the estimates of costs of children produced using this method tend to be relatively low, especially for third and fourth children. For example, some overseas studies found that four children cost their parents less than three children (Merz et al. 1993). An Australian study using the ELES methodology by Valenzuela (1999) also found that the marginal costs of the second and third child were quite low and concluded that parents devoted the same proportion of their income to their children irrespective of whether they were rich or poor.
Another method used in this report is the expenditure survey or equivalent standard of living. This 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 expenditure of the two households represents the costs of the children. This method is explained in more detail in Section 2. As McDonald explains, 'this 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' (1990, p. 20). As spending on children is necessarily constrained by family income
…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. (McDonald, 1990, p. 20)
As the above discussion makes clear, there is no single 'right' answer to the costs of children. Estimating these costs is inherently difficult, as many items of family expenditure are often shared among all family members or incurred indirectly by parents. In practice, it is also likely there are wide variations in the amounts parents spend on their children, both as family incomes vary and as the sense of what is proper to spend varies.
The purpose of this report is to estimate the private costs of children in Australian one and two-parent families and to compare them to selected public costs. Costs are taken to be money expenditures-that is, the amounts parents actually spend on their children. Thus, the indirect costs of children-caused, for example, by mothers reducing their hours of paid labour force participation-are not taken into account.
Section 2 outlines the methodology used to estimate the direct costs of children. Section 3 presents estimates of the direct costs of children in families with two co-resident parents and, Section 4, in families with one parent. Section 5 summarises and concludes the report.
2. Methodology
2.1 Estimating the direct costs of children
The methodology used in this study to estimate the costs of children generally follows that developed by Espenshade (1984) and Betson (1990). Following Engel, Espenshade and Betson estimated the costs of parental expenditures on children in the United States. This methodology was subsequently used by Lee (1988) to provide estimates of the costs of children in Australia in 1984.
Broadly, the methodology estimates the costs of a child as the difference in average expenditures between households with similar numbers of adults, but where some have no children and some have one or more children, given that the households enjoy an equivalent standard of living. A key question is therefore how to define an 'equivalent standard of living'.
As Espenshade points out (1984, p. 19) the central problem in estimating the costs borne by parents in raising children is that it is difficult to separate the costs of each family member from the total costs of the household. In many instances these costs cannot be easily assigned to individuals (for example, housing or electricity costs). As well, many expenditure items that are directly for children are simply recorded as expenditure items by parents (for example, food costs).
One solution to this is to use an index of the material standard of living of different families. This would allow families with the same standard of living to be compared, even though their composition and incomes may differ. A further challenge is how to determine when families have a similar standard of living (that is, how to construct such an index). Simply comparing incomes is not sufficient, as families with the same income may have widely differing demands placed on that income and, hence, differences in their standards of living.
Once it is possible to tell if differently constituted families have the same standard of living, it is reasonably straightforward to estimate the costs of their children as with this scenario using Engel's approach:
- Assume that the proportion of total expenditure devoted to food is an adequate indicator of the standard of living of a family.
- Consider two families, the first a couple with no children and a weekly expenditure of $500 and the second a couple with one child and a weekly expenditure of $600.
- If both spend 15 per cent of their total expenditure on food, then the difference in their expenditures can be said to equal the cost of the child in the second family-that is, $100 per week.
For this report this estimate is generalised into two equations. The first estimates total household consumption expenditure, given information on parental incomes, the number (and ages) of the children and the number of adults. The second estimates household living standards, given information on household consumption expenditure, the number (and ages) of the children and the number of adults (the Appendix has more details).
The methodology used in this report to calculate the costs of children relies on being able to determine when families of different sizes and with different incomes have similar living standards. In his earlier work Espenshade examined several methods used to determine family living standards (1972, pp. 63-74). These included per capita income, level of adult expenditure, proportion of income saved and the proportion of income spent on food. After considering each, Espenshade concluded that the most appropriate measure to use was the proportion of family income spent on food (the 'Engel estimator').
However, using the proportion of total expenditure devoted to food as the indicator of living standards has been subject to extensive criticism. In particular, Deaton and Muellbauer (1986) argue that the Engel method is fundamentally incorrect in assuming that food share indicates the welfare level of households of different sizes (p. 741). They also argue that it can be theoretically shown that Engel's method produces estimates higher than the 'true' cost of children.
Since the publication of the paper by Deaton and Muellbauer, the Engel approach has been described as establishing an upper bound to child cost estimates. However, there are grounds for viewing this assertion with some caution. In particular, as Bradbury (1994) points out, the argument that the Engel approach establishes an upper bound to child costs relies on the assumption that food constitutes a relatively high proportion of total child expenditure. While this conclusion would more typically be the case in developing countries, which is the focus of Deaton and Muellbauer's analysis, it is less certain in more developed countries such as Australia (Bradbury 1994, p. 2).
What is perhaps more likely to be correct is that an Engel estimator will overestimate the costs of larger families. This is because there are likely to be greater economies of scale in a household's non-food consumption than in their food consumption.
Other indexes of standard of living have been proposed, including the level of total expenditure devoted to 'adult goods' (Rothbarth 1943). However, Bradbury has shown that, theoretically, this approach most likely overestimates the costs of children (Bradbury 1997, p. 76).
Given the uncertainty in the literature, this report uses the general Espenshade approach. However, the estimator of comparable living standards is a variation on the Engel method, with the food-at-home share estimator being expanded to include a basket of other basic expenditure items (such an estimator is sometimes referred to as an iso-prop estimator, following Watts 1977).
In this report, the indicator of the standard of living of a family is the proportion of total expenditure devoted to:
- food at home
- fuel and power
- household non-durables for use inside the home (for example, disposable nappies)
- postal, telephone and telegram charges
- personal care products and services (for example, shampoo).
Not included in this basket are housing, clothing and health costs. While these have often been included by other researchers when compiling a basket of goods (see, for example, Betson 1990 and Merz & Faik 1992), their use is problematic.
Housing is not included because it has characteristics that set it apart from other essential expenditures. As a recent study (which did not include the costs of housing in any of several baskets of basic goods) noted, expenditure on housing is 'peculiar' (Carlucci & Zelli 1998). What makes it peculiar is that it can differ markedly between households that are similar in every aspect but tenure type. As well, in contrast to other 'basket' items, the housing costs of many families, particularly those with children, tend to diminish across the life-cycle. That is, families with older children are much more likely to have lower relative housing costs, given that expenditure by home purchasers will, over time, be reduced by the effects of inflation and will increasingly go to paying off the capital component of their mortgage. It would therefore seem that including housing in the measure of living standards is likely to introduce significant distortions.
Clothing is excluded from the basic basket of goods because, in contrast to other basic expenditures, its share of total expenditure rises as household expenditure increases. This mirrors the findings of Carlucci and Zelli (1998) who categorised clothing as a 'comfort' good, rather than a 'necessity' good. (Some clothing is, of course, a necessity. However, in many instances it is also a luxury item. Unfortunately, when compared to food, it is more difficult to separate out what is basic expenditure on clothing from what is luxury expenditure. There also appears to be more scope for wealthier households to increase their expenditure on clothing than there is to increase their expenditure on food, particularly food consumed at home.)
Finally, household expenditure on health is not included in the basic basket of goods, given the role of the Medicare system in Australia to meet all or most basic components of these expenses.
To summarise, the indicator of the standard of living used in this report is the proportion of total current expenditure devoted to a typical basket of goods, including food, personal care items, power costs and telephone charges. Where a couple-only household and a couple household with two children have the same standard of living using this measure, the difference in the total spending of the two households is assumed to be the costs of the two children. This should not be confused with the costs of the children. That is, not only are the food, power and telephone costs associated with children estimated, but the total costs associated with children are as well. It is only when attempting to derive the comparable standard of living indicator that the restricted basket of expenditure items outlined above is used.
2.2 Data source
The data source used in this report is the publicly released 1998-99 Household Expenditure Survey (HES) unit record file (ABS 2000). This Australian Bureau of Statistics (ABS) survey collected information on household expenditures, incomes and a wide range of other socioeconomic characteristics. In total, 6,892 confidentialised records are included in the publicly released file, representing some 7.1 million households.
However, this report only includes households where the reference person or spouse is aged 20 to 59 years and where there are no other persons present or where there are one or more dependent children under 18 years of age. This restriction reduces any age-related effects that might be associated with families-those with and without children-having different characteristics.
This report also excludes households:
- whose principal source of income was from self-employment or reported as being from 'private sources' (for example, from interest or superannuation)
- with negative or zero consumption expenditure
- with negative or zero income
- where the ratio of household total expenditure to household total income is greater than two.
The final data set therefore contains 3,340 records, representing some 3.234 million households.
One slight complication is that the age ranges in the original HES file do not exactly match the age ranges required for this report, which were selected to conform to the current age ranges for Family Tax Benefit (FTB) Part A and child support assessment. The relevant age ranges for FTB (A) are 0 to 12 years, 13 to 15 years, 16 to 17 years, and 18 to 24 years. For child support assessment, it is less than 18 years of age. Age ranges in the HES are comparable except for children aged between 13 and 17 years, who are classified into two age ranges-13 to 14 years and 15 to 17 years. To simulate the costs for children aged 13 to 15 years, we take two-thirds of the costs from the estimates for 13 to 14 year olds and one-third of the costs from 15 to 17 year olds. Sixteen to 17 year olds are held to have the same costs as 15 to 17 year olds. Given our earlier research which shows that the direct costs of very young children were less than those of other children (Percival & Harding 2002), we also estimate costs separately for 0 to 4 year olds and 5 to 12 year olds: these age variables are present in the HES so no imputation was required.
To 'age' the 1998-99 data to the desired 2005-06 timeframe, we index incomes and expenditures by the projected increase in the Consumer Price Index during that period, thus maintaining the relationships apparent in 1998-99 but expressing spending in current dollar values. While there may have been some changes in income and expenditure patterns during this period, particularly given the introduction of the Goods and Services Tax in July 2000, a more comprehensive analysis will have to await the release of the next HES.
2.3 Definition of expenditure
In this report, expenditure is defined as current household expenditure. This is total household expenditure as recorded on the HES less:
- repayment of mortgage principal for the family home
- other capital housing payments (including additions, extensions and renovations to a family home, and purchase of other dwellings)
- expenditure on superannuation and life insurance.
The reason for excluding these items is that they represent savings, not consumption. However, it needs to be acknowledged that expenditure on at least some of the above items is likely to be influenced by the presence of children in the family-that is, they have a non-discretionary element. For example, it is more likely that families with children will purchase life insurance.
Similarly, in the case of housing, once the decision is made to become a home owner, the subsequent housing costs are not discretionary, including those that represent a form of savings.
What would be the effect of including items of non-current expenditure in the cost estimates? Most likely it would increase the costs of older children. For example, typical housing repayment patterns see, over time, an increasing proportion go towards paying off the mortgage principal. As a result, the housing costs of older families (who are more likely to have older children) could be biased towards greater repayment of this mortgage component. (This may, however, be offset by the Espenshade methodology not directly comparing families at the same point in their lifecycles. That is, couples with older children, who would be older themselves, are not compared with older couples without children. Instead, they are compared to couples without children of all ages.) It is also possible that families with older children could be more likely to be paying for home extensions and renovations.
An important difference between this report and our earlier estimates of the costs of children published in the AMP.NATSEM Income and Wealth Reports series (Percival & Harding 2002) is that child care costs are excluded from expenditure estimates. This is because the Taskforce has noted the major changes in government subsidies to child care since 1998-99 and has thus determined that major child care costs should be dealt with separately in a revised Child Support formula. The labour force status of parents with children varies greatly, ranging from parents who are not in the labour force and who do not use child care to those who work full-time and use it extensively. Simply including average costs of child care within the child cost estimates therefore overstates the child costs of those who do not incur child care costs and understates the costs of those who have substantial child care costs.
A further important difference to earlier work is that in this report we attempt to estimate the costs of children in sole parent families, not just on costs of children in intact couple families. This provides the Taskforce with data on the likely costs of children in separated families. The child costs for the two family types are estimated independently, by separating the data according to the number of adults present in the household (that is, one or two).
3. Estimated costs in couple families
For the subsequent analysis, the restricted population of families with children are divided into quintiles, with the 20 per cent of households with the lowest gross incomes placed in the low-income group. In devising the quintiles, sole parents and couples with children are considered separately. Low-income families are defined as the bottom one-fifth of families with children, middle-income families the middle one-fifth, and high-income families the most affluent one-fifth.
It is important to appreciate that this report examines the gross costs of children. In setting out a proposed new Child Support Scheme, the Ministerial Taskforce considers the net costs of children, which represents gross costs minus the contribution made by the Australian Government to those costs by way of Family Tax Benefit (Part A). Another important difference is that this report examines the gross costs of children at various gross household income levels, whereas the Taskforce considered the net costs of children at various taxable income levels. Particularly for larger families, there can be substantial differences between taxable and gross income, due to the receipt of substantial non-taxable income through such sources as Family Tax Benefit (Parts A and B).
3.1 Costs of children by age
The costs of children were first estimated for couples with children with a single child in each of the defined age and income ranges. The results are shown in Table 1 and in Figure 1.
| Level of income | Average income | Age of child | |||
|---|---|---|---|---|---|
| 0 to 4 | 5 to 12 | 13 to 15 | 16 to 17 | ||
| Low income | 661 | 45 | 121 | 182 | 260 |
| Middle income | 1,330 | 85 | 187 | 269 | 364 |
| High income | 2,662 | 152 | 291 | 404 | 522 |
| Average | 1,473 | 91 | 195 | 279 | 375 |
Figure 1: Estimated average costs of a single child in couple families, by age of child and family income, 2005-06
As expected, the direct costs of children increase with the age of the child and the level of family income. The lowest direct costs of $45 a week are estimated for children aged 0 to 4 years living in low-income families (with average gross incomes of $661 a week). The highest costs of $522 a week are estimated for 16 to 17 year olds living in high-income families. Wealthier families spend a greater amount on their children, whatever their ages. Generally speaking, families in the high-income group spend more than twice as much on their children as families in the low-income group.
While there is a steady rise in the cost of a child as family income increases, when total costs are considered as a proportion of family income, there is a fall as incomes rise. However, the rate of decline reduces as family income rises (Figure 2).
Figure 2: Estimated average costs of a single child in couple families as a proportion of gross income, by age of child and family income, 2005-06
The costs of a child as a proportion of combined family income range between 7 per cent (for a child aged 0 to 4 years in a high-income family with a gross income of $2,662) to 39 per cent (for a child aged 16 to 17 years in a low-income family with an income of $661 per week). Interestingly, as Figure 1 illustrates, there is much less variation in the direct costs of children by quintile for older children which, in turn, means the proportion of family income devoted to spending on older children falls sharply as family income increases. High-income families with a child aged 16 to 17 spend just twice as much as low-income families on comparable children, despite having four times as much income (Figure 1). As a result, expenditure on children aged 16 to 17 years falls sharply from 39 per cent of gross family income for low-income families to 20 per cent of income for high-income families (Figure 2). In contrast, high-income families with a young child (aged 0 to 4) spend about three times as much on their child as low-income families (Table 1). As a result, expenditure on younger children as a percentage of income shows relatively little variation between the quintiles, ranging from 6 to 7 per cent of gross income (Figure 2).
3.2 Costs of children by number of children
The next stage considers the costs of children according to the number of children in the family. For this purpose, estimates represent the costs of children averaged across all age ranges. (An alternative would be to estimate average total costs for hypothetical families-for example, a family with one child aged 4 years and another child aged 15 years, and so on.) It should be noted that this is not effectively an estimate of the average costs of children up to 17 years, as it assumes that family incomes remain constant across a child's different ages. This is, of course, not the case, as incomes typically increase during a family's lifecycle. Calculating lifecycle costs requires the use of estimates of average variations in family incomes over the child-rearing years. This approach was adopted by Espenshade in presenting estimates of the total parental expenditure on children (Espenshade 1984) and Percival and Harding (2002).
Table 2 and Figure 3 show the costs of children by number of children. Again the costs of each child rises with family incomes. Low-income families with one child spend $114 a week on that child, while high-income families with one child spend $285 a week.
| Level of income | Average income | Number of children | ||||
|---|---|---|---|---|---|---|
| 1 child | 2 children | 3 children | 4 children | 5 children | ||
| Low income | 661 | 114 | 209 | 290 | 362 | 427 |
| Middle income | 1,330 | 179 | 317 | 428 | 522 | 605 |
| High income | 2,662 | 285 | 492 | 651 | 779 | 888 |
| Average | 1,473 | 188 | 331 | 446 | 543 | 627 |
Figure 3: Estimated average costs of children in couple families, by number of children and family income, 2005-06
As Figure 4 shows, the cost of a single child amounts on average to between 11 and 17 per cent of family income, for two children 18 to 32 per cent and, for three children, about 24 to 34 per cent. As discussed further, costs as a percentage of income continue to increase as family size increases, reaching 55 per cent of the gross income of a low-income family with four children and 65 per cent of the gross income of a low-income family with five children. Costs as a percentage of income decline sharply for large families, dropping to only 29 per cent of gross income for a high-income family with four children and 33 per cent for a high-income family with five children. The costs of each additional child in families with up to five children are shown in Table 3. Costs of the first child are the greatest across all incomes (between $114 and $285). For an average couple with children family the average cost of a second child is approximately 76 per cent of cost of the first child, while the cost of the third child is approximately 61 per cent of the first child. The reductions in the average cost of each additional child result from the expenditure constraints and economies of scale families experience as their size increases.
Figure 4: Estimated average costs of children in couple families as a percentage of gross income, by number of children and family income, 2005-06
| Level of income | Average income | Number of children | ||||
|---|---|---|---|---|---|---|
| 1 child | 2 children | 3 children | 4 children | 5 children | ||
| Low income | 661 | 114 | 95 | 81 | 72 | 65 |
| Middle income | 1,330 | 179 | 138 | 111 | 94 | 83 |
| High income | 2,662 | 285 | 207 | 159 | 128 | 109 |
| Average | 1,473 | 188 | 143 | 115 | 97 | 84 |
| As % of one child family costs | 100 | 76 | 61 | 52 | 45 | |
In proportional terms, the additional costs of each child diverge as incomes rise. The gap between what families spend on a single child and the additional amounts they spend on subsequent children contracts as incomes rise. At low family incomes of $661, the costs of the second child are approximately 83 per cent of those of the first, while the costs of the third child are approximately 71 per cent of those of the first. For high-income families the costs of the second child are approximately 73 per cent of those of the first, while the costs of the third child are approximately 56 per cent of those of the first. For five children families the differences are even more marked, with the average marginal cost of the fifth child representing 57 per cent of first child costs in low-income families but only 38 per cent of first child costs in high-income families.
The reasons behind this trend are not clear. It may be that lower income families receive greater government assistance relative to the costs of children than do high-income families. It may also be that economies of scale with respect to children rise with income. As well, the caution noted at the start of this section with respect to variations in lifecycle incomes needs to be considered with these estimates.
Results suggest economies of scale for additional children, particularly for middle to higher income families. As shown in Tables 3 and 4, the marginal costs of the second child are always lower than those of the first, while the marginal costs of the third child are lower again. This suggests the costs of second and subsequent children are lower, as children can share rooms, pass on clothes and toys, and so on. It should also be emphasised, however, that the results reflect budget constraints faced by parents. In other words, the marginal costs of the third and subsequent children are lower in part because, at any given income level, parents cannot afford to spend the same amount on the third child as on the second.
| Level of income | Average income | Number of children | ||||
|---|---|---|---|---|---|---|
| 1 child | 2 children | 3 children | 4 children | 5 children | ||
| ($ per week) | ||||||
| Low income | 661 | 100 | 83 | 71 | 63 | 57 |
| Middle income | 1,330 | 100 | 77 | 62 | 53 | 46 |
| High income | 2,662 | 100 | 73 | 56 | 45 | 38 |
| Average | 1,473 | 100 | 76 | 61 | 52 | 45 |
4. Estimated costs in sole parent families
The estimated costs of children in sole parent families require particular attention, given overseas research suggesting that separated families may face higher child costs than intact families. In interpreting the following figures, it should be recalled that income quintiles are separately created for couples with children and sole parents. The lower incomes of sole parent families relative to couple with children families are clear in the average incomes applying within each of the income groups. The average gross incomes of sole parents in the bottom quintile of sole parents are only $284 a week, well below the average $661 a week recorded by the bottom quintile of couple with children families. Similarly, the top quintile of sole parents have gross incomes of only $1,169 a week, less than half the $2,662 received by the top quintile of couples with children.
4.1 Costs of children by age
The costs of children were first estimated for sole parents with a single child in each of the defined age and income ranges. The results are shown in Table 5 and Figure 5.
| Level of income | Average income | Age of child | |||
|---|---|---|---|---|---|
| 0 to 4 | 5 to 12 | 13 to 15 | 16 to 17 | ||
| Low income | 284 | 77 | 81 | 94 | 179 |
| Middle income | 459 | 102 | 106 | 125 | 220 |
| High income | 1,169 | 184 | 186 | 218 | 345 |
| Average | 583 | 115 | 119 | 140 | 240 |
As expected, the direct costs of children increase with the age of the child and with the level of family income. The lowest direct costs of $77 a week are estimated for children aged between 0 and 4 years living in low-income sole parent families (with average gross incomes of $284 a week). The highest costs of $345 a week are estimated for 16 to 17 year olds living in high-income sole parent families. Wealthier sole parent families spend a greater amount on their children, whatever their ages. Families in the high-income group generally spend at least twice as much on their children as sole parents in the low-income group.
Figure 5: Estimated average costs of a single child in sole parent families, by age of child and family income, 2005-06
Again, while there is a steady rise in the costs of a child as family income increases, when total costs are considered as a proportion of family income, there is a fall as incomes rise (Figure 6).
For sole parent families, the costs of a child as a proportion of their gross income ranges between 16 per cent (for a child aged 0 to 4 years in a high-income family with a gross income of $1,169) to 63 per cent (for a child aged 16 to 17 years in a low-income family with an income of $284 per week).
Figure 6: Estimated average costs of a single child in sole parent families as a proportion of gross income, by age of child and family income, 2005-06
4.2 Costs of children by number of children
Table 6 and Figure 7 show the costs of children in sole parent families by the number of children. Again the costs of each child rise with family incomes. Low-income sole parent families with one child spend $89 a week on that child, while high-income sole parent families with one child spend $204 a week. Where there are one to three children, high-income sole parent families spend roughly twice as much on their children as low-income sole parent families. However, where there are four children, high-income sole parent families spend less than twice as much as low-income families.
| Level of income | Average income | Number of children | |||
|---|---|---|---|---|---|
| 1 child | 2 children | 3 children | 4 children | ||
| Low income | 284 | 89 | 151 | 204 | 253 |
| Middle income | 459 | 117 | 192 | 253 | 307 |
| High income | 1,169 | 204 | 320 | 405 | 477 |
| Average | 583 | 131 | 212 | 277 | 334 |
Figure 7: Estimated average costs of children in sole parent families, by number of children and family income, 2005-06
As Figure 8 shows, the costs of a single child amount on average to between 17 and 31 per cent of family income, for two children 27 to 53 per cent, and for three children, between 35 and 72 per cent. Low-income sole parents with four children on average devote a very high proportion of gross income to their children, although the small sample size should be noted, as should the fact that many low-income households recorded within the ABS Household Expenditure Survey are apparently dissaving.
Figure 8: Estimated average costs of children in sole parent families as a percentage of gross income, by number of children and family income, 2005-06
The costs of each additional child in sole parent families with up to four children are shown in Table 7 and Table 8. The costs of the first child are the greatest across all incomes (between $89 and $204). For an average sole parent family the average costs of a second child are approximately 62 per cent of the costs of the first child, while the costs of the third child are approximately 50 per cent of the costs of the first child. For the fourth child this figure drops to 44 per cent.
At low family incomes of $284 the costs of the second child are approximately 70 per cent of that of the first, while the costs of the third child are approximately 60 per cent of those of the first. For high-income families the costs of the second child are approximately 57 per cent of those of the first, while the costs of the third child are approximately 42 per cent of those of the first.
In general, the costs of children in sole parent families follow similar patterns to those of intact couple families-older children cost more and families with higher incomes spend more on their children of all ages, but especially older children.
| Level of income | Average income | Number of children | |||
|---|---|---|---|---|---|
| 1 child | 2 children | 3 children | 4 children | ||
| Low income | 284 | 89 | 62 | 53 | 49 |
| Middle income | 459 | 117 | 75 | 61 | 54 |
| High income | 1,169 | 204 | 116 | 85 | 72 |
| Average | 583 | 131 | 81 | 65 | 57 |
| As % of one child family costs | 100 | 62 | 50 | 44 | |
| Level of income | Average income | Number of children | |||
|---|---|---|---|---|---|
| 1 child | 2 children | 3 children | 4 children | ||
| ($ per week) | |||||
| Low income | 284 | 100 | 70 | 60 | 55 |
| Middle income | 459 | 100 | 64 | 52 | 46 |
| High income | 1,169 | 100 | 57 | 42 | 35 |
| Average | 583 | 100 | 62 | 50 | 44 |
5. Summary and conclusions
This report estimates the direct gross costs of children in one and two-parent families in Australia, where the costs of children are defined as parental expenditures on children up to 17 years of age. The level of expenditure is determined by comparing the expenditures of families with the same number of adults, with and without children, and at the same 'material standard of living'. The 'material standard of living' measure represents the proportion of total expenditure spent upon a basket of goods that includes food consumed at home, fuel and power. No account is taken of the indirect costs of children (for example, the forgone earnings due to mothers working part-time rather than full-time).
There are several important findings in this report. Not unexpectedly, these include that the average costs of children in Australian families vary according to the age of the child, the income level of the parents and the number of children in the family. More specifically:
- The costs of a child are lowest for children in the youngest age group (at $85 a week for 0 to 4 year olds living in middle-income couple families with an average gross income of $1,330 a week) and highest for children in the oldest age group (at $364 a week for 15 to 17 year olds in the same middle-income couple families).
- Higher income families spend more on their children than lower income families (for example, the costs for 5 to 12 year olds are $121 a week for couple families in the bottom income quintile, rising to $291 a week for couple families in the top income quintile).
- While the dollar costs of children rise in line with rising family incomes, they fall when expressed as a proportion of gross family income (particularly for older children).
- The average expenditure per child is found to be greatest for families with one child and this falls for larger families. The average costs of the first child in couple families are $179 for middle-income couple families. The costs of a second child are $138 for the same families, the third child $111, the fourth child $94, and the fifth child only $83.
- The average expenditure on children in sole parent families is higher as a percentage of gross income than in couple families. It is unclear to what extent this reflects the lower incomes of sole parent families and the fact that there is one fewer adult sharing the family budget.
In assessing the results of the study, it must again be stressed that the costs of children presented are averaged estimates derived from reporting of what parents spend to meet all household costs. Being averages, actual expenditures on children will often be considerably higher or lower for particular families than the estimates presented-that is, nothing suggests a prescriptive level of parental expenditure.
Appendix: Detailed description of methodology
This appendix provides further details about the methodology used in this report. It involved the estimation using OLS and the 1998-99 HES data of two key equations to predict total consumption of a family and household living standards.
Equation (1) had the following form:
Where
C = household consumption expenditure
fY = total household weekly income
fY2 = the square of total household weekly income
Agei = number of persons of age i in household
For the second equation (2) a functional form specified by Betson (1990) was used.
Where
LNPF = the logit of the proportion of household consumption expenditure spent on the selected basic goods
LEFS = the log of per capita consumption
LEFS2 = LEFS squared
LNF = the log of family size
CKAi = number of persons of age i in household divided by family size
This form is derived from a class of equations referred to in the literature as Working-Leser (WL) equations (Working 1943; Leser 1963). These have the general form of:
Where
w = the expenditure share of a particular item (for example, food)
lnC = the log of total expenditure
f = household size
d = vector of selected demographic variables (for example, the number and ages of children, number of adults)
Equations of this form have been widely used in estimating expenditure-based equivalence scales (see, for example, Carlucci & Zelli 1998; Tran Nam & Whiteford 1990). This form was preferred over the one used by Espenshade (1984) because it provides a better fit for data and is better able to differentiate the costs of children of different ages.
Having estimated both equations, the total costs of a child are calculated as follows:
- Assuming values for husband's income (hY), spouse's income (if present) (sY) and Agei … Agen, estimate the value of C1 using equation (1) for a couple family with one child.
- By substituting this estimated value of C1 for the couple with one child into equation (2), calculate the predicted value of LNPF.
- Assuming the same value of LNPF (that is, the same standard of living), substitute this value into equation (2) for a couple without a child and solve for C2.
- The difference between the two estimated costs (that is C1 and C2) is the estimated costs of a child at income level hY + sY.
Endnote
1. The authors would like to thank Patrick Parkinson for his helpful comments on an earlier version of this report.
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