Are the outcomes of young adults linked to the family income experienced in childhood?

• Author: Maloney, Tim

Abstract

This study uses longitudinal data from the Christchurch Health and Development Study (CHDS) to estimate the effects of early family income on a wide variety of detrimental outcomes experienced by young adults. The CHDS data used for this project follow a birth cohort through to age 21. One advantage of this data source is that it provides information on the income of the family in which these young people resided between the ages of one and 14. Accurate and comprehensive measurements of income histories are critical to the estimation of income effects on any subsequent outcomes. We find that subjects living in families with higher income are significantly less likely to experience economic inactivity, early parenthood and criminal activity, and to enter adulthood without a school or post-school qualification. Among these detrimental outcomes, only alcohol or drug abuse or dependence appears to be unrelated to early family income. Once mediating factors are included in our regression models, however, many of these income effects weaken and become insignificant. This is a common finding in the literature, and raises the question of the extent to which the effects of family income operate through various indirect pathways.

INTRODUCTION

This study empirically estimates the association between early family income and a variety of outcomes experienced by young adults. The results of this research should be of interest in public policy discussions on the use of the tax-transfer system to redistribute income in targeting many of these outcomes (youth economic inactivity, early parenthood, alcohol or drug dependence, criminal activity, and not having a school or post-school qualification).

Longitudinal data from the Christchurch Health and Development Study (CHDS) on the progress of approximately 1,200 individuals born in Canterbury hospitals and followed through to age 21 are used in this analysis. One key advantage of the CHDS data for this study is that the data provide multiple observations on family income from ages 1-14 of the subject. This should afford a better measure of the "permanent" income experienced by the child. It also offers the possibility of testing for how income at different stages of adolescence might have quite dissimilar effects on these various outcomes.

This article is part of an ongoing study commissioned by the Ministry of Social Development to explore both the overall associations between early family income and the subsequent outcomes of young adults, and the possible pathways through which family income might eventually influence these outcomes. In this paper, both base controls (factors that largely pre-date observed family income) and mediating variables (factors that may themselves be influenced by family income) are gradually added to our regression models. The goal is to shed light on the ways in which early family income might work to influence some of the critical outcomes experienced by young adults.

The remainder of this paper is organised in the following way. The next section provides a brief overview of some of the more recent and relevant empirical findings and methodological issues in the literature on the effects of family income on child or young adult outcomes. This is followed by a section that describes the CHDS and discusses the methodology that will be used in the present study. The subsequent section presents our regression results. The final section draws some broad conclusions from this study, and considers the potential value for more in-depth analysis in future work in this area.

LITERATURE REVIEW ON FAMILY INCOME AND CHILD OR YOUNG ADULT OUTCOMES

There have been a number of prominent empirical studies over the last few years on the effects of family income on various child and young adult outcomes. This has been partly prompted by mounting concerns in many countries over the implications of being raised in low-income families for the life prospects of children. Many of these studies have used data from the United States. More recently, however, empirical studies in this area using data from other countries have been published in economic journals.

Susan Mayer's book on this subject (1997) was followed by a report that she completed for the Ministry of Social Development (2002). Mayer began her report by reaffirming that "parental income is positively associated with virtually every dimension of child wellbeing that social scientists measure" (2002:6). Yet, when controls were introduced for various family background factors that are also likely to influence child outcomes, she noted that the estimated effect sizes declined substantially. The net effects of income, she concluded, were small to modest. Income seemed to have its largest effects in the areas of cognitive achievement and educational attainment.

Mayer found some support for the conclusion that family-income effects on child outcomes may be relatively larger for children from low-income families. Evidence suggests, for example, that a $10,000 increase in family income would make a bigger positive difference in terms of outcomes for children from low-income than from high-income families. This is an important finding because it suggests that income transfer programmes would have at least the potential for increasing net child wellbeing. The gains in child outcomes from the low-income families (who primarily receive transfers) could more than offset the losses from high-income families (who primarily pay taxes).

The evidence for family income at different stages of child development having differential effects on most child outcomes is unclear, although educational attainment and early childbearing may be exceptions. For the majority of child and youth outcomes, the effects of family income at different stages of child development are not statistically different from one another. Yet there is some evidence to support the view that family income early in the child's life (ages 1-5) may be relatively more important for schooling outcomes, and family income in early adolescence (ages 11-14) may be relatively more important for early parenthood outcomes.

Mayer also cautioned that findings of modest effects of family income on child outcomes could be the result of effective government programmes that target children from low-income families (2002:69-70). Even universal programmes that do not specifically target children from low-income families can help narrow the gap between the outcomes of children from rich and poor families if the effects associated with family income on child outcomes are non-linear. Public education, for example, may substantially moderate the advantages that children from high-income families would otherwise possess.

David Blau (1999) used matched mother-child data from the National Longitudinal Survey of Youth (NLSY) in the United States to estimate the effects of family income on the cognitive, social and behavioural development of children by age five. Like many other researchers, Blau found that measures of more long-term or permanent income have larger estimated effects on child outcomes than short-term or current income. Multiple observations of family income during childhood are critical for gauging the magnitude of these effects on subsequent outcomes. Blau cautioned that interpretations of the estimated effects of family income change in regressions that include "mediating" variables.

A specification that includes inputs or jointly chosen variables yields estimates of income effects that are not useful for policy purposes, because they hold constant variables that will actually change in response to changes in income. (1999:262) Blau concluded that estimated income effects are too small in magnitude for income transfer programmes to be feasible in substantially improving the developmental outcomes among low-income children.

Yeung et al. (2002) extended some of Blau's analyses with the same NLSY data. The authors also examined cognitive achievement and behavioural problems by age five. They suggested two ways in which family income might influence child outcomes.

* The "child investment" mechanism hypothesises that higher incomes improve child outcomes through increased resources available to aid in child development.

* The "family stress" mechanism presumes that higher incomes improve child outcomes through their impact on improved emotional wellbeing of parents and better parenting practices.

The authors claim that they can differentiate between these two pathways by including mediating variables that proxy for both child investments (e.g., childcare expenditures, the quality of the home environment, access to medical insurance and the quality of the neighbourhood) and family stress (e.g., assessments of maternal emotional levels and positive and negative parenting practices). If the income effects are substantially reduced by the inclusion of a particular set of mediating variables, then the authors contend that it is that mechanism that predominates in transforming lower family income into poorer child outcomes.

Yeung et al. concluded that the child investment mechanism more likely accounts for the link between family income and cognitive achievement, while the parenting stress mechanism more likely accounts for the link between family income and behavioural problems. In this same study, the authors also found some empirical support for the claim that both the level and stability of family income matter for both child outcomes. It should be noted that the authors caution that single-point-in-time measures of child outcomes and the two sets of mediating factors hinder this empirical analysis.

Jenkins and Schluter (2002) used German data to estimate the association between family income and the type of secondary school attended. The authors claimed that, in Germany, the type of secondary school attended is closely related to subsequent socioeconomic...