The Economics Of The Family: Peeking Into The “Black Box”

More in an occasional series about an economist’s approach to life and the universe!

When it was announced in 1990 that the family benefit was to be scrapped,
an off-the-cuff comment by Prime Minister David Lange seemed to attract
rather more attention than the policy change itself. In defending the decision to axe the universal benefit in order to target welfare assistance
on low income families, Lange said “I don’t need the family benefit”. To
which women up and down the country replied “You don’t get the family benefit, your wife does”.

Until very recently, economists haven’t had the analytical tools to understand the implications of what women have known all along: the person
who controls the income, has a large say in how it is spent.

Economists typically view the family as a “black box” Instead, economists have typically assumed that all household income is
pooled; and as a consequence, family expenditure is assumed to depend on
total family income, rather than on the incomes of individual family members.

Of course if total family income is the only thing that determines
family expenditure patterns, then Lange’s statement about the family benefit would not have aroused the ire of women up and down the country.
Furthermore, there would be no issue for policy makers regarding the targeting of income-assistance on individual family members. It simply
would not matter which household member received family benefit or family
support payments. Economists who persist in viewing the family as a “black
box”, with income flowing in and demands for goods and services flowing
out, cannot deal with these issues.

Spending patterns reflect the control of finances within the family The challenge facing economists interested in the economics of the family,
is to develop new ways of thinking about families which reflect the knowledge that family expenditure decisions are derived from the divergent
interests of husbands and wives. Economists must respond to the evidence
from a number of studies, which show that income controlled by the husband
and wife have significant and often substantially different effects on family behaviour, whether measured by expenditures on different kinds of
goods and services, or by outcomes such as child health. The most provocative studies have come from Ghana and Brazil where it has been found
that children, especially daughters, are taller when their mothers control
a larger proportion of family resources.

New Zealand research Qualitative research by Robin Fleming and Susan Easting on a sample of New
Zealand women suggests that women’s expenditure on their own dental care is
correlated with their degree of control over family income. Many women from
supposedly “well off” families were unable to “afford” a visit to the dentist.

A “natural experiment” One way of testing whether it really is true that who holds the purse strings controls how the money is spent, is to look at what happens when
income is transferred from husbands to wives (or vice versa). Such a “natural experiment” occurred in Britain in the late 1970s. The universal
child allowance, which had consisted primarily of a reduction in the taxes
withheld from a father’s pay, was replaced by a cash benefit to the mother.
Researchers noted a shift towards relatively greater expenditure on women’s and children’s goods coinciding with the policy change – strong
evidence against the notion that total household income is the only determinant of family expenditure.

Benefits can be targeted effectively Rejecting the old idea has important policy implications. Policy makers
have often wanted to target benefits to particular people within families.
Economists, blinkered by their belief that only total income matters, have
argued that targeting benefits on particular family members is ineffective. New work suggests that targeting benefits can affect
the distribution of expenditure within families, and information about how
they do so can be used in the optimal design of family support programmes.

There may also be other implications of economists peeking into the “black
box” of the family. Economists interested in the economics of the family
in the United States have long sought an explanation for why many fathers
do not pay alimony on divorce. In New Zealand, the law relating to the
equal division of property on marriage dissolution, may also influence the
welfare of children, particularly if they are in the care of one parent.