The welfare state’s impact on risk attitudes and the consequence for fertility behaviour

Christian Schmitt, German Institute for Economic Research (DIW Berlin) and University of Rostock

Fertility rates in Germany have been exceptionally low for several decades. I investigate to which extent risk aversion or risk affinity translates into fertility behaviour, and whether fertility is affected by economic and social conditions, which are capable of mediating risk attitudes. I aim at answering two major research questions: 1) Does risk aversion foster or hamper the likelihood to opt for the transition to parenthood? 2) Are fertility choices affected by interactions between individual risk attitudes and changes in economic and social conditions? In order to address these questions I distinguish risk attitudes and fertility choices in East and West Germany. Institutional support across Germany might be capable to compensate for occupational adversities like unemployment, e.g., thus containing individual economic risks. However, the Welfare State’s provision of services and support might also raise the internalised level of minimum security, required to make binding long-term commitments like deciding for a first child. In this context, I assume that socialisation under different institutional and social contexts of the FRG and the GDR affected the evolution of different base levels of risk attitudes, where the high predictability and low variability of the GDR’s institutional system fostered a higher level of risk aversion. The key research question rests on whether differences in risk attitudes translate into differences in fertility behaviour. Relying on microdata from the Socio Economic Panel Study (SOEP), the empirical investigation of this issue is based on piecewise constant estimates of first-birth decisions. The findings suggest systematic differences in risk attitudes between individuals who grew up in East and West Germany prior to the fall of the Wall. Moreover childbearing decisions appear to be linked to risk-attitudes with a mediating impact of occupational insecurities, which vastly overshadow the role of risk aversion in opting to start a family.