Fertility Decline and Changing Household Budget Allocation in Imperial Germany: Evidence from an Almost Ideal Demand System

Abstract

Income and household expenses of families are a long-standing topic of interest for economists, demographers and policy makers. The timing of the first fertility transition in Germany coincides with a growing standard of living. As couples were having fewer children, they could spend more on child quality rather than quantity. However, individual-level consumption data has so far not been used to study the period of fertility decline. This paper investigates household consumption behavior in late 19 ^th -century Germany using the Fischer dataset (1859 to 1914), which provides individual-level information on income, expenditure, and household composition. First, we find a decoupling of fertility and income: the income elasticity of children is positive but close to zero, suggesting that households were already moderating their fertility response to rising incomes. Surprisingly, the positive income effect is most pronounced after 1890 and in large cities. Second, using an Almost Ideal Demand System, we show that larger families reallocated their budgets away from health, stimulants, and culture & education – regardless of household income – while animal food products remained largely protected. This heterogeneous crowding-out across expenditure categories provides consumption-based evidence for the quantity-quality trade-off. Third, we reveal that these reallocation patterns were stronger in urban areas. Fourth, we document that these patterns intensified after 1890, which ties into our findings of decreasing income effects. Together these results suggest that urbanization and changing institutional frameworks – i.e. the extension of free and compulsory schooling, restrictions on child labor, and the emergence of the welfare state – probably affected individual fertility choices at the time of the first fertility decline.