Social Transfers, Changing Family Structure, and Low Income Among Children

Our aim in this paper is to resolve a paradox. Since the 1970s, there has been a downward secular trend in the average real and relative earnings of young adults under the age of 35. Despite the fact that most young children live in households headed by adults under 35, there has been no corresponding secular rise in the incidence of low income among children. Rather child poverty has followed the usual fluctuations of the business cycle. We show that the relative stability in child poverty rates in the face of declining labour market earnings is a result of two factors. First, the decline in market income in young households with children has been offset by rising transfers. Since the 1970s, social transfers have replaced earnings as the main source of income among low income families with children. Second, changes in the fertility behaviour and labour market characteristics of young adults have sharply reduced the risk of young children growing up in low income households. Today’s young parents are better educated, working more hours, having fewer children, and postponing childbirth until later ages when earnings are higher. Although more children do find themselves in single parent families, this change has been swamped by other changes in family patterns and labour market behaviour that have reduced the risk of child poverty. Thus, the upward pressure on low income among children stemming from the labour market has been offset by social transfers, on the one hand, and by changes in family formation and the labour market behaviour of young adults, on the other. Except for cyclical variations, the result has been relative stability in the incidence of low income among children over the 1980s and early 1990s. Whether these offsetting patterns will continue in the last half of the 1990s remains to be seen.