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Parental transfers and the labor supply of children

Abstract

To finance their personal consumption, children may rely on transfers in the form of pocket money made by their parents and on personal resources earned from labor market activities. In this paper that focuses on the interaction between these two sources of income, we consider a model of parental transfer where the child can choose his own income through labor supply. The parent commits to a transfer amount that the child takes as given. For our empirical analysis, we use a cross-sectional French survey that includes detailed information about pocket money from parents to schoolchildren. Using a maximum-likelihood method, we estimate a simultaneous-equations model and find that parental transfers do not significantly influence the child's labor supply.

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Notes

  1. Empirical evidence on the motives for family transfers remains scarce in the United Kingdom. Considering both financial transfers and coresidence, Ermisch (1996) and Ermisch and Di Salvo (1997) find some results which are more consistent with the altruistic motivation.

  2. When children are young, they still live at home and parents have undoubtedly more information on the needs of their children. Thus, their reaction in terms of transfers could be more important with respect to a change in the financial situation of their children. This would correspond to a setting of symmetric information within the family.

  3. For recent evidence on the most conclusive empirical tests in both developing and developed countries, see Arrondel and Masson (2004) and (Laferrère and Wolff 2004).

  4. Services are simultaneously a source of disutility for the parent and a source of satisfaction for the child, so that part of the parent's revenue is now endogenous.

  5. Recently, Gatti (2000); Fernandes (2000) and Villanueva (2001) have focused on the altruism model in an incomplete information setting. The main conclusion of these studies is that transfers from parents are expected to respond poorly to changes in the distribution of incomes within the family.

  6. Pezzin and Schone (1999) also model labor force participation of adult children jointly with care and living arrangements. See also the contribution of Byrne et al. (2002) and the references therein.

  7. The hours reduction of men is larger when the men expect to receive additional inheritances.

  8. In addition, the importance of transfers from parents in the education decisions of their children is likely to depend on the degree to which young children have freely access to capital markets.

  9. So, we do not focus on the issue of intragenerational redistribution between siblings. For instance, parents could provide larger amounts of financial transfers to the youngest siblings in order to delay the leaving home decision.

  10. In Dustmann and Micklewright (2001), the optimal solutions of hours worked and pocket money are given by the intersection of two reaction functions (one for the child and one for the parent). In that case, the amount of transfer is not efficient. Parent should transfer more since they do not account for the fact that transferring more resources allows the child to consume more leisure.

  11. With a similar precommitment by the parent to a transfer, this equality does not hold in the model developed in Chami (1996) where the child has private information on his effort level and the child's effort affects his outcome.

  12. Comparative static is obtained by differentiating the system of first-order conditions (2) and (5).

  13. Using data of 16-year-old British children, Dustmann and Micklewright (2001) have information on the number of hours worked. However, because both the parental transfers and child's hours worked are observed as categorical variables, the authors only exploit information on the discrete choice of labor supply.

  14. For a more accurate description of the effect of child's age and education on the distribution of allowances, see Barnet-Verzat and Wolff (2002).

  15. Estimating the corresponding structural model is not trivial since the degree of parental altruism is clearly an unobservable parameter. On this issue, see le Blanc and Wolff (2003).

  16. And there are other reasons for these residuals to be correlated. For instance, if they live together, the parent and the child share a similar standard of living in terms of public goods.

  17. On conditional distributions for the multivariate normal distribution, see Greene (1993).

  18. For the choice of initial estimates, we use estimates obtained with an appropriate two-stage method.

  19. Unfortunately, there is no information in the survey concerning the ability test score of the child. Another proxy is given by the number of years repeated, but this variable may be problematic since it can be both a cause and a consequence of the child's decision to work. Our empirical results remain unchanged with that covariate.

  20. An explanation is that parents who undertake intensive religious activities are less indulgent with their children, so that making cash gifts to young children may be seen as permissive.

  21. Conversely, having older siblings slightly reduces the parental transfer, but the relationship remains insignificant. Children who live outside are more likely to be financially independent, and the parents no longer help them in the form of pocket money and regular transfers.

  22. A similar point may be made about the impact of parents' income in the transfer function in light of the omission of the child's wage, so that the effect of parent's income on transfers is likely to be understated.

  23. The parents' theoretical transfer function suggests that the covariance between the parental transfer and the child's wage is negative. Nevertheless, in cross-section data in which it is difficult to control for heterogeneity across parents and children and between these two source, we may have a positive sign for this covariance.

  24. Using a sample of British teenagers, Dustmann et al. (1997) find that wages of young school children are hardly related in a systematic way to background variables.

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Correspondence to François-Charles Wolff.

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Responsible editor: Alessandro Cigno

This paper is dedicated to my three children, Ambre, Werner and Wilhelm. I would like to thank François Gardes, Lionel Prouteau, Catherine Sofer and seminar participants at the 21èmes Journées de Microéconomié Appliquée (Lille, May 2004). I am also indebted to two anonymous referees for very helpful comments and numerous suggestions on previous drafts. Any remaining errors are mine.

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Wolff, FC. Parental transfers and the labor supply of children. J Popul Econ 19, 853–877 (2006). https://doi.org/10.1007/s00148-005-0012-4

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Keywords

  • Pocket money
  • Child's labor supply
  • Altruism

JEL Classification

  • C35
  • D64
  • J2