An Economic Analysis of Optimum Population Size Achieved Through Boosting Total Fertility and Net Immigration

• Main Author: HOON, Hian Teck
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Labor Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1386; https://ink.library.smu.edu.sg/context/soe_research/article/2385/viewcontent/20_2012_AnEconomicAnalysisofOptimumPopulationSizeAchievedThroughBoostingTotalFertilityandNetImmigration.pdf
• Institution: Singapore Management University

Without net immigration, the population size is projected to decline from 2025 onward. Does it matter? To answer this question, the paper proceeds in two main parts. In the first part, taking a citizen's utility as a measure of welfare, we identify the channels through which a larger population size reduces welfare, on the one hand, and increases welfare on the other hand. The optimum population size is achieved when the net resultant effect of all these channels leaves citizens' welfare at the maximum. When current and projected total fertility rates without net immigration lead to a projected path of actual population size that glides below the path of optimum population size, the policy question is how best to boost population increase to reach the optimum. The second part of the paper analyzes the costs to Singapore society of reaching the optimum by measures to boost total fertility rate, on the one hand, and allowing net immigration flows on the other hand. A starting point of economic analysis uses neoclassical growth theory to demonstrate how an increase in population size reduces per capita consumption and hence utility via a "capital dilution" channel. With a limited land size, an increase in population size raises population density, which lowers welfare through a "congestion" channel. The paper, however, identifies four other channels through which a larger population size increases welfare. These are a "tax base" channel, a "Mozart effect" channel, a "human capital externalities" channel, and an "Okun's Law" channel. To analyze the costs to Singapore's national budget of boosting the total fertility rate, we start off with the classic Becker model of fertility decisions and quantity-quality trade-off. When parents value both the quantity as well as human capital level ("quality") of children, the Becker model predicts that when parents' incomes rise, they choose quality over quantity. (This can be called a level effect.) When education boosts a child's human capital, and higher growth rates raise the marginal productivity of parental investment in a child's human capital, the expected decline in GDP growth rates as the Singapore economy matures would boost total fertility. (This can be called a growth effect.) The impact of policy measures such as parental leave, childcare subsidy and the Baby Bonus on total fertility rate can be analyzed in terms of substitution and income effects. The costs to Singapore society of net immigration, apart from fiscal subsidies to attract potential immigrants, would appear to come from its impact on social capital. In particular, a recent concept of "identity economics" - that an individual's payoff or utility is affected by identification with particular social categories -can help us understand the nature of the cost of achieving a given increase in population via net immigration. The optimal mix of measures to boost total fertility rate and allowing net immigration flows to achieve a given increase in the size of population equates the marginal cost of the two approaches. Forging a national identity is an investment that can lower the cost of achieving a given increase in population size.