Spending on Children

1. Spending on Children Afternoon Session Part II

2. Topics • Data -- Consumer Expenditure Survey • How do we use this information?

3. Consumer Expenditure Survey • A nationally representative sample of consumer units (families) collected to understand how Americans consume. Its main statistical function is to provide information to update the budget share weights used in the Consumer Price Index. • Only US survey aimed at how Americans spend. • Each consumer unit is interviewed five times, once to collect background information then four times more to collect information on expenditures during the quarter, current family members, and income • My research examines annual expenditures and consequently I have restricted my sample to those units with at least three quarterly interviews.

4. 2006 Report • Data was from the 1st quarter of 1998 through the 1st quarter of 2004 (most recently available data is through the 4th quarter of 2005). • Sample Restrictions: • Must contain a married couple between the ages of 18 and 60 years old • The unit does not have any other adults (18+) living in the unit even if the member is an adult child of the married couple. • Distribution of Sample: Number of Children: 0 1 2 3 4 5+ 3,338 1,778 2,611 1,116 311 91

5. Distribution of Total Spending(July 2003 Dollars) Number of Children 0 1 2 3+ Average Expenditures $44,728 $46,140 $49,834 $48,341 Expenditure at 5th percentile $15,553 $15,766 $18,493 $17,170 25th percentile 27,270 27,916 31,275 28,440 50th percentile 38,759 40,175 44,460 42,248 75th percentile 54,854 57,837 61,934 59,600 95th percentile 93,265 94,340 97,562 102,247 To put in 2007 (October), multiple the above numbers by 1.138. For example, the 95th percentile for childless couples would be $106,136 in today’s dollars.

6. Limitations of Data • Can be used only to estimate the cost of children when there are 1, 2, and 3 children -- not enough sample for 4 or more children in the family to provide reliable estimates • Estimates limited to families who spend roughly $110,000 or less. But remember that families who spend $110,000 a year will have net incomes in excess of $150,000 a year or $12,500 per month. • The public use data codes clothing spending on family members more than 15 years old as adult clothing. If the unit had O children over 15 years old, I recoded adult clothing to be equal to 2/(2+O) times the amount of adult clothing report in file.

7. BCSO Table Net Income Family Spending Spending on Child Care, Excessive Medical (CEX) Use CEX to estimate the relationship between Net Income and Total Spending Savings From Net Income to BCSO Table Rothbarth, Engel, USDA Estimates

8. Previous PSI Report • Used Engel and Rothbarth estimates from my 2000 report • Estimated relationship between net income and total spending, percentage of spending devoted to child care and excessive medical spending using a sample from the 1996 to 1998 CEX • Inflated all dollars amounts to reflect 2004 dollars • The table would change if updated to reflect my estimates from the 2006 report and use more recent CEX data to update the needed relationships to move from net income to the BCSO table

9. Example: Net Income = $4,583 (month)Midpoint of $50,000 to $60,000 Interval • Based upon the 1996 to 1998 data, families with children in this income interval (adjusted for inflation) consumed 88.2% of their net income. Consequently at $4,583 of net income, the family is expected to spend $4,042. • Based upon the Rothbarth estimates from the 2000 report, the family is expected to spend 25.5% of the family’s total spending on one child. Hence total spending on the child is $1,031. • As percentage of total spending, child care was 1.7% and excessive medical spending was 3.5% per child (computed using the 1996-8 CEX data) Subtract: .017(4,042) + .035(1,031) = $105 • BCSO amount = $1,031 - $105 = $926 or 20.2% of net income (this amount differs from the PSI report because of rounding of the entries in Exhibit I-1.

10. Construct net income intervals At the midpoint of each interval, compute as previously done the BCSO entry We could assume the spending was the same within the interval but this would lead to discontinuities as well as other problems The table reflects an linearization of the midpoints. In Exhibit I-2 of the PSI report, they report at the midpoint two numbers: the BCSO entry divided by the midpoint and the slope of the green line (marginal percentages) Smoothing the Table BCSO Net Income

11. How do we choose which Economic Table to Use? • Fact: Different assumptions or methods lead to significantly different Economic Tables? • Should we reconfirm the recommendation of the last group to ‘split the difference’ (Wickham Proposal)? • Given we don’t know the true level of spending on children, can we determine the expected level of spending? For example, let us consider the situation where the true value can either be the Rothbarth or the Engel estimate. The expected value is P[Rothbarth is true] x Rothbarth + P[Engel is true] x Engel

12. Subjective Quiz Based upon what you have heard today, what is the probability that the true cost of raising a child is less than the Rothbarth Estimate _____ equal to the Rothbarth Estimate _____ greater than the Rothbarth Estimate but less than the Engel or USDA Estimate _____ Equal to the Engel or USDA Estimate _____ Greater than Engel or USDA Estimate _____ When filling in your answers, the five numbers must sum to 100%. If you believe we should use one of the estimates, you can put 100 for either the Rothbarth or Engel/USDA

13. Discussion and Questions