The Economics of Human Development
James J. Heckman
University of Chicago

October 7, 2014
First Yukichi Fukuzawa Lecture
Keio University

Econ of Hum Dev

Econ of Hum Dev

Econ of Hum Dev

“It is said that heaven does not create one man above or below
another man. Any existing distinction between the wise and thestupid, between the rich and the poor, comes down to a matter ofeducation.” – Fukuzawa Yukichi

Econ of Hum Dev

.45

.5

Figure 1: Trends in Family Income Inequality in Japan

s
nsfer

d Tra

.35

.4

es an
e Tax
Befor

sfers

.25

.3

After Taxes and Tran

1985

1990

1995

2000

2005

2010

Year
Before Taxes and Transfers
After Taxes and Transfers

OLS Slope=0.005, p-value=0.000
OLS Slope=0.001, p-value=0.043

Source: Bradley J. Setzler (2014)

Econ of Hum Dev

Figure 2: Percentage distribution of the number of households by
self-assessed living-conditions, for all the households and specific
19: Percentage distribution of the number of households by self-assessed living-conditions, for all
households Figure
the households and specific households
2010
Very comfortable

Very difficult

All households

Difficult(59.4%)
Somewhat difficult

27.1

Somewhat comfortable
Normal

32.3

4.1

35.8

0.7

(51.5%)

Aged households

21.3

4.0
30.2

44.0

0.5

(65.7%)

Households withchildren

3.8

31.0

34.7

0.3

30.1

(85.6%)

Mother-childhouseholds

0.5

50.5

0%

10%

20%

35.1

30%

40%

50%

60%

70%

13.9

80%

90%

100%

Source: From Ministry of Health, Labour, and Welfare

Source: From Ministry of Health, Labour, and Welfare.
Econ of Hum Dev

Measures of Wealth Inequality (NSFIE)
0.66

Equalized Net Financial Wealth (GINI)

0.64
0.62
0.6
0.58
0.56
0.54
0.52
1984

1989

1994

1999

2004

Source: Lise etal., 2014
Data: National Survey of Family Income and Expenditure (NSFIE)

Source: Lise et al., 2010
Econ of Hum Dev

Poverty Rates in Japan
70
60

50
40
30
20
10
0
1985

1988

Poverty rate (%)

1991

1994

Child poverty rate (%)

1997

2000

2003

2006

2009

2012

Poverty Rate Single Parent (18-65) with Children Under 17

Source: Comprehensive Survey of Living Conditions
Note: Poverty rate is calculated according to OECD guideline (The poverty rate is the ratio of the number of people who fall below the poverty
line and the total population; the poverty line is here taken as half the median household income)Econ of Hum Dev

A Basic Fact on Gender Inequality in Hourly Wage in Japan
Table 1: Gender Inequality in Employment Status and Hourly Wage
(2006 Wage Census in Japan)

Source: Yamaguchi (2014).
Econ of Hum Dev

Figure 3: Poverty rates by household type, mid-2000s
All
%
60

SingleHouseholds with children

50
40
30
20
10

DN
K
SW
E
NO
R
FI
N
AU
T
CH
E
FR
A
IS
L
HU
N
CZ
E
GB
R
BE
L
NL
D
KO
R
SV
K
AU
S
O LU
EC X
D30
GR
C
JP
N
NZ
L
CA
N
DE
U
IR
L
PR
T
IT
A
ES
P
US
A
PO
L
M
EX
TU
R

0

Source: ”Growing Unequal? Income Distribution and Poverty in OECD Countries,” OECD, 2008
Note: Countries are ranked, from left to right, in increasing order of the poverty rate of households without children (in the
top panel) and of those with children (in the bottom one). Data refer to all households, irrespectively of the age of thehousehold head. Poverty thresholds are set at 50% of the median income of the entire population.
Econ of Hum Dev

FigureEducational Inequality Among Age Groups
GINI Country
Report4:Japan
Gini Coefficient of Years of Education in Japan(by Age group)

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

0,18
0,16
0,14
0,12
0,1
0,08
0,06
0,04
0,02
0

Age groups (years old)
Source: International Social Survey Programme (Mechi and Scervini (2010): A new dataset on educational

Source:Figure from Ohtake et al., 2013. International Social Survey Programme (Mechi andinequality).
Scervini(2010):A newofdataset
on educational
inequality).
Note:
Gini coefficients
years of education
are listed separately
by birth cohort. The weighted average of Gini
Note: Gini coefficients of years of education are listed separately by birth cohort. The
coefficients over all age groups is 0.103677, where the weight is the population in each age group.
weighted average of Gini coefficients over all age groups is 0.103677, where the weight is the
population in each age group.
Econ of Hum Dev

Figure 5: Family income plays a key role in determining students’ pathfollowing high school graduation

Percent of High School Graduates

Econ of Hum Dev

Intergenerational Mobility and Inequality:
The “Gatsby Curve”
IGE: ln Y1 = α + βln Y0 + ε
|{z}
|{z}
Income ofparents
Italy

UK

USA

FranceJapan

Germany
NZ

SwedenCanadaAustralia

NorwayFinlandDenmark

0

Intergen. Elasticity of Earnings (IGE)
.1
.2
.3
.4

.5

Income in current
generation

.2

.25
.3
Gini Coefficient, After Taxes and Transfers
Corak's Chosen IGE.35

OLS Slope=2.05, p-value=.001

Source: Bradley J. Setzler (2014)
Note:
Inequality is measured after-taxes and transfers.
Gini index defined on household income.
IGE measured by pre-tax and transfer income of individual fathers and sons.

•••Econ of Hum Dev

.5

USA

Intergen. Elasticity of Earnings (IGE)
.1
.2
.3
.4

Italy

UK

FranceJapan
NZ
CanadaNorwayGermany
Australia

SwedenFinland0

Denmark

.34

.38
.42
Gini Coefficient, Before Taxes and Transfers
Corak's Chosen IGE.46

OLS Slope=1.36, p-value=.093

Econ of Hum Dev

GINI Country Report Japan

Figure 6: Age Distribution of the Poor: Percentage of Poor within Age
Figure 2.25: Age distribution of the poor: percentage of poor within age group
Group
(%)
11
10
9
8
7
6
5
4
3
2

1984

1994

2004

Source: Authors’ calculations using micro data taken from the NSFIE.
Source: Figure from Ohtake et al., 2013. Authors calculations using micro data taken from the NSFIE.

Note: The figure shows the percentage of “the poor” within each age category. The poor includes those whose

Note: The figure shows the percentage of “the poor” within each age category. The poor includes those whose income is lessincome is less than or equal to the national median income, after taking equivalent scale of income (household

than or equal to the national median income, after taking equivalent scale of income (household income is divided by the

income is divided by the square root of the number of household members).

square root of the number of household members).

Econ of Hum Dev

(a) Should there be policies that attempt to lower the IGE?
(b) If so, what form should they take?

Econ of Hum Dev

Becker-Tomes-Solon(Basic Framework used in Literature)
Heritability ↑ β ↑Efficiency of parental investment ↑ β ↑Inequality in wages ↑ β ↑Inequality of public provision of investment ↑ β ↑Econ of Hum Dev

Main Findings of the Literature

Econ of Hum Dev

1. Multiple Skills

Multiple skills vitally affect performance in life across a variety ofdimensions. A large body of evidence shows that cognitive andnoncognitive skills affect labor market outcomes, the likelihood ofmarrying and divorcing, the likelihood of receiving welfare, voting,and health.

Econ of Hum Dev

2. Gaps in Skills

Gaps in skills between individuals and across socioeconomic groups
open up at early ages for both cognitive and noncognitive skills.
Many measures show near-parallelism during the school years acrosschildren of parents from different socioeconomic backgrounds, eventhough schooling quality is very unequal.

Econ of Hum Dev

3. Capabilities Can Be Created by Investment

The early emergence of skill gaps might be interpreted as the
manifestation of genetics: Smart parents earn more, achieve more,
and have smarter children. A body of strong experimental evidenceshows the powerful role of parenting and environments, including
mentors and teachers in shaping skills.
Genes are important, but skills are not solely genetically determined.
The role of heritability is exaggerated in many studies and in
popular discussions. Genes need sufficiently rich environments tofully express themselves. There is mounting evidence that gene
expression is itself mediated by environments. Epigenetics informs usthat environmental influences are partly heritable.
Econ of Hum Dev

4. Critical and Sensitive Periods in the Technology of Skill
Formation

There is compelling evidence for critical and sensitive periods in thedevelopment of a child. Different capacities are malleable atdifferent stages of the life cycle. For example, IQ is rank stable afterage 10, whereas personality skills are malleable through adolescenceand into early adulthood. A substantial body of evidence fromnumerous disciplines shows the persistence of early life disadvantage
in shaping later life outcomes. Early life environments are importantfor explaining a variety of diverse outcomes, such as crime, health,education, occupation, social engagement, trust, and voting.

Econ of Hum Dev

5. Family Investments

Gaps in skills by age across different socioeconomic groups havecounterparts in gaps in family investments and environments.
Children from disadvantaged environments are exposed to a
substantially less rich vocabulary than children from moreadvantaged families. At age three, children from professionalfamilies speak 50% more words than children from working-classfamilies and more than twice as many compared to children fromwelfare families. There is a substantial literature showing that
disadvantaged children have compromised early environments asmeasured on a variety of dimensions. Recent evidence documents
the lack of parenting knowledge among disadvantaged parents.
Parenting styles in disadvantaged families are much less supportiveof learning and encouraging child exploration.
Econ of Hum Dev

6. Resilience and Targeted Investment

Although early life conditions are important, there is considerable
evidence of resilience and subsequent partial recovery. To ourknowledge, there is no evidence of full recovery from initial
disadvantage. The most effective adolescent interventions target theformation of personality, socioemotional, and character skills throughmentoring and guidance, including providing information. Thisevidence is consistent with the greater malleability of personality andcharacter skills into adolescence and young adulthood. The body ofevidence to date shows that, as currently implemented, many later
life remediation efforts are not effective in improving capacities andlife outcomes of children from disadvantaged environments. As ageneral rule, the economic returns to these programs are smaller
compared to those policies aimed at closing gaps earlier.
Econ of Hum Dev

However, workplace-based adolescent intervention programs andapprenticeship programs with mentoring, surrogate parenting, andguidance show promising results. They appear to foster characterskills, such as increasing self-confidence, teamwork ability,
autonomy, and discipline, which are often lacking in disadvantaged
youth. In recent programs with only short-term follow-ups,
mentoring programs in schools that provide students withinformation that improves their use of capacities have also beenshown to be effective.

Econ of Hum Dev

7. Parent-child/Mentor-child Interactions Play Key Roles in
Promoting Child Learning

A recurrent finding from the family influence and intervention
literatures is the crucial role of child-parent/child-mentor
relationships that “scaffold” the child (i.e., track the child closely,
encourage the child to take feasible next steps forward in his or her“proximal zone of development,” and do not bore or discourage thechild). Successful interventions across the life cycle share thisfeature. The child as an “emergent” system.

Econ of Hum Dev

8. High Returns to Early Investment

Despite the generally low returns to interventions targeted toward
the cognitive skills of disadvantaged adolescents, the empiricalliterature shows high economic returns for investments in young
disadvantaged children. There is compelling evidence thathigh-quality interventions targeted to the early years are effective inpromoting skills. This is a manifestation of “dynamic
complementarity”.

Econ of Hum Dev

Hart & Risley, 1995
Children enter school with “meaningful differences” in vocabulary knowledge.
1. Emergence of the Problem
In a typical hour, the average child hears:
FamilyStatus
WelfareWorking Class
Professional

Actual Differences in Quantityof Words Heard
616 words
1,251 words
2,153 words

Actual Differences in Qualityof Words Heard
5 affirmatives, 11 prohibitions
12 affirmatives, 7 prohibitions
32 affirmatives, 5 prohibitions

2. Cumulative Vocabulary at Age 3
Cumulative Vocabulary at Age 3
Children from welfare families:
Children from working class families:
Children from professional families:

500 words
700 words
1,100 words

Econ of Hum Dev

Figure 7: Relation between the mother’s educational background and her
educational Relation
awarenessand thebehavior
between
Mother's(%)
Education Beckground and her
Educational Awareness and Behavior (%)

Junior or Senior High School Graduate

Vocational College or Junior College

University or Graduate School

100
90
80
70
60
50
40
30
20
10
0

Reads picture Takes the child
ProvidesTalks to the Many books at Mother reads
story books to
to visitbreakfast for child about the
home
books
child
museumsthe child every
news
day

Mother visits
museums

Parents areaware thatchildren should
be exposed toforeign cultures

Source: Hamano 2010

Source: Takashi HAMANO, 2010

Econ of Hum Dev

Gaps Open Up Early

Econ of Hum Dev

Figure 8: Mean Achievement Test Scores by Age by Maternal Education

Dropout

Econ of Hum Dev

Lexical Ability of Children by Annual Household Income
35

30

Vocabulary Scores

25

20

15

10

5
3 year olds
< 5million yen

4 year olds
5 to 9 million yen

5 year olds
>9 million yen

Note: Lexical Ability is measured by Picture Vocabulary Test (PVT). PVT measure thedegree of development of language comprehension, in particular, basic “vocabularycomprehension.” The test is used internationally and asks children to perform such tasks aschoosing the most appropriate picture from a set of four for a word given by the examiner.
Econ of Hum Dev

Family Background and Cognitive Measures
Figure 9: Father’s Education

Source: Akabayashi et al., 2013
Econ of Hum Dev

Family Background and Cognitive Measures
Figure 10: Family Income

Source: Akabayashi et al., 2013
Econ of Hum Dev

Figure 11: Mother’s educational attainment and level of academic ability,
Mathematics

Source: Akabayashi et al. (2013).
Econ of Hum Dev

Figure 12: Father’s educational attainment and level of academic ability,
Mathematics

Source: Akabayashi et al. (2013).
Econ of Hum Dev

Figure 13: Family income and academic ability, Mathematics

Source: Akabayashi et al. (2013).

Econ of Hum Dev

Source of Gaps
• Is it due to genes?
• Family environments?
• Parenting and family investment decisions?
• Schools?

Econ of Hum Dev

Trends in Family Environments

Econ of Hum Dev

0.05

Proportion of Children in Family Type
0.10
0.15
0.20
0.25
0.30

Children Under 18 Living in Single Parent Households by Marital Status of Parent

1976

1980

1984

1988

Divorced
Widowed

1992
1996
Year

2000

2004

2008

2012

Married, Spouse Absent/Separated
Never Married/Single

Source: IPUMS March CPS 1976‐2012
Note: Parents are defined as the head of the household. Children are defined as individuals under 18, living in the household, and thechild of the head of household. Children who have been married or are not living with their parents are excluded from the calculation.
Separated parents are included in “Married, Spouse Absent” Category

Econ of Hum Dev

Children Under 20 Living in Single Parent Households by Marital
Status of Single Mother (Japan)8
7
6Perventage

5
4
3
2
1
0
1998

2001

2004
Divorced

2007
Widowed2010

Unmarried

Source: Comprehensive Survey of Living Condition

Econ of Hum Dev

2013

Single Parent Households Among Households with Children under 20 in
Japan
8
7
6

Percentage

5
4
3
2
1
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
single mothersingle father

Source: Comprehensive Survey of Living Condition

Econ of Hum Dev

Capabilities, the Technology of Capability Formation, andthe Essential Ingredients of a Life Cycle Model of Human
Development

Econ of Hum Dev

Capabilities are defined as the real f reedoms people haveto achieve and the beings and doings that they value andhave reason to value(Sen, 1979, 1985, 1992; Nussbaum and Sen, 1993).

Econ of Hum Dev

• Capabilities are multiple in nature.
• More than just cognition of IQ.
• Non-cognitive skills.
• They encompass cognition, noncognitive and social preferences

and personality and preference traits, as well as health.
• Vector of capabilities at age t: θt .
• Capacities to act.
• Capabilities affect (a) resource constraints, (b) agent
information sets and expectations, (c) parental information and
expectations and (d) preferences.
• They are stable across situations but evolve over time.

Econ of Hum Dev

Define relationships Mt mapping θt to outcomes Yt at stage t of
the life cycle as:
M t : θ t → Yt .
(1)
A core low-dimensional set of capacities generates a variety ofdiverse outcomes.

Econ of Hum Dev

Technology of Capability Formation
Cunha and Heckman (2007), Cunha (2007)θt : a vector
θ t +1 = ft (

θt
|{z}

self productivity
and cross effects

,

It
|{z}

,

investment
broadly defined(parents, environment)θP ,t )|{z}parentalcapabilities

Econ of Hum Dev(2)

Complementarity Increases with Age∂ 2 θt+1↑t↑.
∂θt ∂It0

Econ of Hum Dev

Positive at later stages (t > t ∗ ) of childhood∂ 2 θt+1> 0,∂θt ∂It0t > t ∗.

Some evidence suggesting∂ 2 θt+1≤ 0,∂θt ∂It0t < t ∗,

But even if positive, still smaller than at t > t ∗ .

Econ of Hum Dev

Complementarity coupled with self-productivity ⇒Dynamic Complementarity
It ↑ θt+1 ↑θt+1 ↑ ⇒ θt+s ↑ s > 1∂ 2 θt+s+1∴>00∂It ∂It+s

Econ of Hum Dev

Family Preferences for Child Outcomes
Different versions of altruism, paternalism and beliefs about“proper” child rearing

Econ of Hum Dev

Family Resources Broadly Defined:
Parental and Child Interactions
with Financial Markets and Access to Support from ExternalInstitutions(a) Restrictions on transfers across generations(b) Restrictions on transfers within generations (parental lifetime
liquidity constraints)(c) Public provision of investment; public policy towards children

Econ of Hum Dev

Other Constraints on The Family Actively Being Investigated(a) Information on parenting and other aspects of life acrossgenerations(b) Genes(c) Structure of household and assortative matching patterns(marriage markets)

Econ of Hum Dev

The Empirical and Theoretical Challenge
A Life Cycle Framework for Organizing Studies and Integrating Evidence
θt : Capacities at t; It : investment at t; θP ,t : Parental environmental variables
θt+1 = ft (θt , It , θP ,t ): Technology of Skill Formation
θP ,−1I−1

θ−1Prenatal

θP ,0

I0

θ0

Birth

θP ,1

I1

θ1

Early
Childhood, 0–3

θP ,2

I2

θ2

Later
Childhood, 3–6

θP ,T

IT

θT
θT +1

Adulthoodand Beyond

Econ of Hum Dev

Bare-Bones Models of Parental Investment

Econ of Hum Dev

Life lasts four periods:• Two periods as a passive child who makes no economic
decisions (and whose consumption is ignored) but who receives
investment in the form of goods.
• Two periods as a parent.

Econ of Hum Dev

Denote by θ1 the initial capability level of a child drawn from the
distribution J(θ1 ).
(For notational simplicity, denote θP,t = θP = h.)Denoting by h0 the human capital of the child when child reaches
adulthood

Econ of Hum Dev

Simplified parameterization of technology:

 ρt
φt












φt
φt
φt
θt+1 = δt γ1,t θt + γ2,t It + γ3,t h| {z } | {z }investment parental 





human capitalwith 0 < γ1,t , γ2,t , γ3,t , ρt ≤ 1, φt ≤ 1,Pk γk,nt = 1.

Econ of Hum Dev

Final Form Representation
If T = 2, ρ1 = ρ2 = 1, δ1 = 1, and φ1 = φ2 = φ ≤ 1, skills at
adulthood, h0 = θ3 = θT +1 can be written as
 φ1





h0 = δ2 γ1,2 γ1,1 θ1φ + γ1,2 γ2,1 I1φ + γ2,2 I2φ + (γ3,2 + γ1,2 γ3,1 ) hφ  .
| {z }“Multiplier”

Econ of Hum Dev

• Polar example arises in the Leontief case where φ → −∞:h0 = m2 h, θ0 , min(I1 , I2 )

Econ of Hum Dev(3)• u(·): parental utility function• β: discount factor• r : real interest rate
• υ: parental altruism• c1 , c2 are consumption in parental life cycle periods 1 and 2

Econ of Hum Dev

The goal of the parent is to optimize:V (h, b, θ1 ) = max u (c1 ) + βu (c2 ) + β 2 υE [V (h0 , b 0 , θ10 )]c1 ,c2 ,I1 ,I2(4)
subject to technology and budget constraints.

Econ of Hum Dev

Budget constraint is:
c1 + I 1 +c2 + I 2
b0
wh
+
+ b.
2 = wh +(1 + r ) (1 + r )(1 + r )Econ of Hum Dev(5)• Tractable final form technology:










h = m2 h, θ0 , γ
 |{z}
0

investment
multiplier φρ  φφ (I1 ) + (1 − γ) (I2 )   , for φ ≤ 1 and 0 ≤ γ ≤ 1, ρ ≤ 1.

Econ of Hum Dev

(6)

ρ

 1−φ
I1
γ
=
.
I2
(1 − γ) (1 + r )I1↑ as γ ↑, φ ↑, ρ ↑ and r ↓.
I2

Econ of Hum Dev(7)• Important policy question: How easy (costly) is it to remediate

low I1 with high I2 ?

Econ of Hum Dev

Implications of the Model

Econ of Hum Dev

Borrowing Limits

Econ of Hum Dev

Liquidity Constraints Within the Life Cycles of Parents• The parent, within his/her lifetime, faces a sequence ofconstraints at each stage of the life of the child.

Econ of Hum Dev

Denoting parental financial assets by a and allowing parental labormarket productivity to grow at exogenous rate g , these budget
constraints can be represented by a sequence of constraints:a= wh + b(1 + r )(8)b0= w (1 + g ) h + a(1 + r )(9)c1 + I1 +andc2 + I 2 +and the borrowing constraints a ≥ a and b 0 ≥ 0.
Assume that a ≥ 0: parents cannot borrow against their own future
income.
Child investments at different ages are not perfect substitutes(φ < 1).

Econ of Hum Dev

Parental utility: u (c) =
I1
=
I2



γ
(1 − γ) (1 + r )|{zc λ − 1 /λ.
1 1−φunconstrained ratio

}

1
1−φ

[β(1 + r )]
|
{z



c1
c2

1−λ
 1−φ

=1 if unconstrained,<1 if constrained

λ≤1Econ of Hum Dev

.
}

(10)

• Cunha, Heckman, and Schennach (2010):.
1/(1 − φ) = .3̄ (φ = −2).
• Attanasio and Browning (1995): λ ∈ [−3, −1.5]• (1 − λ)/(1 − φ) ∈ [0.83̄, 1.3̄]. Family resource influence on
relative investment.
• Dynamic complementarity coupled with borrowing constraints
in the early years raises a potentially serious market
imperfection.

Econ of Hum Dev

Introducing income uncertainty

Econ of Hum Dev

Empirical Estimates of Credit Constraints and the Effects ofFamily Income on Child Outcomes

Econ of Hum Dev

Recent Evidence on the Importance of Credit Constraints
and Family Income

Econ of Hum Dev

College attendance by AFQT and Family Income Quartiles (1979)

Source: Belley and Lochner (2007).
Econ of Hum Dev

College attendance by AFQT and Family Income Quartiles (1997)

Source: Belley and Lochner (2007).
Econ of Hum Dev

College attendance by AFQT and Family Income Quartiles (1979 and1997 placed on one graph)

Lochner 1997
Lochner 1979

Source: Belley and Lochner (2007).
Econ of Hum Dev

• More people going to college at virtually all quartiles ofability and income.
• Increases in college going is strongest for the lowest ability
group, especially less able children with richer parents.

Econ of Hum Dev

• This provides no firm evidence for or against credit constraints.

Econ of Hum Dev

Figure 14: In Japan, family income plays a key role in determining
students’ path following high school graduation

Percent of High School Graduates

Econ of Hum Dev

Do these problems disappear in the welfare state? Compare
Denmark and the U.S.

Econ of Hum Dev

High School Completion and College Attendance by Mother's Education
Denmark and US
High School Completion

College Attendance

0.9

0.7

0.8

0.6

0.7
0.5

0.6
0.5

0.4

0.4

0.3

0.3

0.2

0.2
0.1

0.1
0

0
No High School

High School
Denmark

CollegeUS

No High School

High School
Denmark

US

Source: Rasmus Landers
Note: Observation Denmark 33,954; CNLSY 3,268

Econ of Hum Dev

CollegeFigure 15: Cognitive skills at age 15-16 and parental income / wealth(a) CNLSY(b) Denmark

Source: Rasmus LandersøEcon of Hum Dev

Figure 16: High school completion by parental income and wealth — θC ,θN,C(a) CNLSY(b) Denmark

Source: Rasmus LandersøEcon of Hum Dev

Figure 17: College attendance by parental income and wealth — θC ,θN,C(a) CNLSY(b) Denmark

Source: Rasmus LandersøEcon of Hum Dev

Studies on the role of income on children’s outcomes and on
credit constraints

Econ of Hum Dev

Summary of the Evidence on Family Income, Credit
Constraints, and Child Development• The literature on credit constraints and family income shows that higher
levels of parental resources, broadly defined, promote child outcomes.

• However, a clear separation of parental resources into pure income flows,parental environmental variables and parental investment has not yet beendone.

• It is premature to advocate pure income transfer policies as effective ways
for promoting child welfare and promoting social mobility.

• What studies exist suggest very weak effects of income transfers onchildhood test scores.

• The evidence from the structural models supports this conclusion.
• Many of the studies show effects of prices, not constraints or pure income.
Econ of Hum Dev

Structural Models of Parental Investment

Econ of Hum Dev

Recent Extensions(a) Parental time (mother and father) (Del Boca et al., 2013; Gayleet al., 2013)(b) Role of multiple parents (Del Boca et al., 2013; Gayle et al.,2013)(c) Multiple children (Del Boca et al., 2013; Gayle et al., 2013)(d) Parental learning about technology (Badev and Cunha, 2012;
Cunha, 2012; Cunha et al., 2013)(e) Fertility (Gayle et al., 2013)(f) Marriage market (Gayle et al., 2013)(g) Multiple capabilities (Cunha and Heckman, 2008; Cunha,
Heckman, and Schennach, 2010)

Econ of Hum Dev

Estimates of the Technology of Capability Formation in the
Literature(a) Most of literature focuses on cognitive skill technology(b) Noncognitive skills recently introduced (Cunha and Heckman)(c) Noncognitive skills foster production of cognitive skills(d) Most analysts use linear technologies(e) Nonlinearity essential to capture dynamic complementarity(f) When estimated complementarity increases with the stage ofthe life cycle (dynamic complementarity)(g) Measurement error empirically important

Econ of Hum Dev

Estimates of Technologies of Capability Formation and Some
Implications

Econ of Hum Dev

Investment with Multiple Children

Econ of Hum Dev

Representation for the utility parents receive from N children:
Vc =

N
X

! σ1
ωk Vkσ(11)k=1where Vk represents the relevant outcome for each child which isvalued by parents Behrman et al. (1982).

Econ of Hum Dev

Targeting Relatively More Investment Toward Disadvantaged
Children Can Be Socially Efficient

Econ of Hum Dev

• What is socially fair can also be economically efficient.

Econ of Hum Dev

Summary of Main Results

Econ of Hum Dev

• Roughly speaking, the more concave are the technologies interms of stocks of skills, the more favorable is the case forinvesting relatively more in the disadvantaged child.
(2)• The greater the second period complementarity (f12 ), thegreater the case for investing more in the initiallydisadvantaged child to allow the child to benefit from greater
second period complementarity of the stock of skills withsecond period investment.
• In general, even when investment is greater in the first
period for the disadvantaged child, second period
investment is greater for the initially advantaged child.
• It is generally not efficient to make the initiallydisadvantaged child whole as it enters the second period
when the effect of greater second period
complementarity kicks in.
Econ of Hum Dev

Testing and Operationalizing the Theory

Econ of Hum Dev

Capabilities as Determinants of Functionings

Econ of Hum Dev

Decompose the θt vector into three subvectors:
θt = (θC,t , θN ,t , θH,t )(12)where θC,t is a vector of cognitive abilities (e.g., IQ) at age t, θN ,tis a vector of noncognitive abilities (e.g., patience, self-control,
temperament, risk aversion, discipline, and neuroticism) at age t,
and θH,t is a vector of health stocks for mental and physical healthat age t.

Econ of Hum Dev

• Capabilities, combined with effort, incentives and purchased

inputs determine functionings.

Econ of Hum Dev

• Functionings (task j) at age t:

Yj,t = ψj,t (θt , ej,t , Xj,t ),j ∈ {1, . . . , Jt } and t ∈ {1, . . . , 2T }(13)

• Yj,t : outcome from activity j at time t• θt is the vector of capabilities at age t• Xj,t is a vector of purchased inputs that affect the functionings• ej,t is effort in task
• T is the length of childhood• T is the length of adulthood• 2T is total lifetime

Econ of Hum Dev

Effort: ej,ta
ej,t = δj (θt , At , Xj,t , Rj,t(It−1 ) | u).

At : environment• Rja,t : incentives•

Econ of Hum Dev(14)

Estimating and Interpreting the Distribution of Capabilities,
the Maps Between Capabilities and Functionings and theTechnology of Capability Formation

Econ of Hum Dev

Nonparametric Factor Models Are Natural Frameworks for
Estimating Capabilities and Determining Frontier Capability
Sets

Econ of Hum Dev

• Low dimensional capabilities (“factors”) generate a highdimensional set of functionings.
• Dimension and factor structures selected through a variety ofmethods.
• Exploratory factor analysis.
• Novel Bayesian procedures—avoid arbitrary methods in
Exploratory Factor Analysis.

Econ of Hum Dev

Estimating Functionings and Extracting Factors:
Multiple Capabilities Shape Human Achievement Across a
Variety of Dimensions

Econ of Hum Dev

• The relationship between capabilities estimated in the recent

literature and traditional preference parameters (timepreference, leisure, risk aversion, etc.) is weak. Dohmen, Falk,et al. (2012)• Suggests that a richer set of preference and constraint
descriptions may characterize choice behavior.

Econ of Hum Dev

Probability

Figure 18: The Probability of Educational Decisions, by Endowment
Levels, Dropping from Secondary School vs. Graduating

1
0.8
0.6
0.4
0.2

0.18
0.16
0.14

2

3

5

4

10
8 9 tive
6 7
niof Cog
Decile0.2

Probability

1

0.18
0.16

0.8

0.14

0.12
0.6

0.12
0.6

0.1
0.08

0.4

0.1
0.08

0.4

0.06
0.04

0.2

0.06
0.04

0.2

0.02
0

1

2

3

4

5

6

7

8

9

10

Decile of Cognitive

0

0.02
0

1

2

3

4

5

6

7

8

9

10

Decile of Socio-Emotional

Source: Heckman et al., 2011
Econ of Hum Dev

0

Fraction

0.2

Probability

1

0.8

Fraction

1

Probability

Probability010
De 9 8cil
eo 7 6fS
oc 5 4
ioEm 3 2
oti 1
on
al

The same low-dimensional vector of capabilities predicts a wide
variety of outcomes for:• Crime• Wages• Health• Healthy behaviors (smoking, drug use)
• Trust• Voting behavior• Employment• Participation in welfare

Econ of Hum Dev

Technology of Skill Formation•

θk,t+1 = fs,k (θt , Ik,t , θP,t )for k ∈ {C , N, H}, t ∈ {1, 2, . . . , T }.

Econ of Hum Dev(15)

• Capabilities evolve over the life cycle• Parental investments explain 34% of variance of educational

attainment• Self-productivity becomes stronger as children become older,for both cognitive and noncognitive skill formation(i.e., ∂θ∂θt+1↑ t).
t• Strong cross effects (noncognitive skills foster cognitive
investment)• Complementarity between cognitive skills and investment
becomes stronger as children become older. The elasticity of
substitution for cognitive production is smaller in second stage
production

Econ of Hum Dev

• Emerging dynamic complementarity.
• It is more difficult to compensate for the effects of adverse

environments on cognitive endowments at later ages than it isat earlier ages. This pattern of the estimates helps to explain
the evidence on ineffective cognitive remediation strategies for
disadvantaged adolescents reported in Cunha et al. (2006),
Cunha (2007), and later papers.
• Complementarity between noncognitive skills and investments
stays roughly constant over the life cycle.
• Suggests that later life investments should be more focused on
promoting noncognitive—personality—skills.
• The evidence on which adolescent interventions are successful
is consistent with this evidence.

Econ of Hum Dev

The Implications of the Estimates for Design of Policy• Targeted strategies• Consider a policy for a social planner to optimize the stock of

education in society.
• Assume (for simplicity) full control of investment (ignores
parental responses)• The bulk of the evidence in the child development literatureshows reinforcement of investment by parents.
• No consideration of social fairness, equality of opportunity or
equality of final outcomes—just efficiency.
• Yet with these estimates the optimal policy invests the most in
the disadvantaged.
• As an empirical matter, social justice is enhanced by what is
productively efficient.
Econ of Hum Dev

Socially Optimal Early and Late Levels of Investment by Initial
Capabilities

Child Initial
Cognitive Skill

Child Initial
Cognitive Skill
Child Initial
Noncognitive Skill

Child Initial
Noncognitive Skill

Source: Cunha et al. (2010). Optimal investments to maximize aggregate education in society.
Econ of Hum Dev

3.5

Figure 5
Densities of Ratio of Early to Late Investments
Maximizing Aggregate Education Versus Minimizing Aggregate Crime
Education
Crime

3

2.5

2

1.5

1

0.5

0
0.5

1

1.5

2

Ratio Early to Late Investment
Econ of Hum Dev

2.5

Using Economics to Go Behind Estimated Program Treatment Effects
and Beyond Meta-Analyses of Treatment Effects:
Linking the Program Evaluation Literature with
the Economics of the Family• Widely used “metanalyses” on early childhood do not recognize thatvarious interventions in early childhood previously implemented differ.
1
2
3
4
5
6

The populations targeted differ.
The objectives and curricula of the programs differ.
The measurement systems for backgrounds and outcomes differ
among each other and also with observational studies.
The methods of evaluation differ.
Need to integrate the studies of family influence with the intervention
studies to understand how interventions affect family life.
Need to compare alternative policies in comparable metrics; i.e.,
rates of return to policies or cost-benefit analyses.

Econ of Hum Dev

Lessons From and Lessons For the Intervention Literature

Econ of Hum Dev

The Mechanisms Producing the Treatment Effects:
A Case Study

Econ of Hum Dev

Cognitive Evolution by Age, Perry Males
Male Cognitive Dynamics
105

Treatment

100

95

IQ

90

85

Control

80

75

Treatment

79.2

94.9

95.4

91.5

91.1

88.3

88.4

83.7

Control

77.8

83.1

84.8

85.8

87.7

89.1

89.0

86.0

Entry

4

5

6

7

8

9

10

Age

Econ of Hum Dev

Personal Behavior Index by Treatment Group

Treatment
.8
.4

.6

density

.6
.4

.2

.2

0

0

density.8

1

1

Control

2

2.5

3

3.5

4

4.5

5

2

2.5

3

3.5

4

4.5

5

®

®

Econ of Hum Dev

Socio-Emotional Index by Treatment Group.6.4

density

0

.2

.4
.2
0

density.6.8Treatment.8

Control

1

2

3

4

5

1

2

3

Econ of Hum Dev

4

5

MONTH YEAR

Decomposition of Treatment Effects, Males
0.013

0.161

CAT total at age 14, end of grade 8 (0.566*)
0.114

0.557

0.071

# of misdemeanor arrests, age 27 (-1.21**)
0.071

0.246

0.062

0.144

0.089

0.027

# of felony arrests, age 27 (-1.12)# of adult arrests (misd.+fel.), age 27 (-2.33**)
Monthly income, age 27 (0.876**)
0.046

0.141

0.136

0.088

0.056

0.403

0.086

0.149

THE AMERICAN ECONOMIC REVIEW

Use tobacco, age 27 (-0.119*)# of misdemeanor arrests, age 40 (-3.13**)# of felony arrests, age 40 (-1.14*)# of adult arrests (misd.+fel.), age 40 (-4.26**)
0.077

0.204

0.085

0.018

# of lifetime arrests, age 40 (-4.20*)
Employed, age 40 (0.200**)
0.130

0.499

0.032

Use heroin, age 40(-0.143*)0%Cognitive Factor

20%

Externalizing Behavior

40%

60%

80%

Academic Motivation

100%

Other Factors

32

Figure 6. Decompositions of Treatment Effects on Outcomes, Males
Note: The total treatment effects are shown in parentheses. Each bar represents the total treatment effect normalized to 100 percent. One-sided p-values
are shown above each component of the decomposition. The figure is a slightly simplified visualization of Tables L.10 and L.14: small and statisticallyinsignificant contributions of the opposite sign are set to zero. See Web Appendix L for detailed information about the simplifications made to produce
the figure. “CAT total” denotes California Achievement Test total score normalized to control mean zero and variance of one. Asterisks denote statisticalsignificance: * – 10 percent level; ** – 5 percent level; *** – 1 percent level. Monthly income is adjusted to thousands of year-2006 dollars using annual
national CPI.

Econ of Hum Dev

Effects on HealthEcon of Hum Dev

Econ of Hum Dev

Abecedarian Intervention, Health Effects at Age 35

Econ of Hum Dev

Attachment, Engagement
Toward a Deeper Understanding of Parenting and Learning• In both Perry and ABC (and many other interventions) a main

channel of influence is on the parent-child interactions.
• Enhanced attachment and engagement of parents.
• This has important implications for how we model family
influence.

Econ of Hum Dev

Mechanisms—producing effects(a) Information(b) Changing preferences of parents(c) Parental response to child’s curiosity and interest induced byparticipation in the program

Econ of Hum Dev

Figure 19: Parental Warmth, Perry Preschool.
.4

Density

.3

.2

.1

0
-2

-1

0
1
Parental Warmth2

3PooledControl
Treatment

Note: this figure presents the densities –pooled and by treatment status– for a single factor summarizing a set of questions in
the Perry questionnaire attempting to measure how much affection the child gets from the parent(s).
Econ of Hum Dev

Figure 20: Family Conflict, Perry Preschool.
.8

Density

.6

.4

.2

0
-2

0

2

4

Family Conflict
PooledControl
Treatment

Note: this figure presents the densities –pooled and by treatment status– for a single factor summarizing a set of questions in
the Perry questionnaire attempting to measure family conflict in the household.
Econ of Hum Dev

Figure 21: Parental Authority, Perry.
.4

Density

.3

.2

.1

0
-4

-2

0

2

Parental Authority
PooledControl
Treatment

Note: this figure presents the densities –pooled and by treatment status– for a single factor summarizing a set of questions in
the Perry questionnaire attempting to measure how much discipline the child is subject to from the parent(s).
Econ of Hum Dev

• An approach where parents learn about child quality andscaffold the child

Econ of Hum Dev

Figure 22: Spending per student on pre-primary education was low inJapan in 2009

Note: The bars show public (bottom part) and private (top part) education spending in US
dollars, adjusted for price level differences across countries, for children too young for primaryschool. Annual spending is based on the number of students, calculated on a full-time basis.
Source: OECD (2012f), OECD Education at a Glance 2012.

Econ of Hum Dev

Integrating Experimental Studies with Family Influence
StudiesEcon of Hum Dev

• IGt : government investment• IPt : private (family) investment• Government technology: f G (θt , θPt , IGt , IPt )• Private technology: f P (θt , θPt , IGt , IPt )• Mixed technology: f M (θt , θPt , IGt , IPt )Econ of Hum Dev

• Studies under way doing this (Fan, Hai, Heckman, Wei, andZhang, 2013)

Econ of Hum Dev

What about promoting education?

Econ of Hum Dev

Summary

Econ of Hum Dev

Point 1• Multiple skills shape child and adult achievement.
• Broader concept of what capabilities matter for life success.
• Cognition and personality are important predictors of lifetime

success.
• They are not epiphenomena solely determined by situations.
• They are stable across situations.
• Traits are skills and can be shaped. They evolve over the life
cycle.

Econ of Hum Dev

Point 2• Different critical and sensitive periods for the formation of skills.
• Deeper understanding when in the life cycle policies to promoteparticular capabilities are more effective.
• Understanding that formal education starting at age 5 or 6 isonly one of many skills—it plays an important role, but weshould move beyond focusing solely on education in thinking
about skill formation policy.

Econ of Hum Dev

Point 3• Parenting, attachment, and parent-child interactions moregenerally are key components, and information play key roles inshaping child abilities.
• The child as an emergent system.

Econ of Hum Dev

Point 4• Multiple channels through which policies operate as theyaffect capabilities.
• Not enough to know that early environments affect adultoutcomes• When and where do they have effects?
• We are slowly learning about the channels of influence.

Econ of Hum Dev

Point 5• Strong correlation between family income and child outcomes.
• Mechanisms through which it works are not yet clearly

understood.
• The evidence on credit constraints and income per se as
determinants of child welfare is not strong, andestimated effects are weak.
• This is consistent with both the treatment effect model and thestructural literature.

Econ of Hum Dev

Point 6• Despite the emphasis in some quarters in many recent

economic models of skill formation, parental liquidity
constraints interacting with dynamic complementarity are notso empirically important, and the evidence supporting theimportance of liquidity constraints is weak.
• Reducing these constraints reduces social mobility.

Econ of Hum Dev

Point 7• Addressing the problems of inequality and social mobility, movebeyond simple redistribution policies that dominate current
discussion.

Econ of Hum Dev

Predistribution Not Simply Redistribution

Econ of Hum Dev

Point 8• Recent developments in the literature on capability formation

are providing a unification of the literature in the economics ofthe family and the intervention literature.
• Show the value of economics and econometrics in interpreting
diverse evidence and shaping policy.

Econ of Hum Dev

(a) Should there be policies that attempt to lower the IGE?
(b) If so, what form should interventions take?

Econ of Hum Dev

Answers

Econ of Hum Dev

Evidence on the importance of the accident of birth is powerful.
2 One can interpret this as a market failure (markets to insure
against “bad” or “poor” parents missing).
3 Evidence of limited parental knowledge and parental skills.
4 Recognize altruism and especially paternalism. There is a
wealth elasticity of parental transfers that affects tied transfers
to children. More educated parents have greater responsiveness.
(This can arise for multiple reasons:
1(i) Preference(ii) Samaritan’s dilemma)
5

Returns to college going for low ability children—low ornegative.

Econ of Hum Dev

Evidence on the effectiveness of pure income transfers is quite
weak.
2 Targeted transfers with incentives for child skill formation are
relatively effective.
3 Parental time and interactions appear to have very strong
effects: interventions that promote knowledge and parenting
skills look to be effective.
1

Econ of Hum Dev

• But we should recognize that the case for reducing the IGE islargely political or philosophical.
• Except for the uninsurability of the consequences of theaccident of birth, the evidence of market failure is weak.
• One thing for sure—the evidence does not support income
redistribution per se.
• There are efficiency enhancing policies that promote social
mobility

Econ of Hum Dev