The effect of easing liquidity constraints on investment in human capital: The case of increasing child allowances to Arab families in the 1990s
· The main finding of the research is that the increase in the allowances led to an increase in school attendance of girls from a low socioeconomic background. The impact of the increased allowances on school attendance of boys is not statistically significant.
· The research’s conclusion is that direct transfer payments to poor families with children are likely to contribute to an increase in human capital accumulation.
New research conducted by Shay Tsur from the Bank of Israel Research Department finds that an increase, in the middle of the 1990s, in child allowances paid to Arab families led to an increase in their children’s high-school attendance rates. Until 1993, only families headed by an “army veteran” and ultra-Orthodox families headed by someone studying full time in a religious institution benefited from increased child allowances for the fourth child—under the age of 18—and upward. In 1994, gradual implementation began of a process to equalize the child allowances received by families that had not benefited from that status until then, the vast majority of which were Arabs. The research utilized the fact that the policy change focused on families with four or more children (Figure 1), and compared school attendance of youth aged 16-17 (grades 11-12) from those families, to attendance of the similar cohort from families with only three children. The sample included about 2,700 youth from Arab families that participated in the Labor Force Survey of the Central Bureau of Statistics in 1989–97.
The research found that in the years when child allowances increased in a manner that benefited, as noted, mainly Arab families with four or more children, the gap in schooling rates, which was to the detriment of youth from those families vis-à-vis youth from Arab families with only three children under age 18, was narrowed (Figure 2). In particular, while attendance rates of girls from families with three children declined slightly in the years of implementing the policy (1994–97), the attendance rates of girls from families with four or five children (at ages that were eligible for the child allowance) increased markedly. Among boys, attendance rates declined sharply in families with three children, and declined by a much more moderate rate among families with four or five children.
A multivariate statistical analysis found that most of the increase in school attendance occurred among girls. An increase of about 7 percent in family income led to an increase of 14 percent in their schooling rates. Most of the increase in schooling rate reflected a decline in the share of girls who did not work for a salary and did not study in school, and in addition the employment rate declined among girls of those ages from levels that were already low, at 3 percent, to near zero. A detailed analysis found a particularly large impact among girls from households with children below age 9. This finding indicates that the allowances helped in finding an alternative solution in cases where girls helped maintain the household and where they provided childcare for their younger siblings, such that the possibility increased for those girls to persist in their studies.
A cost-benefit analysis can likely explain why the policy change impacted mainly girls and not boys: On the cost side, while the employment rate of boys in the treatment group was 11 percent before the policy change, the employment rate for girls was 3 percent. While boys who worked contributed about 30 percent to household income, the few girls who worked contributed less than 20 percent to income. The child allowance for families with 5 children increased by about 8 percent (relative to household income), and this share was apparently too low to compensate boys for the switch from employment to schooling. On the benefit side, an addition of one year of schooling for Arab women was correlated in those years with a wage increase of about 10 percent, while the expected addition for Arab men was only about 4 percent. That is, both sides of the cost-benefit analysis support an increase in years of schooling for girls, and much less so for boys.
Economic research worldwide indicates that financial constraints in the short run are liable to lead children and youth to stop their studies, even if the long term return to schooling is greater than, for example, the return on entering the work force as a teen-ager. The current research’s findings indicate that direct transfer payments to poor families with children are likely to ease those financial constraints and thus lead to making efficient decisions that accelerate the young generation’s accumulation of human capital. It is difficult to reach a conclusion, based on the research, about the overall efficiency of child allowances (which in the meantime have been reduced sharply, beginning in 2003) as a tool to reduce poverty, since these allowances are likely to reduce parents’ incentive to work, and influence family size. However, a policy tool that does not negatively impact the incentive to work, such as the Earned Income Tax Credit (negative income tax), is consistent with the research’s findings, as its positive effects on children’s schooling will not be offset by the negative effect on parents’ employment.