Beyond the Quantity-Quality tradeoff: Population control policy and human capital investment

The quantity-quality tradeoff theory implies that a reduction in fertility would induce more human capital investment per child, and it is widely believed that population control policy could promote human capital levels in developing countries. China's one-child policy (OCP) has significantly reduced the fertility in the country, and popular belief holds that this policy has contributed to the enhancement in China's human capital since 1979. However, the quantity-quality tradeoff dose not present the complete truth-another crucial factor relates to which segment of the population is reduced, a critical issue that has been ignored in the literature. China's OCP is significantly more strictly implemented in urban areas than in rural areas, where human capital investment in children is significantly lower. This two-tier OCP could have significantly increased the rural-urban fertility ratio and brought about important consequences. We first emphasize the importance of such a population compositional effect, which may offset the potentially positive quantity-quality tradeoff effect on human capital. We present a simple analytic framework and quantify the relative sizes of the quantity-quality tradeoff and compositional effects. We find that the former is dominated by the latter, and that the OCP has reduced the average human capital level of China's next generation by approximately 1-2%. This novel evidence indicates that the conventional wisdom on population control may be incomplete and that its policy implications could be misleading.