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Economic disruption, demographic trends, and economic growth


Micevska, Maja Branko (2002). Economic disruption, demographic trends, and economic growth. Master's thesis / Doctoral dissertation.


The transition to market-oriented economies in Central and Eastern Europe and the former Soviet Union in the 1990s, like the Great Depression in the U.S. and Germany in the 1930s, generated sharp declines in real incomes and a corresponding drop in fertility. This is contrary to the robust negative relationship between income and fertility that has been extensively documented in the literature. The first chapter presents a theoretical model that explains the positive relationship between fertility and income. The model predicts that: (i) the perceived level of subsistence consumption fundamentally determines whether fertility and income are positively or negatively related; (ii) the steeper the decline in labor income, the deeper is the fall in fertility; and (iii) income inequality substantially affects fertility rates in a nonmonotone way. Empirical tests using both aggregate and microeconomic data provide strong support for the predictions of the model. Specifically, the empirics predict that the average transition country will remain in a Mathusian fertility regime for twenty more years. The second chapter seeks to explain the marriage trends in view of the need to mitigate income risks and facilitate consumption smoothing in an environment characterized by information costs and covariant risks. This paper shows that, as a result of worsening economic situation and uncertainty from a changed economic environment during the period of transition, single adults reevaluate their marriage plans and adjust to difficult economic conditions by delaying marriage or not marrying at all. By analyzing the dynamics of the model, the third chapter reveals novel implications regarding the effect of individual views about the subsistence consumption on the growth path of economy. What is considered to be a minimum income "needed to make ends meet" influences fertility choices and accumulation of human capital and, therefore, affects the long-run growth. In particular, a higher perceived subsistence consumption level raises the potential for economic development. Since the subjective subsistence level of consumption is positively related to the economic well-being, this would imply the need for more aggressive policies to fight poverty, including initiatives to support employment, income transfer programs, enhanced tax collection and control of inflation.

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Micevska, Maja Branko