Human Capital and the Demographic Transition: Why Schooling Became Optimal

Abstract

This paper develops a model with increasing adult life expectancy as the driving force of the economic and demographic transition. We show that if parents invest their own time into children's human capital, rising adult life expectancy unambiguously increases fertility. With children educated in schools and parents paying tuition fees, the reaction of fertility to changes in longevity is ambiguous. If productivity of adult human capital is sufficiently large and parent's valuation for additional children is sufficiently low, fertility will decrease. Without a schooling system, rising life expectancy therefore initially increases fertility. As during the development process life expectancy rises, a schooling system will be endogenously adopted and the relationship between fertility and longevity reversed. We argue therefore that it is important to account for the change in the nature of the costs of child education: from time costs to monetary costs.