Income Declines after Divorce

Summary of working paper 8786
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The family income of children whose parents divorce and remain divorced for at least six years falls by 40 to 45 percent.

It is well known that two-parent families fare better financially than one-parent families. That is the reasoning behind the Bush Administration's recent proposal to Congress for $300 million a year for counseling and other efforts to encourage and support marriage. However, it is not easy to measure the effects of family structure on the economic resources available to children. In Will You Miss Me When I Am Gone? The Economic Consequences of Absent Parents (NBER Working Paper No. 8786), authors Marianne Page and Ann Huff Stevens extend the work of earlier studies on this subject.

One major conclusion of their research is that the family income of children whose parents divorce and remain divorced for at least six years falls by 40 to 45 percent. Food consumption is also reduced by 17 percent. Families respond to the absence of a second parent in a variety of ways that help mitigate some of the costs, the authors note. In the case of children born to single parents who subsequently marry and remain married for at least six years, post-tax family income increases 50 percent and pre-tax income rises 57 percent. But there is no related increase in food consumption. This suggests that children's access to essentials, such as food, may be somewhat better protected than is assumed by focusing on income changes alone.

These different types of measures can be helpful for policymakers considering the skyrocketing number of single-parent families in the United States in the past 50 years. Between 1960 and 1995, the number of children living apart from one of their parents increased from 12 percent to almost 40 percent, the rate of divorce increased by more than 200 percent, and the fraction of children born out of wedlock rose from about 5 percent to more than 30 percent. Half of all American children today are expected to spend part of their childhood in a family headed by a mother who is divorced, separated, unwed, or widowed.

In the past, studies simply compared the average income among two-parent families to the average income of single-parent families. The wide differences that were observed prompted calls for societal and legal changes to strengthen marriage. Some states, including Arizona, Arkansas, and Louisiana, created optional "covenant marriages" that make it harder for couples to divorce. Three quarters of the U.S. states broadened the eligibility for welfare to include two-parent families with Temporary Assistance to Needy Families (TANF); the former welfare program, Aid to Families with Dependent Children, was targeted primarily toward single-parent families. In the wake of TANF, which places a five-year lifetime limit on welfare benefits and requires that participants become members of the labor force within two years of initiating benefits, understanding the relationship between income and family structure factors is particularly important

But Page and Stevens note that these previous studies -- "cross-sectional comparisons" of family types -- are unable to tell us how much of the observed gap in income is actually caused by the absence of a second parent. Other factors may be partly responsible for the income variation. So Page and Stevens use a "dynamic model" that takes into account the usual tendency for family income to grow as parents move up the job ladder and also incorporates changes in family status over time. (For example, children whose parents divorce may experience a short-term income reduction that is recouped in later years when their mothers remarry or become more active in the labor market.)

The estimates based on cross-sectional income comparisons that have been presented in other studies are almost 1.8 times bigger than the true losses associated with living in a single-parent family, Page and Stevens find. Similarly, their estimates of the effects of divorce are only 60 to 80 percent as large as estimates based on cross-sectional regressions. Furthermore, divorced parents often remarry. This means that in the years after an initial divorce, income losses average 15 to 20 percent (compared to losses of 40 to 50 percent among those who remain unmarried). Similarly, the typical increase in family income for a child born out of wedlock whose parent marries (28-33 percent) is smaller than the predicted improvement for the child whose parent marries and then stays married (50 to 57 percent). That's because many of these marriages do not last.

Overall, the authors find that the family-income costs associated with growing up in single-parent families are not temporary, but largely persist until a marriage or remarriage occurs. These findings, they note, have important implications for public policy. "Time limits recently imposed as part of welfare reform, for example, could result in substantive reductions in the economic well-being of children living in single-parent families." Further, if family income does play an important role in determining a child's later success in life, then "policies that encourage two-parent families may be justified."

-- David R. Francis