Raising children in the lucky country: Understanding the income penalty and poverty at childbirth

For Anti-Poverty Week 2023, Dr Ana Gamarra Rondinel [@AnaGamarraRondi] Melbourne Institute: Applied Economic & Social Research [@MelbInstUOM] and Life Course Centre (@lifecourseAust) and Dr Anna Price The University of Melbourne [@UniMelb] and Centre for Community Child Health, Murdoch Children's Research Institute [@MCRI_for_kids] explore the interplay between first time parenthood, financial security, and early child development.

For children in Australia, “luck” is unequally apportioned - but it doesn’t have to be that way. Photo by Ahmed Aqtai, Pexels.

Australia is a high-income country with universal health, education, and social services. Despite this, one in six  families with children experience poverty and two in three families with children under five years of age are finding it hard to make ends meet.  

The first 1,000 days of a child’s life represent a critical period when the brain develops more rapidly than at any other time. During this period, financial security is a protective factor that contributes to children's optimal health and development. In contrast, financial insecurity (typically defined by measures such as low household income and poverty) can compromise brain growth and increase the risk of poorer socioemotional functioning. A paradox of the first 1,000 days is that becoming a parent is associated with substantial drops in household income, known as the ‘income penalty’.

The income penalty at childbirth

Our analysis examines the effect of first child arrival on household income and poverty. Using the Household, Income, and Labour Dynamics in Australia (HILDA) Survey from 2001 to 2021, we follow parents over a nine-year timeframe (three years before having a child and five years after).

Figure 1 illustrates our main finding. The arrival of the first child reduces household disposable income (defined as the sum across all household members of gross income after taxes) on average by 23.3% for one-parent households and 16.5% for two-parent households. This fall in income can be explained by the gender inequities in employment, hours of work and wages, commonly referred to as the ‘motherhood penalty’.

Figure 1: Impact of First Childbirth.

Notes: The vertical line refers to the year before the arrival of the first child. The shades are 95% confidence intervals.

We consider how this drop in income relates to the risk of poverty by estimating the transitions into and out of poverty during this period. We define the poverty threshold at 60% of the median equivalised household disposable income and consider three categories: in poverty (equivalised household disposable income below the poverty threshold); near poverty (equivalised household disposable income between 100% and 125% of the poverty threshold); and not in poverty (equivalised household disposable income above 125% of the poverty threshold).

We find that, for one-parent households: 32-41% remained out of poverty; 8-12% moved out of poverty or near poverty, and 50-56% stayed in or moved into poverty or near poverty. In contrast, for two-parent households, 72-74% remained out of poverty, 3-4% moved out of poverty or near poverty, and 23-25% stayed in or moved into poverty or near poverty.

This indicates that a substantial proportion of families are in or near poverty around the first childbirth, and that there is little movement out of these categories during the first five postpartum years. We also find that the first childbirth increases the probability of staying in, or moving into or near poverty, and that this risk is greater for one- than two-parent households.

Do family payments moderate poverty around the time of birth?

To identify households' poverty status without family payments, we exclude major government welfare benefits related to childbirth and parenthood from disposable income (Parenting Payments, Family Tax Benefit Part A and B, Maternity Allowance, and the Single Income Family Bonus).

Figure 2 shows that, without family benefits, poverty rates approximately double from an average of 12.5% prior to the birth year to 26.6% in the years after birth. When family benefits are included, the average poverty rate is 15.7% in the years following birth. While family payments help reduce poverty around childbirth, these payments do not protect some households from falling into poverty after childbirth. Even with family payments, a substantial proportion of families are entering parenthood and raising their children in poverty.

Figure 2: Poverty rate during childbirth

What needs to change?

We need to reframe the way we think about early childhood into an unparalleled opportunity for investment in our collective future. We can look to the European Commission’s leadership on the European Child Guarantee to ensure that every child at risk of poverty/social exclusion has access to the most basic rights. Member states develop national action plans on how to implement the Child Guarantee, including key targets and timelines, enabling countries to re-focus efforts to reduce child poverty and monitor progress. In Australia, a Child Guarantee could involve setting an agreed baseline percentage of government expenditure to reducing child poverty and establishing an agreed set of policy priorities across government departments that impact the key drivers of child poverty, such as finance, housing, early childhood education and care, education and health.

We need to ensure that child poverty and its impacts are measured and monitored annually. This allows government services and programs to monitor the impact of policy decisions for reducing child poverty and adapt and respond accordingly, now and for future generations. Monitoring must be long-term, to evaluate Australia’s investment in redressing child poverty across a lifetime. A country of Australia’s wealth has a moral imperative to eliminate child poverty, and the early years are the best time to try to offset suboptimal early life experiences, and subsequent developmental trajectories, and offer the best return on human capital investments.

Finally, we need a political appetite for continuous quality improvement. This means owning and learning from our failures as well as celebrating our successes.

This post is part of the Women's Policy Action Tank initiative to analyse government policy using a gendered lens. View our other policy analysis pieces here.

Posted by @LifeCourseAus