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June 12, 2026 | 12:37
Stork Reality: The Economics of Fewer Babies
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Stork Reality: The Economics of Fewer BabiesFertility rates are plunging in Canada and much of the world, with many regions now well below replacement. We look at some of the reasons why and what it means for the economy and policymakers. |
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Canadian and U.S. families are having fewer babies, which carries many economic and societal implications. In a stunning collapse, Gen Z families in North America are expected to average about 1.5 children, down from consecutive generations before them and well below replacement levels. Fertility Rates PlungingCanada’s demographic attention has been rightly focused on the massive influx, and then capping, of nonpermanent residents. But a collapse in natural population growth has been unfolding in the background, and net births are expected to turn negative for the first time ever in 2028 (Chart 1). That is, more Canadians will begin to pass away than will be replaced with new babies. |
In the U.S., the Congressional Budget Office projects negative net births by 2030 which, absent immigration, would pull population growth into negative territory. To be sure, fertility rates are not stable and can evolve with economic and societal conditions, but the path we’re on right now is directly toward a major flip in natural population growth. Canada’s total fertility rate has plunged to just 1.3 children expected per woman, as longer-term secular decline since the 1960s has accelerated through the current generation. In the U.S., fertility rates have generally held somewhat higher, but they too have now fallen to 1.6, or well below the 2.1 necessary for population replacement. Interestingly, this is an almost entirely global phenomenon too. While fertility rates are generally lower in developed regions like Canada, the U.S. and Europe, they have plunged almost everywhere (Chart 2). Mexico and Latin America in particular have suddenly gone from a major population source to producing below replacement. Where are All the Babies?Plunging fertility rates are pretty well documented, with reasons spanning health care, economics and society. Here are some of the major factors, roughly in order of importance—with a bent toward the economics: Contraception: ‘The Pill’, or oral birth control, was approved for widespread use in the 1960s. Not coincidentally, the most significant decline in fertility rates followed shortly thereafter through the 1970s. Education and participation: Education and labour force participation among women have trended higher over the decades. Since the end of the 1960s, the female age 20-39 labour force participation rate in Canada and the U.S. has jumped by more than 20 ppts (Chart 3). In Canada, that shift has put roughly 9 million more child-bearing age women into the labour force today than otherwise would have been the case. The impact on fertility is straightforward—families start later in life, after education, and end up smaller because of a narrower fertility window with more career demands. Housing—sizes and prices: Urbanization and intensification of housing likely contribute to smaller family sizes. Canada’s major cities have intensified dramatically over the past two decades, with single-family home construction falling by the wayside—it’s much less appealing to raise 2.1 or more kids in a condo. |
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Affordability pressures are also widely cited, although that alone didn’t stop prior generations—Canada’s fertility rate held steady through the 1980s despite the squeeze of inflation, interest rates and housing affordability. Bigger picture though, housing challenges are reinforcing other factors already at play. More women working creates dual-income and wealthier households, which drives up scarce single-family housing costs, further necessitating dual incomes, and pinning down fertility rates even more. Cost-benefit calculus: The pure economic cost of raising a child is, let’s just say, not small. And only increasing. We’ll save that topic for another day, but StatCan has estimated the amount spent by a middle-income family at nearly $300,000 by age 17—that’s before any opportunity cost related to career and investment, let alone university education. Societal change: This is outside the scope of this report, but social norms, media influence, environment and a broad shift in preferences have likely all played a role. Economic and Policy ImplicationsThe economic implications should be significant, although they are slow moving and longer-term in nature. Nevertheless, the demographic ship is turning, and once it gets going, it’s hard to change course. Lower growth potential: An economy can produce by having more people working (labour force growth), or each person producing more stuff (productivity). Suffice it to say that, all else equal, labour force growth is on a one-way path lower in North America in the years ahead, which will put further downward pressure on potential growth rates. Note that the Bank of Canada now views potential growth at just 1.2% in 2026 given the (near-term) absence of immigration, and just 1.5% by 2028. Lower potential growth arguably implies somewhat lower neutral interest rates. |
Fewer jobs needed: As labour force growth slows, investors and the Bank of Canada don’t need to read soft job growth numbers as dovish, given that they won’t necessarily indicate building labour market slack. We judge that breakeven job growth in Canada is barely above zero in the near term, before settling in just below 10k per month beyond 2027—well below past norms (Chart 4). Recent work by the Federal Reserve similarly finds that breakeven U.S. job growth could be around 10k per month right now given the stall in immigration—gone are the days of needing 200k-plus payroll prints. Immigration fills the gap: Canada’s crackdown on nonpermanent resident inflows shouldn’t be confused with a continued robust permanent immigration program—currently 380k per year. That will add roughly 0.9 ppts to population growth going forward after Canadian net births turn negative (Chart 5). This highlights, in the U.S. too, the need for a robust, but carefully managed, immigration program in the decades ahead. Going further, as fertility rates plunge across regions like Latin America and Asia, countries like Canada may eventually find themselves in competition for a quality immigration stream, which could make relative taxation, affordability and infrastructure comparisons even more meaningful. The role of AI: It wasn’t long ago when the big question was, how are we going to find enough workers to keep growing? That could mean that AI fears in the job market will ultimately prove to be overdone. Recall that if we are in a world of flattening labour force and job growth, perhaps AI isn’t as much a job killer, in the aggregate, as it is a supplement that helps drive more output per job. |
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Fiscal and Social Security strains: Today’s plunge in the fertility rate will lead to a higher dependency ratio tomorrow as incoming prime-age workers don’t replace those leaving the labour force for retirement. Indeed, an updated (June 2026) report from the Social Security Administration now sees retirement benefit fund reserves (OASI) depleted earlier by 2032, in part because of falling fertility rates. That will warrant either a reduction in benefit payouts, or new funding. In Canada, the rising dependency ratio will put steadily increasing pressure on government finances, through a flatter revenue growth curve and increased spending pressure. This will be more acute at the provincial level, and, barring shifts to net migration, in regions where fertility rates are relatively low—B.C. and Atlantic Canada. Housing policy: Recent migration trends to exurbs or cheaper/more spacious cities, provinces and states highlight how single-detached housing availability is either pushing families away, or curtailing family size for those that stay. Millennials are imposing peak housing demand in North America right now, but they had fewer kids than their parents; and their kids will too—thus the demand stress on housing would eventually (a very long eventually) fade. There also might be a chicken-or-egg phenomenon, where too much intensification makes single-family housing scarcer and less affordable, which limits family size, and then leads to even more intensification. Effective infrastructure to move people in-and-out of core cities, to where single-family housing space is plentiful, remains an important long-term housing policy. Assessing the IncentivesPolicymakers can attempt to directly incentivize fertility, or indirectly support it though childcare costs and work leave. Layers of supports do exist, especially in Canada, although not without some flaws. Federal subsidization has pulled down daycare costs, but finding a space is like gaming the lottery in some areas. And, direct subsidies are much less adaptable than broader tax credits, which would allow families to use alternative forms of childcare as the nature of the workplace evolves. Direct support through the Canada Child Benefit has swelled to as much as $8,000 per year, per child, but is heavily tilted to the lower end of the income spectrum, and phased out for many professional dual-income families. In some cases, the scale of benefit payments could actually disincentivize labour force participation—a trade-off to consider versus more children. Some past effective family tax incentives, such as household income splitting, have been curiously phased out. Alternatively, policymakers could begin to work their way up the demographic ladder, and think about incentivizing later labour force participation. There is currently a 20 ppt drop-off in participation between from the 55-59 age group to 60-64. Across the developed world, the impact of major incentives is somewhat murky. Notable examples include Nordic countries with highly-subsidized early education and generous leave benefits—fertility rates in Sweden and Denmark, however, are barely higher than in Canada. Hungary also made headlines by eliminating income tax for women with four or more children in 2019—but the fertility rate there has since fallen. Short of digging deep into a cross-section of national policy, it appears that targeted supports are worthy. But, we’re most likely working to flatten the fertility decline, not prevent it, as bigger economic and societal changes will ultimately outweigh government incentives. |