Socio-economic status, permanent income, and fertility: a latent-variable approach

This paper examines how permanent income and other components of socio-economic status (SES) are related to fertility in less developed countries. Because permanent income cannot be measured directly, we employ a latent-variable method. We compare our results with those of the more common proxy-variable method and investigate the consequences of not accounting for measurement error. Using data from Ghana and Peru, we find that permanent income has a large, negative influence on fertility and that research must take the latent nature of permanent income into account to uncover its influence. Controlling for measurement error in the proxies for permanent income can also lead to substantial changes in the estimated effects of control variables. Finally, we examine which of the common proxies for permanent income most closely capture the concept. The results have implications beyond this specific dependent variable, providing evidence on the sensitivity of microanalyses to the treatment of long-term economic status.