Home or Alone: The Costs of Independent Living for Youth

Abstract

We explain the tendency of youth to reside outside the parental household and the decision to share living arrangements with unrelated persons. We depart from the typical demographic analysis of household formation by using a multiequation framework, by addressing sample truncation bias, and by testing for whether marriage and childbearing are endogenous decisions. Household formation should depend on the cost of independent living and the individual's ability to pay that cost. We focus on the role of spatially varying rental costs and use Australian data to test our hypotheses. We find that the cost of shelter influences the decision to reside in a group or alone. We also find that an individual's earnings' capacity significantly impacts both the decision to reside separately from others and the decision to reside outside the parental household. The greatest influence on household formation derives from the impact of marriage and childbearing. The effects of these factors on the decision to reside separately from others have been underestimated in past work that does not account for sample truncation.