A reporter from the Guardian investigated this.
You cannot use newborns because actors need to be a member of SAG, and you can only become a member if you're 15 days old.
“Our initial intention with Knocked Up was to film a live birth, but we
found out we couldn’t because the baby, by virtue of not being born
yet, couldn’t be a member of SAG. So we created a fake lower body of a
woman with a head that came out to simulate crowning. There are a lot
Babies can also only be used for a short time:
Per usual, my questions are more macabre than their answers. Infant
actors are well-protected; they can only work four hours per day; they
can only shoot for 20 minutes of those hours.
“So you have four infants, approximately the same age, same hair
color, look enough alike that they can double each other,” said Chris
Riddle, an assistant director for film and television. “You use one
baby for the first 20 minutes, a second baby for the next 20, etc. And
if you’re doing a shot where the baby isn’t the focal point, or maybe
it’s just in a crib in the background, you use a doll.”
Which results in this:
Jane Rogers explained to me that the reason casting agents go after
twins or triplets isn’t just to get lookalikes for the same character
(thus making the most of each newborn’s mandated 20 work minutes), but
also because multiples are typically born premature. Soliciting
premature babies, in other words, is a way to cast for age zero while
sticking to SAG’s 15-day-old age requirement.
The money these babies earn isn't necessarily going to the parents:
“In California, with all under-18 actors you have to set up a Coogin
Trust [a blocked trust account]. Any money that my daughter makes goes
into that, and she gets it when she’s 18.”
The goo the "newborns" are covered in varies from set to set:
“I want to know about the cheeselike varnish,” I said.
“High fructose corn syrup,” he said. “The same sort of stuff we would
use for blood if someone got shot.”
I relayed the question to my other sources and found that the
substance varies set-to-set.
Jane Rogers, who does background casting for shows like Man Seeking
Woman and often works with children, took time to emphasize the
integrity of her goo. The goo is edible and gluten free – it is very
LA. “We make sure that the goop they’re covered in is organic, water
soluble, non-toxic, la-la-la.”
“We put grape jelly and cream cheese on children for birthing scenes,”
Knocked Up’s producer Evan Goldberg said. “It’s weird.”
Far, far more over at the link.