Relationship between Consumption, Labor Supply and Fertility - Theory and Evidence from Japan

We present an alternative explanation of the positive relationship between total fertility rate (TFR) and female labor participation rate (FLPR) observed in recent cross section of OECD countries. We first use a simple model of consumer behavior where consumption good is indexed by quality, both consumption and child rearing require time and a physical good as inputs. The model predicts that while the relationship between number of children and consumption will always be negative, relationship with hours worked is ambiguous when there is positive relationship between wages and quality of goods. We verify implications of the model with Japanese cross sectional data from 8 different points in time (every five years from 1970 – 2005) in which a positive correlation between TFR and FLPR among prefectures (regions) have been observed since 1980. However, we found that FLPR has a significantly negative effect on TFR after dealing with unobservable heterogeneity, simultaneity or endogeneity problem and the measurement error problem by Fixed effect IV estimation. The results are consistent with the theoretical prediction as well as traditional economic models of the relation between TFR and FLPR. Furthermore, consumption variables are statistically significant and highquality consumptions have negative impact on TFR. ∗Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8603, Japan, [email protected] †Research Institute of Economy, Trade and Industry, 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, Japan, [email protected]