The 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 general equilibrium model with vertical quality differentiation and heterogeneous labor and show how low fertility is associated with consumption of higher quality products. Then we use a Japanese cross section from 8 different points in time (every five years from 1970 – 2005), where similar positive correlation between TFR and FLPR among prefectures (regions) have been observed since 1980. We show that consumption variables are statistically significant when they are added to the cross section regression of TFR on FLPR. However, the FLPR coefficient is no longer significant at the 5% level when quality of consumption variables are included in the regression. Furthermore, FLPR has a statistically significant negative effect on TFR in addition to the statistically significantly positive consumption variables, once we take both time-variant regional heterogeneity of consumption and time-invariant heterogeneity into account using the fixed effect model. The results are consistent with our theoretical model as well as more traditional economic models of employment and childbearing behavior. ∗Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8601, Japan, [email protected] †Research Institute of Economy, Trade and Industry, 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, Japan, [email protected]