Virginia Sanchez Marcos (Universidad de Cantabria)

“Labor Market Frictions and Lowest Low Fertility”

Abstract: The total fertility rate in some OECD countries, such as Greece, Italy, Portugal and Spain, is around or below 1.3 children, a situation that demographers characterize as the lowest-low fertility. In this paper we study the link between labor market frictions and fertility. We focus on two labor market frictions: dual labor markets, i.e. coexistence of jobs with temporary and permanent contracts, and inflexibility of work schedules. We use rich administrative data from the Spanish Social Security Records and show that having a temporary contract has a significant and negative effect on the probability that a woman has her first birth. Furthermore, women are much less likely to be promoted to a permanent job than men. Using data from the Time Use Surveys, we also show that women with children are more likely to work in jobs with regular work schedules. We next build a life-cycle model in which married women decide whether to work or not as well as how many children to have and when to have them. All jobs start as temporary with a high separation rate and become permanent stochastically. Children are costly in terms of time and money. When a women does not work, her labor market experience, and as a result wage, suffer. Given the cost of having children, both in terms of time and money as well as in terms of labor market implications, women make their fertility choices. As women wait to build their careers, they delay their fertility. We use this model to show that reforms that eliminate the labor market duality in Spain can increase the total fertility rate substantially. Our results indicate that in a world without labor market duality, the total fertility rate would be about 0.4 children higher (1.81 versus 1.44). When we eliminate both duality and inflexibility of working hours, the total fertility rate increases to 1.9 children.