Do labor market institutions matter for fertility?

Abstract

Using annual data for 20 OECD countries over the period 1961-2014, we study whether labor market institutions (LMIs) not targeted to maternity impact the total fertility rate (TFR). We distinguish between employment rigidities (ER) and real wage rigidities (RWR), since the former reduces and the latter amplifies the response of the business cycle to shocks. Panel regressions and principal component analysis reveal that ER, such as employment protection and union strength, increase TFR. On the other hand, RWR, proxied by the centralization of wage bargaining and unemployment benefits, reduce TFR. We also find evidence that unemployment volatility reduces fertility whereas wage volatility raises fertility. Thus, to the extent that labor market institutions affect unemployment and wage volatility, they may also affect fertility. We complement our analysis with a DSGE model that incorporates households' fertility decision as well as unemployment and wage rigidities. We find that downward wage rigidities amplify real contractions in response to negative demand shocks and lead to large drops in employment and fertility.