SOEPpapers 331: Fertility, Female Labor Supply, and Family Policy

The parameters αc and αn as well as the substitution elasticity ρ determine the preference structure, w defines the wage and b0, b1 the costs of children in terms of money and time. [...] Although the utility from leisure consumption could also be considered in the static model, the labor supply decision in the present context has to account for the timing of births and the accumulation and depreciation of female human capital during child rearing. [...] Given the wage rate for effective labor w and ej as the age-j productivity, labor supply of the husband lh is exogenously predetermined3 while the working time of the mother lfj is endogenously chosen given the husband’s income, and the number of children in the household. [...] As explained above, the higher the intratemporal elasticity of substitution between ordinary utility (from goods and leisure consumption) and family size ρ, the larger is the difference in completed fertility between the high-skilled and the low-skilled class. [...] About half of this increase is due to the di- rect effect of higher benefits (with a constant number of children) and the other half is due to the increase in the number of children.