A dynamic model of labor supply and fertility with Ben-Porath human capital accumulation

The aim of this study is to explain two remarkable changes that occurred in the female labor market between the 1970s and the 1990s using a human capital investment model: (1) labor supply of married women has been more compatible with having children and (2) married women have faced higher wage growth rates as a result of higher participation. To this end, this paper constructs a dynamic stochastic labor supply model in which fertility and investment decisions are choice variables. I incorporate the Ben-Porath human capital accumulation into the model to link the expected intermittency caused by having children to women’s human capital. Specifically, women who expect to work less during child-rearing ages invest less in their human capital and face lower wages. After calibrating the model to match the 1970s cohort in the PSID data, which has lower participation and lower wages, I examine factors that might contribute to the observed changes over the two decades. From the numerical experiments, the main findings are as follows: (1) the decrease in childcare costs is the sole factor that accounts for the simultaneous increase in the labor participation and fertility rates and (2) the increased returns to experience generate higher wage growth through higher human capital investment. I emphasize the role of investment to shed light on the observed changes by comparing the model with no investment. JEL: J13, J16 and J24