Dynamic modeling of fertility and labour market participation of married or cohabiting women

We jointly model fertility and participation decisions of women who live in couple using a dynamic model. In this paper we analyze the labour supply and the fertility decisions of married or cohabiting women in France, Spain, Germany, UK and Denmark. We estimate, for the period going from 1994 to 2001, a dynamic bivariate probit model with random effects using the ECHP (European Community Household Panel) and using a simulated maximum likelihood estimator. These estimates are made on an annual basis taking into account the initial conditions problem. The decisions of participation and fertility of women who live in couple depend on the individual characteristics (observed or unobserved) and are characterized by a significant state dependence. Our results suggest that the decisions of employment and fertility cannot be modeled separately. The difference of fertility across these countries is explained by individual characteristics and variations of social and fiscal policies across countries. However, the unobserved components of heterogeneity also play a central role in the observed differences across countries. We show the importance of the permanent income component in the participation decision. Random effects are negatively correlated across the equations of the model. Consequently, women who, a priori, prefer to have a higher consumption have weaker preferences for fertility.