Around half the pregnancies in the United States are unwanted and half of those end up in an abortion (Henshaw (1998)). Since the arrival of children into a household represent important costs in terms of resources and time for a significant period in the life-cycle, the imprecision with which individuals carry out their fertility plans can be identified as a source of economic inequality.
In this paper I develop a model to understand and quantify the driving forces behind fertility decisions. My model is described by a life-cycle, consumption-savings problem with uninsurable earnings risks, heterogeneous demographics (stochastic marriage/divorce) and exogenous educational types. I introduce fertility decisions into the model, with the property that the effectiveness of birth control and reproductive technologies is subject to idiosyncratic shocks, which gives rise to what I label fertility risk. I then estimate the model using data from the 1995 National Survey of Family Growth (NSFG), the Panel Study of Income Dynamics (PSID) and the Current Population Survey (CPS) using a simulated method of moments approach, where I choose education specific fertility and abortion life-cycle rates as data moments to be matched by the model.
In the model, I assume that children induce a shift in the utility of public consumption inside the household (through equivalence scales) and a time cost for mothers: I model children as durable consumption goods that require time for maintenance (child rearing time). In previous literature this assumption is key in obtaining a negative relationship between fertility and market skills, since the opportunity cost of a child is higher for females with higher income.
Here I argue that in trying to match some additional fertility facts, such as timing of births, unwantedness and abortion rates, the model needs an extra assumption, which I identify as differential fertility risk across educational groups.
My setup is different from previous literature and the mix of model ingredients explain the new result: under imperfect insurance mechanisms, non-labor income (savings) is endogenous and higher for more skilled/lucky earners. This creates an income effect that can overpower the opportunity cost (in term of forgone wages) of having/rearing children. In other words, higher educated individuals with higher wages, can insure better against the time costs of child rearing. This effect is reinforced if we account for marriage and positive assortative matching: females with more education tend to marry more educated males, who have higher wages. Just like own savings, male wages can act as an insurance against child expenses and the consumption cost of not working due to child rearing.
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Fertility Risk in the Life-Cycle
