The effects of family policy on labor supply and fertility decisions: Evidence from a dynamic structural micro-economic model with task-specific human capital, estimated using microdata for France and Germany

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Although France and Germany are similar in many socio-economic dimensions, their total fertility rates are at the opposite extremes of the spectrum found in the OECD. German family policy has sought to increase the low rate for years with little success. We believe that much can be learned from a systematic comparison that is guided by economic theory, features detailed modeling of family policy and labor market environments alike, and adequately controls for heterogeneity in preferences.In the proposed project, we develop an estimable life cycle model with endogenous fertility, career, and labor supply decisions. The model is fully forward-looking, so women choose their careers based on their desired fertility level and the costs of career breaks. These costs are shaped by policy through the prices of childcare, maternity leave benefits, and birth-related job protection policies. They are also influenced by the choice of career itself: Foregone returns to experience and human capital depreciation vary with the task baskets associated with different types of jobs. Our model includes the decision to obtain a university degree; in order to get a meaningful distinction between different career paths we develop a task based approach. Heterogeneous preferences for education, work and fertility ensure that we do not falsely attribute differences in outcomes to variation in the institutional setting. We perform extensive model checks, including validation on holdout samples. Estimating comparable versions of the model for Germany and France allows us to decompose differences in outcomes into differences in policy, the labor market environment, and preferences. We are also able to investigate possible interaction effects between these three sets of explanatory factors. We also use the model to study specific family policy measures in greater detail. Our main application will be the 2007 reform of parental leave benefits in Germany. Unlike the existing quasi-experimental studies, the structural model will allow us to quantify the separate effects of the different components of the reform, to isolate the reform effects from concomitant changes such as the expansion of childcare, and to predict the long-run fertility effects of the reform, distinguishing changes in completed fertility from pure timing effects. We will also use the model to simulate changes to the current system of parental leave regulations and to approximate the efficient frontier of fertility and female labor force participation, while leaving total fiscal cost constant at the present level.