Since 1945, fertility rates in all West European countries have displayed cyclical characteristics, including at least one `baby boom'. Since around 1965, however, fertility rates have been in general decline, and it is now often argued that the shortage of young workers in Europe in the next few decades may have serious implications for growth.
Some have argued that the answer lies in increased labour force participation by women. This will require, however, an adequate supply of women who want to work in the paid labour market. A challenge to this outlook is presented by Easterlin's `relative income hypothesis'. Starting from earlier evidence that the main motivation for women to engage in paid work is to make up shortfalls in their partners' earnings, Easterlin predicts that per capita earnings of smaller cohorts increase relative to those of larger cohorts. Female labour force participation should therefore be highest, and fertility lowest, in larger cohorts, while in smaller cohorts women will choose to have more children and work less. Hence fertility trends are cyclical, driven by the relative economic status of young workers.
In Discussion Paper No. 384, Research Fellow Siv Gustafsson reviews the economic literature relating to this theory. She focuses on the relation between income and cohort size and on the prediction of a strong negative effect of partners' incomes on women's labour supply.
Studies of economic fluctuations and growth focus on the demand for different factors of production. Different sorts of labour, characterized by different endowments of human capital in the form of work experience and education, can be viewed as distinct factors of production. The relative price of a factor that becomes scarcer may be expected to increase, so the relative earnings of young workers should increase and youth unemployment decrease in the 1990s and 2000s in Europe. Gustafsson reports recent empirical evidence from the US labour market, supporting the view that the size of a cohort appears to have marked effects on relative income, but that these effects do not persist over the life cycle. In Europe, where baby booms have been of smaller amplitude and duration, there is evidence that the relative income of larger cohorts has not suffered so much.
The relative importance of partners' income and of own income in determining female labour supply is a key issue, Gustafsson emphasizes. The relative income hypothesis can be thought of as a version of labour supply theory which emphasizes the effect of partners' incomes rather than `substitution effects': the opportunity costs of women's paid employment in terms of alternative uses of that time, notably child-rearing. She reviews a wide range of empirical evidence from many countries since the late 1960s. There is conclusive evidence, robust across several different specifications of the labour supply function, that the own-wage effect is substantially larger than the effect of partners' income. This lends strong support to the `opportunity cost' hypothesis rather than to the relative income hypothesis.
Gustafsson also discusses recent fertility trends in Sweden, which has passed a turning point and become the only European country to experience an upturn in fertility over the period 1980-6. Having once had one of the lowest fertility rates in Europe, Sweden now has one of the highest. She ascribes this to pro-natalist equal opportunities policies, which substantially reduce the cost of child-rearing for working women through subsidized child-care and paid parental leave.

Cohort Size and Female Labor Supply Siv Gustafsson

Discussion Paper No. 384, March 1990 (HR)