Fertility, labor market participation, and macroeconomic dynamics

We develop a dynamic macroeconomic model with heterogeneous households, endogenous fertility, and endogenous labor market participation to study the two-way interactions between demographic change and economic growth. The model yields closed-form results in a simplified setting and is then calibrated to Japanese data from 1970 to 2019 to examine long-run trends and policy counterfactuals. We find that reducing participation costs increases employment but lowers GDP per worker and total population due to a negative spillover that increases childrearing costs; lowering the cost of raising children slows population decline but reduces GDP per capita mostly by expanding the non-working population; and faster productivity growth boosts GDP per capita and population growth, but reduces labor force participation through selection effects. Overall, fertility and labor market policies involve trade-offs—between participation and productivity or between growth and demographic stability. These trade-offs are mitigated by technological progress, which tends to enhance both economic and demographic outcomes; participation may decline via composition effects.