Easterlin Cycles: Fertility and the Labor Market

I mentioned in chapter 7 that the fluctuation of human population can be summarized into three broad categories: the pretransitional, transitional, and posttransitional cycles. Among these three categories, the last one has caught the attention of most demographic economists in the past thirty years. The main reason for this unbalanced research attention is that the posttransitional cycles appear only in developed countries, where high-quality data are available for empirical research. The recent development of advanced mathematical tools also facilitates the analysis of posttransitional density-dependent population dynamics. In this chapter we will provide a summary of the theoretical and empirical analyses of the most typical population fluctuations in the posttransitional period: the so-called Easterlin cycles. The well-known Easterlin cycles, named after the pioneer work by Richard Easterlin (1961, 1980), describe the observed two-generation-long birth cycles in the twentieth-century United States and in several other developed countries. Easterlin believed that there were two features associated with the observed cycles: they are related to the labor market, and they are more or less “self-generating” (Easterlin, 1961). The first feature implies that a complete theoretical framework should characterize how people’s fertility behavior is affected by the labor market and how the labor market is affected by the fertility pattern. The second feature addresses whether the theoretical framework can generate a persistent fertility fluctuation. An ideal theoretical framework should embody both of these features, and an ideal empirical analysis should also be compatible with these features. We start the background introduction by studying a Malthusian model presented by Lee (1974). Let us consider an overlapping-generation framework in which each individual lives one or two periods. The first period is childhood, the second period is adulthood, and all surviving adults will be in the labor force. Lee wrote down the following two equations: . . . W(t) = f(L(t)), (10.1). . . . . . b(t) = g(W(t)), (10.2). . . where W(t) is the wage rate (at time t), L is the size of the adult age group, b is the crude birth rate, and f(.) and g(.) are functions with f'(.) < 0 and g'(.) > 0.