AbstractThe aim of this paper is to understand recent observations of fertility, female employment, and participation rates in O.E.C.D. countries. These observations indicate that fertility rates are positively correlated with female employment ratios and participation rates across O.E.C.D. countries during the period 1985-1996. Moreover, the time series observations show that fertility rates are procyclical in developed countries. Economic theories of fertility developed after the seminal work of Mincer (1962) and Becker (1965) are consistent with secular trends of fertility and female employment but do not account for these recent observations. In this paper we explore the role of labor market frictions in understanding the positive association between fertility and employment among O.E.C.D. countries. To this end we develop a framework of fertility and labor market participation decisions which is designed to quantitatively study the impact of labor market frictions on the timing of births, the fertility rate, and the labor market participation of females. We find that unemployment induces females to postpone and space births which, in turn, reduces the total fertility rate. In our framework, economies with a high unemployment rate are characterized by a low fertility rate, female participation, and female employment ratio. We also find that in our framework, differences in unemployment rates similar to the ones observed among O.E.C.D. countries, can generate a positive correlation between fertility and labor market participation rates. Interestingly, a temporary shock that increases job destruction can generate a decrease of the fertility rate and of the female employment ratio that mimics time series observations of Sweden during the 90's.