The Impact of Children on Earnings of Japanese Fathers: Estimate Using Exogenous Variation in Family Size

Miho Iwasawa, National Institute of Population and Social Security Research, Japan
Akira Motegi, Institution of Social Science, The University of Tokyo

Having children have various impacts on parents' life. In this paper, we shed light on the causal relationship between childbearing and father’s earnings. Since decision to have another child is likely to be jointly determined with prospective earnings, naïve estimates with OLS of the causal effect of family size on parents’ earning should suffer from endogenous bias. To overcome this endogeneity problem, we use the exogenous variation in sex composition of the first two children to construct instrumental variables estimates of the effect of having additional children on father’s income. Using large sample surveys on fertility in Japan, we estimated conventional OLS model and two-stage least-square models with the instrument. Naïve OLS estimates show the negative relationship between having a third birth and father’s income. However, once we correct for endogeneity with IV estimates, such relationship alters to positive direction especially for less educated fathers.