The incidence and severity of poverty in urban and rural Ethiopia are similar – both extremely high. In contrast, urban and rural fertility rates differ substantially. Whereas the Total Fertility Rate (TFR) in rural areas is as high as 5.5, it is as low as 1.9 in Addis Ababa. The declining fertility rate especially in the capital city is paradoxical to economic demographers. This paper analyses the complex relationship between childbearing and poverty in urban and rural Ethiopia. We model child bearing and poverty as joint random effect models, controlling for initial conditions. Using panel data for three (comparable) waves both for rural and urban Ethiopia, our analysis examines the inherent differences in the poverty and fertility relationship.