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Boosting Women’s Labor-Force Participation To Lift Long-Term Growth – Analysis

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As populations age and labour productivity slows, policy agendas that support stronger diversity and inclusion measures could provide a much needed shot in the arm for the global economy. This column describes the constraints limiting women’s full participation in the workforce across a wide sample of countries, and suggests that governments looking to maximise growth prioritise paternity leave legislation, tax wedges, and employment protections. Policies targeting gender parity must focus not only on women’s labour-supply decisions but on men’s behaviour as well. 

By Stephanie Kelly, Abigail Watt, Nancy Hardie and Jeremy Lawson*

The diversity and inclusion debate usually centres on the importance of social justice and fairness in the labour market and society writ large. The morality of empowering and creating opportunities for all individuals regardless of background, race, or gender is well trodden and founded on strong philosophical grounds. However, there is a powerful economic argument as well. With aging populations weighing on the effective labour supply – and hence, potential growth across economies – making more efficient use of labour endowments creates an opportunity to boost potential growth into the future (Clements et al. 2015). 

Structural inequalities are contributing to sluggish long-term prospects

While women tend be at least as well educated as their male counterparts in most developed countries, they are also much more likely than men to face a trade-off between accepting paid work and undertaking unpaid work, including caring responsibilities. This results in women being consistently less attached to the workforce than their male counterparts, and working fewer average hours when they do work. This persistent participation gap represents a failure to benefit from the complementarity of male and female labour (Lagarde and Ostroy 2018). 

This structural inequality has been brought into sharp relief by the extent to which women have been especially exposed to the deep recessions and increased caring requirements caused by the Covid-19 pandemic (Djankov et al. 2020). Lockdowns had their largest impact on the low-paid service sector jobs in which women are more likely to be employed. And their greater unpaid caring responsibilities have left them with a higher burden of managing the fallout from COVID, home working, and home schooling. 

Given the desirability of greater gender equality from both an ethical and economic standpoint, this issue should be central to policymakers. The first step is to understand how existing policies might be limiting women’s full participation in the workforce. Our work builds on early contributions from Ruhm (1998) on maternity leave and later work by Jaumotte (2003) and Thévenon and Solaz (2013) on the influence of a wide array of policy drivers of female labour force participation. Importantly, our study looks at a wider number of countries than previous work, uses a more current sample period covering the post financial-crisis era, and considers the implications of these policies for men also (Kelly et al. 2021). 

Policies allowing and facilitating more male parental leave should be a priority 

Men are often left out of discussions on gender inequality in the literature, which tends to incorporate only female participation rates and policies that directly apply to women, such as maternity leave. In our research, we look at how policies, education, demographics, and economic strength drive both female and male participation rates in order to strengthen our ability to make comparisons between genders, as well as draw conclusions about what contributes most to maximising aggregate participation. In the policy space, paternity leave is a visible omission from much of the literature. Though targeted at men, paternity leave has the potential to influence female participation as well by altering firms’ hiring incentives and biases and the optimisation of labour supply within households. 

Indeed, the most striking result of our research is that higher legislated paternity leave entitlements are significantly and positively associated with higher rates of female labour force participation. This highlights that policies targeting greater gender diversity and inclusion must focus on male behaviour and labour supply decisions and not only those of women. 

Although our research cannot identify the precise channel through which legislated paternity leave matters, there are two possibilities. One is causal, with higher paternity leave entitlements themselves altering labour supply decisions. Another possibility is that countries implementing greater paternity leave are undergoing the type of social and cultural change associated with higher female participation. 

While we cannot capture how the culture of taking leave changes over time, we find related evidence that points to this being an important constraint. While Japan and South Korea have the most generous entitlements, we know that take-up is particularly low in these countries. When we remove Japan and South Korea, not only is the benefit of paternity leave estimated to be higher across leave lengths, but the length at which this impact becomes negative is much later (54 versus 45 weeks, see Chart 1). 

Figure 1 Impact of paternity leave is striking, but excluding outliers highlights potential role of culture 

Source: Aberdeen Standard Investments 2020

The potential benefit of both parents taking leave makes sense for both the supply and demand sides of the labour equation. If women expect to take career breaks while their partners do not, this naturally creates less attachment to the labour force, meaning that an employer considering two candidates of different genders may have conscious or unconscious bias towards hiring the person least likely to leave. If all parents regardless of gender are likely to take leave for caring purposes, these barriers to women entering and staying in the workforce should logically decline. 

The relevance of our paternity-leave finding is even more significant considering that maternity leave is not significant for female participation in our model. We investigated whether this is a recent change by extending earlier work by Thévenon and Solaz (2013). The results suggest the substantial progress made in expanding maternity-leave rights in previous decades – notably the 1980s – has meant that any changes that have occurred since the 2000s have not had a statistically significant impact on female participation rates (see Chart 2). For countries that still have low maternity-leave entitlements (mainly English speaking), it may be that company policies are on average more generous – though again, we cannot measure that directly, which underscores the challenge of trying to understand these complex relationships with limited data. 

Figure 2 Maternity leave gains greatest in 1980s

Source: OECD, Aberdeen Standard Investments

Tax can act as an important disincentive in terms of extensive and intensive margins for women

Relevant policies to alter incentives to work stretch beyond equitable leave policies, particularly given the fact that individuals can still choose whether and how much available leave to take. Tax systems don’t offer the same individual choice and so play a vital role in determining the relative cost-benefit of taking up formal paid employment (the extensive margin) and the number of hours one works when in paid employment (the intensive margin). Poor policy can distort labour supply decisions and lead to sub-optimal aggregate resource allocation. The fact that tax wedges can be larger for second earners and for single parents is particularly relevant to the issue of female participation rates. 

Our research found that systems that put a higher tax burden on second earners and sole earners having children, respectively, are associated with lower female labour force participation rates. This makes sense given that women tend to be the second earners in dual income households and are more likely than men to be single parents. We found the opposite relationship held for men, which might suggest that traditional gender norms make men more likely to be the primary earner in a household. 

Employment protections underscore the differences in male and female engagement with the workforce

Employment protections are an interesting element of the policy puzzle. Ideally, these protections should strike a balance between protecting labour rights while allowing firms the flexibility to optimally manage their work forces. In practice, however, governments do not always get this trade-off right, and most importantly for our purposes, distortions might influence men and women differently.

We found a positive relationship between regular employment protection and female participation. This is consistent with our expectation that, given the challenges women face working full time, greater overall employment protections may help mitigate conscious and unconscious biases. We did not pick up any such relationship for male participation.

For temporary contracts, however, we found the opposite relationship: Less stringent employment protections were associated with higher levels of female participation. This suggests that labour market flexibility may allow easier entry and re-entry for women who are less attached to the labour force and therefore more likely to work in temporary, part-time roles. Indeed, we found that higher rates of part-time work among women were associated with higher rates of female participation. 

For men, this was not the case. We found that more stringent employment protection for short-term contracts were associated with high male participation, while part-time work rates were not significant in our model. This hints at the idea that men have a fundamentally different relationship with the workforce than women, reflecting the different incentives created by the policy regime, and differences that persist in the roles of men and women in caring and formal employment.

The Covid-19 experience has brought the risks of the current balance into sharp relief: Unequal caring responsibilities and over-representation in less secure work in the service sector has resulted in more women than men leaving employment. While our results show the benefits of part-time, flexible work for boosting the quantity of women in the workforce, it does not address the quality of that work, whether the labour resources are optimally allocated, or if they reflect gender preferences engrained in the workplace. This is a clear area for further research.

Figure 3 Female participation incentives

Source: Aberdeen Standard Investments

*About the authors:

  • Stephanie Kelly, Senior Political Economist, Aberdeen Standard Investments Research Institute
  • Abigail Watt, Research Economist, Aberdeen Standard Investments Research Institute
  • Nancy Hardie, Macro ESG Research Analyst, Aberdeen Standard Investments Research Institute
  • Jeremy Lawson, Head, Aberdeen Standard Investments Research Institute

References

Clements, B, K Dybczak, V Gaspar, S Gupta and M Soto (2015), “The Fiscal Consequences of Shrinking Populations”, IMF Staff Discussion Note, 15/21, International Monetary Fund.

Djankov, S, T Trumbic and Y Zhang (2020), “The gender gap and COVID-19: Evidence from eight advanced economies”, VoxEU.org, 14 December. 

Kelly, S, A Watt, N Hardie, N and J Lawson (2021), “Disentangling the drivers of labour force participation by sex – a cross country study”, CEPR Discussion Paper 17677.

Jaumotte, F (2003), “Female labour force participation: Past trends and main determinants in OECD Countries”, Economics Department Working Paper, No. 376, OECD, Paris.

Lagarde, C and J D Ostry (2018), “The macroeconomic benefits of gender diversity”, VoxEU.org, 5 December.

Ruhm, C J (1998), “The Economic Consequences of Parental Leave Mandates: Lessons from Europe”, Quarterly Journal of Economics 113(1): 285–317.

Thévenon, O (2013), “Drivers of Female Labour Force Participation in the OECD”, OECD Social, Employment and Migration Working Papers, No.145, OECD, Paris.

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