Slowing Women's Labor Force Participation: The Role of Income Inequality

Intuitive NBER finds a relationship btw high earning husbands and well educated women’s propensity to work“…The entry of married women into the labor force and the rise in women’s relative wages are amongst the most notable economic developments of the twentieth century. The growth in these indicators was particularly pronounced in the 1970s and 1980s, but it stalled since the early 1990s, especially for college graduates. In this paper, we argue that the discontinued growth in female labor supply and wages since the 1990s is a consequence of growing inequality. Our hypothesis is that the growth in top incomes for men generated a negative income effect on the labor supply of their spouses, which reduced their participation and wages. We show that the slowdown in participation and wage growth was concentrated among women married to highly educated and high income husbands, whose earnings grew dramatically over this period. We then develop a model of household labor supply with returns to experience that qualitatively reproduces this effect. A calibrated version of the model can account for a large fraction of the decline relative to trend in married women’s participation in 1995-2005 particularly for college women. The model can also account for the rise in the gender wage gap for college graduates relative to trend in the same period…”

The basic story“…The entry of married women into the labor force and the rise in women’s relative earnings are amongst the most notable economic phenomena of the twentieth century (Goldin (2006)). These trends were particularly pronounced in the 1970s and 1980s, when full-year participation of married women grew from 38% in 1975 to a peak of 60% in 1996 and the male to female ratio in hourly wages dropped from 1.60 to 1.34. Since then, these indicators have stalled, as shown in figure 1. Moreover, this development is particularly pronounced for highly educated women. The labor force participation of married women with college degree and the gender wage gap of college workers saw no improvement since the early 1990s until the Great Recession. These observations are puzzling in light of the continued rise in women’s educational attainment relative to men and their entry into professional high-earning occupations…. We document a break in the trend for the labor force participation rate of married women in the early 1990s. The rate of labor force participation of married women increased by about 2 percentage points per year in the post war period up until this point, with a stronger growth for women with a college degree, converging rapidly to the participation rate of single women in the same education group. This convergence stopped in the early 1990s. The labor force participation rate for single women with less than college was approximately 5 percentage points higher than for married women in this education group in 1993-2007, whereas for women with college degree, the participation rate for single women remained 10 percentage points higher than for married women over the same period. The gap in labor force participation rate between single and married women dropped slightly during the Great Recession, mainly due to a decline in the participation rate of single women, and there was no further convergence after 2012, as the economy recovered. We then examine labor supply and wages of married women by their own and their husbands’ education, as well as their husbands’ income. We find that the decline in the growth of labor force participation of married women is primarily concentrated among those with a college husband and is positively related to husband’s income. Due to positive assortative matching, this channel disproportionally affected women with a college degree. Turning to wages, we find that the growth in top incomes for married men is associated with an increase in the skill premium for this group, whereas there was no comparable increase of the skill premium for married women. We also show that there was no difference in the skill premium by gender for single workers. To reinforce this observation, we examine the evolution of the gender wage gap by educational attainment for married workers. We find that the gender wage gap completely stopped converging for workers with a college degree in the early 1990s, though it declined somewhat after the Great Recession. For non-college workers, the gender wage gap continued closing until the early 2000s, even if the participation of married high school women was also flat over this period….”

This phenomenon accounts for 1/3 of gender wage gap (relative to trend) among college graduates, “…We calibrate the model to match key empirical moments in 1980, such as the distribution of household income and spousal earnings and wives’ labor force participation by household type. We conduct experiments to gauge the quantitative relevance of our hypothesis. Specifically, we increase the exogenous common component of the skill premium to match the observed rise in the male skill premium in the data in the 1990s. Our findings suggest that the rise in the skill premium can account for more than half of the decline relative to trend in married women’s participation in 1995-2005, and more than two thirds of the decline for college women. The model can also account for one third of the rise in the gender wage gap for college graduates relative to trend in the same period….”

The supporting Evidence

“…Figure 2 illustrates the joint evolution of labor force participation for married women and the gender wage gap by educational attainment.As shown in Panel (A), the labor force participation of married women with a college degree has mostly stalled since the early 1990s, with a small transitory increase for college workers during the Great Recession. For high school women, the growth in participation drops substantially starting in the early 1990s, but is still mostly positive. High school women also experience a temporary surge in participation during the Great Recession, after which their participation declines. Albanesi (2019) shows that female labor supply displays a strong countercyclical component, interpreted as resulting from household insurance against the risk of earnings loss of their male partners, who are more sensitive to business cycle risk. Ellieroth (2019) finds that temporary rise in female labor force participation during recessions results from a decline in the employment to non-participation flow of married women. We focus most of our analysis on the years previous to the Great Recession, to avoid the effect of this major cyclical event. Turning to the gender wage gap, measured as the male to female ratio of hourly earnings, Panel (A) shows that for college workers it decreased rapidly until 1992 and it stalled during the 1990s and early 2000s, only reaching values lower than those in 1992 after the Great Recession. A similar but less stark pattern occurred for high school workers, as shown in Panel (B). As shown in figure 3, panel (A), the flattening of labor force participation starting in the early 1990s is limited to married women. Participation of single women has been mostly stable throughout the sample period. Panel (B) shows the labor force participation rates of married women by age groups. One striking observation from these figures is that prime age married women have lower participation rates than older women, suggesting that the aging of the population is not related to this phenomenon…”

“..We first consider changes in fertility. Women with children are less likely to participate in the labor force, and hence increases in fertility could reduce labor force participation of married women. However, we can rule out this explanation as the only cause of the observed behavior of female labor force participation. As shown in figure 9, the decline in the growth rate of labor force participation was similar for women with and without children. Most importantly, the evolution in the labor force participation of married women depends on the characteristics of their spouse, since the decline in the rate of growth of participation was largest for women married to men in the 90th percentile of the earnings distribution, followed by those married to men in the 50thpercentile and in the 10th percentile. We conclude from this pattern that changes in fertility are not the main driving force behind the observed change in participation trends….”