Women in Work How can policy makers encourage female labour force participation?

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1 Women in Work How can policy makers encourage female labour force participation? Ensuring that women can partake in the workforce on equal terms with men is important for gender equality and poverty reduction. However, policy makers face a trade off between laws that can increase women s supply of labour versus those that decrease firms demand for women s labour. New data shows that allowing women to work in the same industries and for the same hours as men narrows the gender labour force participation gap, as does paid maternity leave and paternity leave, but excessively generous maternity leave is counterproductive. When women can work they are able to provide for themselves and their families; furthermore the female labour force participation rate in a country is linked to the GDP or international competitiveness (WEF 2010). Yet in all but one country, women significantly lag behind men in the work force. Raising female labour force participation is therefore a policy priority. A challenge is to find the balance that maximises women s labour force participation, for example by making it easy to combine childbearing and having a job, while not making hiring women prohibitively expensive from a firm s point of view. Policy is all the more important now that new evidence reveals much of the labour force participation gap cannot be explained by differences in education (Garguli, Hausmann, Viarengo 2010). The World Bank s new report, Women, Business and Law (WBL), is an invaluable new source of information on legislation with implications for women s position in the workforce. But it is not always clear which policies will yield the best outcome, or which are the highest priority. This paper will focus on legislation restricting women s work and legislation concerning parental leave and taxation. Where possible, this paper will examine the association between legislative choices and the ratio of female to male labour force participation 1. 1 I have chosen to use the ratio, rather than straight figures of female labour force participation, because the important point is how legislation affects women relative to men in the workforce. LABOUR RESTRICTIONS ON WOMEN In a number of countries, laws directly restrict women from participating in the job market in certain ways. Many of these measures are intended to be protective, for example restrictions on women working at night when it may be considered dangerous for women to commute to jobs at night time (WBL 2010). Yet these laws may be damaging to women s ability to participate in the labour force and provide for themselves or their families. The data reveals a significantly higher percentage of women in the work force compared to men in countries where women are allowed to work the same night hours as men. The same is true for countries where women are allowed to work in all the same industries as men. However there is not a significant difference in the gender ratio of labour force participation in countries where pregnant and nursing mothers cannot work the same hours or in the same industries as men and other women. In 37% of the economies studied, the statutory retirement age for women was lower than that of men, and in all other economies the retirement age was the same. The difference in the ratio of female to male labour found in countries with different statutory retirement ages for men and women was neither substantial nor significant, even for those This metric minimizes irrelevant differences between countries due to biases from different ways of collecting the data, as well as different unemployment rates or sizes of the informal as opposed to formal economy.

2 countries where retiring at the statutory age is compulsory. The difference was more significant where the minimum pensionable age between men and women was different. This implies that pensionable ages are more important when designing policy than retirement ages. **significant at 0.01 level significant at 0.1 level MATERNITY LEAVE All countries surveyed by WBL have some form of maternity leave, but the availability and terms of maternity leave are an important determinant of women s labour force participation. In general, maternity leave can improve female participation by helping women to reconcile work and family life. Job-protected, paid maternity leave in Taiwan has been shown to increase women s labour input (employment and hours) by about 7% (Zveglich & van der Meulen Rodgers, 2003). Likewise the German Elterngeld maternity reform, which replaced 67% of earnings for up to 14 months after birth of the child, has been shown to cause a significant increase in mothers employment probability at the end of this period (Kluve & Tamm, 2009). These are examples of laws that have made it easier for women to combine motherhood and a career; yet excessively generous policies can make employers less likely to hire women in the first place, and thus decrease women s labour force participation. Employers are reluctant to invest in skills of women when it is expected that they will leave the labour market for extended periods of time (Iversen & Rosenbluth 2010). There are international guidelines on parental leave: ILO Convention 183 requires member states to mandate at least 14 weeks of maternity leave, at a rate of at least two-thirds of previous earnings, where the employer is not solely responsible for the payment (be it by social security, public funds or other means). Globally only 30% of member states fully meet these requirements. The regions with the highest proportion of countries in conformity

3 with these aspects of the Convention are Central Asia and Europe, while conformity is particularly low in Asia and the Pacific and the Middle East (ILO 2010). In countries where all of these conditions are met, we find a significantly higher ratio of female to male labour force participation, 76.5% compared to 68.7% (significant at 0.05 level). It is instructive to examine the components of maternity leave policy to determine what is most significant. The four major components are: 1. Replacement of earnings 2. Length of paid leave 3. Provision of paternity leave 4. Who pays for the leave REPLACEMENT OF EARNINGS Country-level research shows that the take-up of leave among women is low especially when the leave is unpaid (ILO 2010). WBL shows that 102 of the 128 countries surveyed pay at least the minimum amount of money for maternity leave advised by the ILO. However there is no significant association between the generosity of the paid leave and the size of the labour force participation gap. This suggests that the generosity of paid leave is not the most crucial element of the design of maternity leave. LENGTH OF PAID LEAVE The provision of maternity leave has often been shown to boost female labour participation, but if this leave is too short it may not be sufficient to help women balance their family and work commitments. WBL shows that 102 of the 128 countries surveyed mandate at least the 14 weeks of maternity leave advised by the ILO. The mean ratio of female to male labour force participation for countries that mandate at least 14 weeks of maternity leave is 77.3% compared to 65.3% for countries that don t (significant at the 0.01 level). In fact we find a positive relationship between the length of paid maternity leave and the ratio of women to men in the labour force. There is a reduction in the labour force participation gap of 18.5%, for each time the length of paid maternity leave doubles, until

4 maternity leave becomes longer than 140 days. However, laws offering maternity leave for an extended period of time can hinder women s labour force participation. Such policies discourage employers from hiring women in the first place (Iversen & Rosenbluth 2010). Extended absence from the workforce for maternity leave may deteriorate labour market skills, and damage future career paths and earnings, particularly when taken early in the career (Miller 2009). For example, for highschool graduates in the US, there is a motherhood wage penalty of about 10% per child, 40% of which has been shown to be due to time out of the workforce (Anderson, Binder & Krause 2002). There is also evidence that extended parental leave has a negative impact PATERNITY LEAVE The provision of paternity leave can mitigate the effect of maternity leave in making women less attractive to employers, as well as achieving a more equitable division of labour within the family. Dividing leave and payments between mothers and fathers ensures that women are no more of a liability for firms to on the salary of returning mothers (Ruhm 1998). Some studies have indicated that beyond 140 days (20 weeks), the marginal effect of additional parental leave on female participation appears to become negative (Jaumotte, 2003). 13 of the WBL economies show paid parental leave of longer than 140 weeks. There are too few data points to make quantitative conclusions about maternity leave above a certain point having a negative effect, although our findings match those of other studies very closely in showing that at approximately 140 days, the relationship between the length of maternity leave and the improvement in the labour force participation gap flattens out and possibly becomes negative. hire than men, and also ensures that mothers spend less time out of the labour market, doing less damage to their long-term labour-market prospects and lifetime earnings. 63 of the 128 economies in WBL mandate some form of paternity leave. There is a significant and substantial difference in the average gender ratio of labour force *significant at 0.05 level significant at 0.1 level

5 participation in economies that mandate paternity leave as opposed to those that don t. Where paternity leave exists there is also a higher percentage of female skilled workers and female owners within firms on average. This confirms existing literature, such as Ray et al. 2010, who found that in 21 high-income countries, providing maternity leave without paternity leave (or non-transferable paternity leave) is likely to increase the child care responsibilities for mothers while also reducing their long-term earnings relative to fathers. In the design of paternity leave, it has been found that men s take-up rates are much higher where paternity leave is non-transferable, for example in Iceland (ILO 2010). WHO PAYS? 28% of countries stipulate that payment during maternity leave be covered entirely by the employer; 16% use mixed payments by employers and the government; 50% finance benefits through social security paid by the government. When a firm must pay for mandated maternity benefits, the policy acts as a tax on the employers of women, which can cause firms to substitute away from women s labour. The data confirms the theory, since countries in which the government pays for maternity leave, rather than the employer or a mixed system, show a smaller gap between women s and men s labour force participation on average. TAXATION WBL shows that in the vast majority of economies, women and men earning the same income face the same tax liabilities when filing personal income tax returns. Direct gender differentiation in tax law does not appear to be a policy problem. But tax laws can create indirect tax differentiation and discourage the labour force participation of married women, by disfavouring equal distribution of income across spouses. A more neutral tax treatment of second earners relative to single individuals can increase female labour force participation by increasing the return on married women s work. Likewise extra tax credits for low income families can discourage the labour supply of married women but encourage the labour supply of single women. The WBL data does not reveal a significant association between the taxation of second earners and the labour force participation gap, but existing country level surveys point to a strong relationship. There is much research from OECD countries to prove that women s labour force participation is significantly affected by tax laws. Female labour force participation has been seen to decrease as the relative tax on second earners increases (Jaumotte 2003). In the United States, the earned income tax credit (EITC) is designed to reduce the tax burden on low-income families. But if married women work, their families are more likely to earn sufficient income to be ineligible for the credit. As a result, the EITC has been shown to reduce married women s participation in the job market (LaLumia 2008). Conversely, it has had a large significant positive effect on the labour of single mothers (Eissa, Kleven and Kreiner 2008). The French tax credit for low-income families has been shown to have an even larger negative impact on the employment rate of married women, while having no significant effect on single mothers (Stancanelli 2008). There is currently a lack of research into these effects in developing countries. The labour force participation gap is actually lowest in low-income and high-income countries, rising in the middle-income countries (Forsythe et al. 2000). This suggests that abstaining from the labour force in response to taxation may be a luxury that low-income women cannot afford. Yet developing countries tend to have much larger informal economies and more women than men tend to be employed in the informal sector, partly because it makes it easier to combine family responsibilities with employment (Tzannatos 1998). So tax laws that are biased against a second earner may discourage women from working in the formal economy. This is particularly dangerous, since

6 workers in the informal economy typically lack legal and social protection. As for tax credits for lower income families, if the disincentives are modest, then benefits do not reduce the work effort, while they can provide income security, particularly for single women. CONCLUSIONS A vast range of factors affects female labour force participation, from policy to education to social norms. This paper has found certain policies appear to be associated with very different average labour force participation gaps. Policies that prevent women from working at night and prevent them from working in the same industries as men are associated with a lower ratio of women to men in the workforce. Longer maternity leave is associated with higher labour force participation for women, but only up until 140 days. Paternity leave also makes for a smaller labour force participation gap on average, as does having the government finance maternity leave rather than an employer. The financial generosity of such leave is less important. No clear findings emerged about the relationship between tax laws and female labour force participation, but existing country-level studies show that tax laws that are neutral towards second earners are beneficial for female labour force participation. REFERENCES Anderson, Deborah J., Melissa Binder and Kate Krause, 2002, The Motherhood Wage Penalty The American Economic Review Vol. 92, No. 2 Forsythe, Nancy, Roberto Patricio Korzeniewicz, Valerie Durrant, Gender Inequalities and Economic Growth: A Longitudinal Evaluation, Economic Development and Cultural Change, Vol. 48, No. 3 Ganguli, Ina, Ricardo Hausmann and Martina Viarengo, The Closing of the Gender Gap in Education: Does it Foretell the Closing of the Employment, Marriage, and Motherhood Gaps? (Working Paper) ILO, Maternity at work: A review of national legislation Iversen, Torben and Frances McCall Rosenbluth, Women, work, and politics,yale University Press Jaumotte, Florence Labour Force Participation of Women: Empirical Evidence on the Role of Policy and other Determinants in OECD Countries OECD Economic Studies 37 (2) Kluve, Jochen, and Marcus Tamm Now Daddy s Changing Diapers and Mommy s Making Her Career: Evaluating a Generous Parental Leave Regulation Using a Natural Experiment IZA Discussion Paper Institute for the Study of Labor, Bonn. Eissa, Nada, Henrik Jacobsen Kleven and Claus Thustrup Kreiner Journal of Public Economics 92 (3 4): LaLumia, Sara The Effects of Joint Taxation of Married Couples on Labor Supply and Non-wage Income. Journal of Public Economics 92 (7): Miller, Amalia, The effects of motherhood timing on career path, Journal of Population Economics 24 (3) Ray, Rebecca, Janet C. Gornick and John Schmitt Parental Leave Policies in 21 Countries. Center for Economic and Policy Research, Washington, D.C. Ruhm, Christopher J., The Economic Consequences of Parental Leave Mandates: Lessons From Europe, QJE, Vol. 113, No. 1 Stancanelli, Elena G. F Evaluating the Impact of the French Tax Credit on the Employment Rate of Women. Journal of Public Economics 92: Tzannatos, Z, Women and labor market changes in the global economy: Growth helps, inequalities hurt and public policy matters World Development, Elsevier World Economic Forum Global Gender Gap Geneva. Zveglich, Joseph E., and Yana van der Meulen Rodgers The Impact of Protective Measures for Female Workers. Journal of Labor Economics 21 (3).