What's Up with the Decline in Female Labor Force Participation?

Abstract

Working Paper 2005-18 August 2005 Abstract: This paper determines that the weaker positive pull of education into the labor market and weaker labor market conditions are the observed factors that contributed the most to the decline in the labor force participation rate (LFPR) between 2000 and 2004 among women ages 25-54. As is typical, however, unobserved factors contributed more than any single or combination of observed factors. Furthermore, if the unemployment rate rebounded to its level in 2000, the LFPR would still be 1.4 percentage points lower than it was in 2000. JEL classification: J22, J11 Key words: female labor force participation, labor supply, labor force participation over the business cycle What's Up With the Decline in Female Labor Force Participation? I. Introduction and Background Since the late 1940s the percent of the male population participating in the labor force has been on a steady decline, while female labor force participation has been steadily increasing. Figure 1 illustrates these long-term trends. The decline in male labor force participation has been attributed to a variety of factors. The institution of Social Security in 1935; its expansion to include disability insurance and Medicaid; and the Revenue Act of 1942, which granted tax incentives for firms to establish private pension plans, have been found to have contributed significantly to the decline (for example, see Burtless and Moffitt 1984, Helmuth Cremer, et al. 2004, Gruber 2000, and Lumsdaine, et al. 1997). These policies provided both greater incentives to claim a work-inhibiting disability and to retire earlier from the labor market. Another explanation offered to explain the decline of male labor force participation among all age groups is the increase in female labor force participation. With labor supply decisions often made in a household (husband-wife) setting, the increase in family income from more wives working provides an income effect incentive for husbands to decrease their labor supply. [FIGURE 1 OMITTED] The rise in female labor force participation has several explanations, as well. A major determinant of the increase in labor force participation are the biotechnological advancements that have provided women greater control over and timing of child bearing decisions since the 1940s (see Bailey 2004). This greater flexibility, along with advancements in household technologies (such as the introduction of the dishwasher and microwave oven) have afforded women greater freedom and time to increase their educational attainment, providing yet another reason to devote more time to the labor market (see Goldin 1995). Further, changing social attitudes about the role of women and the appropriateness of women (and wives) to work have increased the job opportunities and, thus, the incentives for women to enter the labor market (see Rindfuss et al. 1996). While the on-going decline in male labor force participation and the long-lived rise in female labor force participation have received much attention over the years, there has been a more recent change in the trend of labor force participation among women since 2000 that begs further scrutiny. Figure 2 plots the change in labor force participation rates between 2000 and 2004 for women across age categories. The figure shows that the decline in labor force participation has occurred across all age groups, except those 55 and older. While the 16-19 and 55+ age groups deserve their own analyses, this paper focuses on the change in labor force participation of those women who comprise the bulk of the female labor force, those 25-54 years of age. (1) These women made up 69% of the female labor force in 2004. [FIGURE 2 OMITTED] The importance of identifying the source of the unprecedented decline in female labor force participation lies in the value of knowing whether the decline is the beginning of a new trend or whether it is temporary and likely to reverse itself. …