Non-Technical Summary:
Female labour force participation has increased tremendously since World War II in developed countries. We develop a new decomposition approach to explain rising female labour force participation. The approach allows us to identify the role of tax and transfer policy reforms as well as three other factors that have been shown to matter by earlier studies. We consider actual labour supply changes over more than two decades and assess the contributions of changes in financial incentives arising from all tax and transfer policy reforms implemented during this period, real wage growth, population composition changes, and changes in labour supply preference parameters. Previous papers have pointed to the potential importance of some of these factors separately, but the contribution of tax-transfer reforms remains largely undocumented. The key contribution of this paper is to provide separate and internally consistent estimates of the role of each of these factors.
Using Australia’s consistent historic data collecting the same household and individual information over several decades, and specialised tax-benefit behavioural microsimulation modelling capacity, we apply this new approach to estimate the respective roles of the four factors of interest in a unified analytical framework. We focus on changes in labour supply decisions separate from decisions related to education or retirement by restricting our analysis to prime working-age individuals aged between 25 and 55.
The key result is that changes in financial incentives due to tax and transfer policy reforms have contributed relatively little to achieve the large increases in female labour force participation. Instead, it is the other three factors that drive the increased female participation. This is despite the ongoing emphasis of public policy on improved work incentives for women in Australia and elsewhere, and despite employment effects of tax and transfer reforms looming large in the political discourse in Australia. In some cases, the reforms are even working against increasing participation trends. Two other important results emerge from this study. First, real wage growth plays an important role, confirming results from earlier studies. Second, changes in the structure of the population, which includes age, education and family composition among other observable characteristics, play a more important role than suggested by earlier studies.
An updated version of this paper has been published as Hérault N and Kalb G. (2022) Understanding the rising trend in female labour force participation. Fiscal Studies, 43, 341–363. DOI: 10.1111/1475-5890.12313