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Policy Changes Could Boost Women’s Participation in U.S. Workforce

On the Record: A Conversation with Fang Yang

Fang Yang is an associate professor of economics at Louisiana State University in Baton Rouge. Her research interests include labor economics, wealth inequality and housing. She discusses the labor market impacts of tax policy, an evolving U.S. workforce, the effects of gender and an aging population.

Q. In addition to an aging U.S. workforce and retiring baby boomers, what other recent demographic trends are affecting the labor market?

Another demographic trend affecting the labor market is the reduction in the fertility rate. In the short run, fewer children will boost female labor force participation, which increases the growth in the number of working people.

In the long run, in contrast, a lower fertility rate reduces the share of the working-age population and, thus, slows the growth of the aggregate economy. This reduction in the population growth rate in the United States can be mitigated by immigration, depending on what immigration policies are implemented.

Q. Your research has focused on the ways federal tax policy for married couples may suppress the labor supply of secondary earners. How big are the effects on work and income?

In the United States, income taxes depend on one's marital status. Among married couples, existing law tends to discourage the labor supply of the secondary earner. The disincentives from joint taxation stem from the fact that couples file taxes jointly, and taxation is progressive.

As a result, secondary earners face a higher marginal tax rate, which is a very important determinant in the decision to work. Since women tend to have lower wages than men, these secondary earners have historically been women.

In work with Margherita Borella [University of Torino, Italy] and Mariacristina De Nardi [University of Minnesota] to illustrate the magnitude of the disincentives embedded in the income tax system, we consider four marginal tax rates as a function of women's earnings.

A single woman earning $500 a year faces a marginal tax rate of –10 percent (due to the earned income tax credit), whereas a married woman earning the same amount faces a marginal tax rate of 14 percent, 18 percent or 21 percent if she is married to a man in the 25th, 50th or 75th income percentile, respectively. Thus, allowing married people to file taxes as singles (rather than jointly) implies much lower marginal tax rates for women and can lead to higher labor market participation.

Fang Yang

Governments should implement policies that encourage labor participation by women so that the economy fully benefits from the increasing skills of women.

Q. Your work has also looked into the work disincentives of the Social Security program. Why do these disincentives arise?

The disincentives to work due to Social Security benefits arise because married and widowed people can claim Social Security spousal and survivorship benefits using their spouses’ past contributions rather than their own. More specifically, Social Security benefits for a married person are the higher of one's own benefit entitlement or half of the spouse's entitlement (spousal benefit).

In addition, Social Security benefits for a widow or widower are the higher amount between one’s own benefit entitlement and that of the deceased spouse (survivor benefit). Those policies imply that the lower labor supply of the secondary earner does not necessarily infer lower Social Security benefits, so there is less incentive for secondary earners to work.

Q. What changes to Social Security do you find in your model to increase the incentives to work and to work more?

To evaluate the effect of marriage-related taxes and Social Security benefits on female labor supply, we estimate a rich life-cycle model of labor supply and savings with single and married people facing a possible change in marital status. The model incorporates skill building on the job, medical spending and longevity risk. Importantly, our model not only fits the observed data on labor supply and savings for single and married men and women over the life cycle, but it also implies realistic labor supply elasticities.

Using our model, we find that marriage-based income taxes and Social Security benefits strongly reduce female labor supply. When eliminating both spousal and survivor Social Security benefits, the participation of married women is, respectively, 10, 11 and 4 percentage points higher at ages 25, 55–60 and 65. In contrast, men decrease their participation starting at age 55, and their participation is 6 percentage points lower by age 65.

The elimination of both marriage-based income taxes and Social Security benefits would have raised participation at age 25 by more than 20 percentage points for married women and by 5 percentage points for single women. At age 45, participation would have been 15 percentage points higher for married women and 3 percentage points higher for single women without these marriage-related income tax and Social Security provisions.

In contrast, the elimination of these marriage-based policies would reduce the participation of married men as of age 60, leading to a participation rate that is 8 percentage points lower by age 65.

I should point out that our analysis is based on a revenue-neutral reform. The cost savings from the elimination of marital Social Security benefits and extra revenue from labor income allows the government to reduce the proportional component of the income tax in order to balance the government budget. We find such revenue-neutral reform would be welfare-improving for the vast majority of people in this cohort.

Q. Younger cohorts of women are working more than their mothers. Because they are more likely to marry later in life and have fewer children, what is the impact?

The results I just discussed refer to the cohort born around 1945. We also study a cohort that is 10 years younger—born in 1955. The labor force participation of women in this cohort is higher and they have fewer children. Nevertheless, we find that even for the 1955 birth cohort, the effects of eliminating marriage-based taxation and Social Security benefits are large and similar to what I just discussed.

Q. What are other policy proposals that have been offered to boost labor force growth and work effort?

One policy aimed at increasing U.S. labor force participation is the Earned Income Tax Credit, which raises the incentives to work by providing a refundable tax credit for low-income workers, typically with children. Policies such as paid parental leave or the provision of affordable child care have been proposed to help caregivers balance work and family obligations.

Other advanced economies are also struggling with the lack of labor force growth. They have adopted or proposed policies such as increasing immigration, paid parental leave, free or affordable child care and a higher retirement age. The effects of these policies are still subject to evaluation.

Q. With more women than men graduating from college, how will the view of their contribution to the U.S. economy change?

The college attainment rate for women surpassed that for men decades ago. In work with Suqin Ge [Virginia Tech University], we compute, at each year, the percent of men and women age 25 to 34 with some college education by age 35, and we find that females overtook males in college attainment in 1987 and have led ever since.

With more and more women gaining human capital though college education, they contribute more to economic growth. Governments should implement policies that encourage labor participation by women so that the economy fully benefits from the increasing skills of women. The economy benefits not only in the short run through the increased labor force but also in the long run through increased skills acquired on the job.

Q. In another generation, how will the role of women in the workforce change?

While women are increasingly enrolling and completing college education, women are still underrepresented in science, technology, engineering and math (STEM)-related fields. Young girls should be encouraged to study STEM-related fields that bring higher earnings. In addition, future generations of women need to not only participate more in the labor force but also take on more leadership positions.

Q. To what degree are gender differences in the U.S. a reflection of global attitudes?

Economic gender inequality exists across the world. In every OECD [Organization for Economic Cooperation and Development] country, women’s labor force participation is lower than that for men, despite higher schooling.

The U.S. has been lagging in reducing economic gender inequality compared with several countries. In 2015, the OECD reported that the participation rates of prime-age adult women were around 12 percentage points lower than those of men in the U.S., while the gap was only around 4 percentage points in Sweden, Finland and Norway.

Many OECD countries have adopted policies to boost the labor supply of women. For example, the U.S. is the only advanced country that does not offer national paid parental leave. In addition, while the U.S. adopts joint-income taxation, many countries tax the income of married people by allowing them to file as if they were single.

Southwest Economy is published quarterly by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

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