DP5667 Women Prefer Larger Governments: Growth, Structural Transformation and Government Size
The increase in income per capita is accompanied, in virtually all countries, by two changes in the structure of the economy, namely an increase in the share of government spending in GDP and an increase in female labour force participation. This paper suggests that these two changes are causally related. We develop a growth model where the structure of the economy is endogenous so that participation in market activities and government size are causally related. Economic growth and rising incomes are accompanied by a greater incentive for women to engage in labour market activities as the opportunity cost of staying at home increases. We hypothesize that government spending decreases the cost of performing household chores such as, but not limited to, child rearing and child care so that couples decide to engage further in the labour market and chose a higher tax rate to finance more government spending. Using a wide cross-section of data for developed and developing countries, we show that higher participation by women in the labour market are indeed positively associated with larger governments. Furthermore, we investigate the causal link between the two variables using as instrumental variables a unique and novel dataset on the relative price of home appliances across OECD countries and over time. We find strong evidence of a causal link between participation in the labour market and government size: a 10 percent rise in participation in the labour market leads to a 7 to 8 percent rise in government size. This effect is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998). The inclusion of an endogenous choice of government spending allows a considerable extension of the model in Galor and Weil (2000) so fertility can either rise or fall and phenomena like the baby boom and baby bust in Greenwood at el. (2002) can be addressed. In addition, the paper has important implications for the analysis of the secular as well as cross-country determinants of government size.
