Female Labour Force Participation
Women are unemployed too

In most empirical analyses of female labour supply any woman reporting zero hours of work is assumed not to want to work: no involuntary unemployment is possible. This assumption stands in sharp contrast to the procedures used to calculate labour force statistics, such as the umemployment rate, where 'participation' is defined to include not only those supplying positive hours of work, but also those actively seeking work. In Discussion Paper No. 149, Research Fellow Richard Blundell, John Ham and Costas Meghir modify the standard model of female labour supply to allow for the presence of unemployed workers who want to work at their perceived market wage but who cannot find a job.

In the conventional labour supply model, desired hours of work depend on the market wage, other sources of income, and on other demographic and (unobservable) individual characteristics. It is important to note that in this model, 'demand-side' variables only enter the labour supply function indirectly, through the wage rate. The introduction of unemployment provides a more realistic model of the labour market and also allows demand-side factors to enter directly into the determination of an individual's labour market position. This may increase the stability of the model estimates across different periods, since it allows the model to incorporate the effects of changes across time in the economic environment.

In the modified model, two groups of individuals will record zero hours of work. The first, who are included in the standard model, consists of those who do not wish to supply any hours of work at their perceived market wage. The second consists of individuals who want to work at their market wage but who do not find employment. The authors model this inability to find jobs by introducing an employment probability index, which is a function of the macroeconomic and microeconomic factors which determine whether an individual who wishes to work can find employment. Demand variables can therefore affect the probability of labour force participation in two ways: indirectly, through their effect on the wage rate; and directly, through their effect on the employment probability index. A negative shock to aggregate demand, for example, may decrease the probability that a woman wishes to work a positive number of hours because it lowers the market wage. The shock may also reduce the probability that she finds a job. The approach discussed in the paper allows these direct and indirect effects on labour force participation to be estimated separately.

Blundell and his co-authors apply this approach to a sample of 2011 married women from the 1981 UK Family Expenditure Survey. The standard labour supply model, when estimated using this sample, appears to be misspecified. The introduction of the employment probability function into the model has quite dramatic effects. There is less indication of model misspecification, and many of the labour supply parameters change significantly from those reported for the standard model. Moreover, estimates of the impact of young children on women's labour force participation are reduced, although they are still of considerable importance. In addition the new approach provides strong evidence of a backward-bending supply curve for female labour, which is not apparent in the standard analysis.


Unemployment and Female Labour Supply
Richard Blundell, John Ham and Costas Meghir

Discussion Paper No. 149, January 1987 (ATE)