Dynamic Female Labor Supply

1. Dynamic Female Labor Supply Zvi Eckstein and Osnat Lifshitz December 27, 2010 Based on the Walras-Bowley Lecture to the American Econometric Society Summer meeting, June 2008

2. Why Do We Study Female Employment (FE)?

3. Because they contribute a lot to US Per Capita GDP… 3

4. Central Question Why Did Female Employment (FE) Rise Dramatically?

5. Because Married FE Rose…..! 5

6. Why did Married Female Employment (FE) Rise Dramatically?

7. Main Empirical Hypotheses • Schooling Level increase (Becker) • Wage increase/Gender Gap decline Heckman and McCurdy(1980), Goldin(1990), Galor and Weil(1996), Blau and Kahn(2000), Jones, Manuelli and McGrattan(2003), Gayle and Golan(2007) • Fertility decline Gronau(1973), Heckman(1974), Rosensweig and Wolpin(1980), Heckman and Willis(1977), Albanesi and Olivetti(2007) Attanasio at.al.(2008) • Marriage decline/Divorce increase Weiss and Willis(1985,1997), Weiss and Chiappori(2006) • Other – (unexplained)

8. Schooling Level Increase

9. Wage increase – Gender Gap decline 10

10. Fertility Decline Ref. by cohort 11

11. Marriage Declines – Divorce Increases 13

12. What are the Other Empirical Hypotheses? • Social Norms Fernandez, Fogli and Olivetti(2004), Mulligan and Rubinstein(2004), Fernandez (2007) • Cost of Children Attanasio, Low and Sanchez-Marcos(2008)Albanesi and Olivetti(2007) • Technical Progress Goldin(1991), Greenwood et. al.(2002), Will show up as a cohort effects..

13. Post baby-boomers Cohort’s FE stabilized Employment rates by Age 15

14. An Accounting Exercise • Measure female’s employment due to: • Schooling Levelincrease • Wageincrease/Gender Gap decrease • Fertilitydecline • Marriagedecline/Divorcegrowth • The “unexplained” is Others Lee and Wolpin, 2008

15. An Accounting Exercise • Need an empirical model • Use Standard Dynamic Female Labor Supply Model – Eckstein and Wolpin 1989 (EW): “old” model Later extensions (among others..): van der Klauw, 1996, Altug and Miller, 1998, Keane and Wolpin, 2006 and Ge, 2007.

16. Sketch of the Model • Extension of Heckman (1974) • Female maximizes PV utility • Chooses employment (pt = 1 or 0) • Takes as given: • Education at age 22 • Husband characteristics • Processes for wages, fertility, marital status • Estimation using SMM and 1955 cohorts from CPS Model

17. Estimation Fit – 1955 cohort FE

18. Estimation Fit – 1955 cohort FE

19. Estimation Fit – 1955 cohort FE

20. Back to Accounting Exercise • For the 1955 cohort we estimated: p55= P55(S, yw, yh, N, M) for each age • Contribution of Schooling of 1945 cohort (S45) for predicted FE of 1945 cohort is: predicted p45= P55(S45, yw55, yh55, N55, M55) • ….Schooling and Wage predicted p45= P55(S45, yw45, yh45, N55, M55) • ….Etc

21. FE by Age per Cohort

22. Accounting for changes in FE: 1945 cohort Dynamic Model Age Group: 28-32 1955: Actual: 65% Fitted: 65% Actual 1945 49% 1 - Schooling 63% 1+ 2 Wage 63% + 3 Children 61% + 4 Marital Status 61% Other 12% Age Group: 38-42 1955:Actual: 74% Fitted: 74% Actual 1945 68% 1 - Schooling 71% 1+ 2 Wage 69% + 3 Children 69% + 4 Marital Status 69% Other 1% Early age total difference 12% is Other

23. Goodness of Fit Tests for the Three Models

24. Accounting for the change in FE:Cohorts of 1925, 30, 35 based on 1955

25. Accounting for the change in FE:Cohorts of 1940, 45, 50: based on 1955

26. Accounting for the change in FE:Cohorts of 1960, 65, 70, 75: based on 1955 What are the missing factors for “other”? 37

27. What is missing factor for early ages? • Childcare cost if working • Change 1 parameter (a4) – get perfect fit • 1945 cohort childcare cost: $3/hour higher • 1965 cohort childcare cost: $1.1/hourlower • 1975cohort childcare cost: $1.1/hourlower

28. What is missing factor for all ages? • Childcare cost if working • Value of staying at home • Change 2 parameters (a1,a4) – get perfect fit • 1935,1925 cohorts childcare cost: $3.2/hour higher • 1935 cohort leisure value: $4.5/hourhigher • 1925cohort leisure value: $5/hourhigher How can we explain results?

29. Actual and Predicted Employment Rates 1940 Cohort

30. Actual and Predicted Employment Rates 1930 Cohort

31. How can we explain results? • Change in cost/utility interpreted as: • Technical progress in home production • Change in preferences or social norms How do we fit the aggregate employment/participation?

32. Aggregate fit Simulation • Simulate the Employment rate for all the cohorts: 1923-1978. • Calculate the aggregate Employment for each cohort at each year by the weight of the cohort in the population. • Compare actual to simulated Employment 1980-2007.

33. Predicted Aggregate Female Employment Rates Dynamic Model

34. Predicted Aggregate Female Employment Rates by Cohort and Age - Dynamic Model

35. Alternative Modeling for Explaining “Other Gap” • Unobserved heterogeneity regarding leisure/cost of children • Bargaining power of women changes • Household game: a “new” empirical framework 46

36. Concluding remarks We demonstrate the gains from using Stochastic Dynamic Discretemodels: Dynamic selection method, rational expectations, and cross-equations restrictions are imposed Accounting for alternative explanations for rise in US Female Employment Better fit than static models (new version) Education – 35% ofincrease in Married FE Other – 25-45% ofincrease in Married FE Change in two parameters close the Other Gap 47

37. Thanks!! Thanks!!