Family growth depends on wages

When policy reforms are made, the influence on labour supply is often emphasised. Usually it is tax policy that is changed to affect labour supply. But key elements affecting labour supply include something that is more difficult to influence through reform: families having children. And children expose inequality between men and women.

"The link between parenthood and labour supply is particularly strong for women. Children are undoubtedly one of the main drivers of gender inequality, as they continue to keep women out of the labour market for longer than is the case for men," says Thomas Høgholm Jørgensen, associate professor at the Department of Economics at the University of Copenhagen.

To understand this inequality, he and two research colleagues from Oxford University have just investigated how changes in economic circumstances influence men's and women's considerations about having children.

Wage and tax differences are found to affect the sexes' desire to have children differently.

"We find that when women are paid more, family formation tends to be postponed, while the opposite is true when men are paid more – this tends to speed up family growth. Tax reforms can thus influence couples' family planning and affect gender inequality in the labour market in the long term," explains Thomas Høgholm Jørgensen who is associated with Center for Economic Behavior and Inequality (CEBI).

Model reveals huge difference

In the research project, the economists have also developed a dynamic life-cycle model of the choice of family size and labour supply. As a basis for comparison, they have set up a fictitious scenario in which couples cannot adjust their family plans on the basis of financial incentives.

"Specifically, in the model we looked at variations in the number of working hours for men and women and compared the result with the constructed scenario where family growth is not a factor," explains Thomas Høgholm Jørgensen:

"Here we can see that the fluctuations in women's working hours are 28 % higher in the lifecycle model, compared to the scenario where couples cannot organise plans for family growth based on economic considerations."

According to Thomas Høgholm Jørgensen, this figure underlines that considerations about children have a very strong impact on women's share of labour supply.

Widening the long-term pay gap

The researchers also see long-term consequences of this gender gap.

"An increase in men's wages that increases family size and decreases women's labour supply also leads to lower wages for women in the long term. This further exacerbates the wage gap within the household," says Thomas Høgholm Jørgensen and continues:

"Conversely, the increase in women's wages, which reduces plans for family growth and increases labour supply, also leads to higher wages in the long term and reduces the wage gap between men and women."

Thomas Høgholm Jørgensen stresses that the research project cannot say anything about why men's and women's approaches to family formation are affected differently by wage increases.

"All we can say is that women's participation in the labour market in particular is strongly influenced by considerations about raising a family. And when politicians have to make welfare and tax reforms, it is absolutely essential to know what influences people to enter the labour force," he emphasises.