How Female Labor Supply Shapes Aggregate Labor Market Dynamics

In this article, we detail key aspects of female labor supply and how it shapes aggregate labor market dynamics. We start by documenting several important features of female labor supply including labor market participation, business cycle volatility, responsiveness to the underlying economic environment and its role for insurance within the household. For this article, we relied on Michele Tertilt and Matthias Doepke's excellent survey "Families in Macroeconomics."

During the second half of the 20th century, women's engagement in the labor market changed in profound ways. Female participation in the labor market experienced a significant increase — nearly converging with that of males — and the disparity in hourly wages between males and females diminished. Concurrently, shifts in family dynamics occurred, with women marrying and starting families later in life and also emerging as the primary drivers of college educational attainment. We cover these aspects of female labor supply in this article, including how it affects economic recoveries.

The Rise in Female Labor Market Participation

In the U.S., the labor market participation of female workers more than doubled from about 30 percent in the 1950s to around 70 percent at the beginning of the 2000s. Several explanations have been proposed for this rise. First, there has been a significant reduction in the wage gap between males and females, with the ratio improving from about 60 percent to about 80 percent. This may have incentivized households to embrace a dual-earner status.

Second, it is easier to participate in the labor market when child care is more accessible, and there is some evidence that the ratio of child care costs relative to female earnings has declined over time. A fact that supports this hypothesis is that the rise in female labor market participation has been mainly driven by married females (as opposed to single females). In addition, a 2008 paper models female labor supply using a life cycle quantitative model and finds that both the decline in child care costs as well as the narrowing in the gender wage gap are important model features in explaining the rise in female worker participation.¹

Third, starting in the 1950s, the service sector has been increasingly more important for economic output. Female workers are traditionally more connected to the service sector as opposed to, for example, manufacturing.

Fourth, shifts in marriage patterns have affected the overall labor supply. Compared to the 1950s, marriage ages are older, and divorce rates are higher. Both imply a rise in the fraction of females and males who are single as opposed to married. Since single females are typically more attached to the labor market than married females, a rise in the fraction of females who are single would lead to a rise in the overall labor supply.

The Lower Volatility of Female Labor Supply

A salient feature of economic recessions is that workers lose their jobs. Although the labor supply for both males and females declines in recessions, the labor supply of females declines by less. A 2020 working paper found that, between the 1980s and 2010s, male unemployment rose on average by about 1 percentage point more than female unemployment in every recession.² During the Great Recession for example, male employment declined by about 6 million, while female employment fell by about 2 million. It should be noted that the pandemic recession, which occurred after this period, saw female unemployment rise much faster than male unemployment.

The industry composition of workers may explain these patterns. When employment losses are concentrated in sectors with a higher share of male workers, male employment appears more volatile than female employment. In contrast, when employment losses are concentrated in female-dominated sectors, female unemployment will rise more. The housing sector (traditionally a male-dominated sector) was hit the hardest during the Great Recession, while service sectors such as leisure and hospitality were hit the hardest during the pandemic recession, resulting in higher female unemployment.

What about expansions? Female employment recovers more slowly than male employment during expansions, a feature which is connected to the important topic of jobless recoveries, discussed in more detail below.

The Higher Elasticity of Female Labor Supply

As previously mentioned, a leading narrative for the rise in female labor market participation after the 1950s is the rise in female wages relative to male wages (that is, the narrowing of the gender wage gap). This narrative requires that the female labor supply is responsive to wage changes. Said another way, the female labor supply would need to be an elastic factor of production. Economists are in constant pursuit of measuring the elasticity of female (as well as male) labor supply not only to explain secular trends but also to examine business cycle fluctuations and the optimal design of the tax system.

Most studies find a large female labor supply elasticity.³ One such study uses tax reforms in 1981 and 1986 to compare the labor supply responsiveness of married women with high-income husbands (who were more likely to benefit from the reduction in marginal tax rates) with the responsiveness of married women with low-income husbands. In the period surrounding the tax reforms, the participation rate of the women with high-income husbands grew 19 percent, while the participation rate for those with lower-income husbands grew 9.7 percent.⁴ This gives an elasticity of participation equal to 1.35, which is much higher than the labor supply elasticity of males, typically estimated to be less than 0.5.

Reconciling Contradictory Facts

So now, we've outlined two seemingly contradicting facts:

• Female labor supply is less variable than male along the business cycle.
• Women have a much higher labor supply elasticity than men.

How can we reconcile a more responsive female labor supply at the individual level with a less responsive labor supply at the aggregate level?

We already proposed some explanations — such as the different industry compositions of male and female workers — but one more explanation is worth fleshing out: the insurance role of female labor supply.

Female Labor Supply as Insurance

In a recession where males are more likely to lose their jobs (perhaps due to shocks in male-dominated industries), secondary earners are likely to enter the workforce to compensate for the loss in household income. Thus, some females work more precisely when aggregate conditions are bad, which tends to lower the aggregate volatility of female hours along the business cycle. But how clear is the evidence that such a mechanism takes place?

It is natural to expect that when household members lose their jobs, spouses can increase their labor supply to compensate for the income loss. This mechanism is known in the literature as the "added worker effect" (AWE).

However, surprisingly little empirical evidence supports the AWE, so it does not appear that females work substantially more when their husbands lose their jobs. One paper from 2000 argues that there is little room for (private) insurance between household members through labor supply adjustments when public insurance (namely, unemployment insurance benefits) is available. Its analysis shows that total hours of female work would rise by 30 percent during their husbands' spells of unemployment in the absence of unemployment insurance.⁵

A working paper from 2019 develops an incomplete markets model with family labor supply and labor productivity shocks where the labor supply decision depends endogenously on the generosity of government transfers.⁶ This model recognizes that, besides government transfers, the limits of AWE may also be explained by correlated shocks. For example, if the male worker loses his job due to a general economic downturn, then it will be difficult for the female worker to find a job.

A 2020 paper analyzes the AWE based on married couples in Austria where the husband loses a job due to plant closure or mass layoff. It documents a limited rise in spousal employment upon layoffs.⁷

Structural models of labor supply are more supportive of the AWE. A 2016 paper uses consumption data coupled with a structural model of family labor supply and concludes that there is significant intra-household insurance through the labor supply channel.⁸ Finally, a 2022 paper argues the spousal labor supply response may not be strong overall but is stronger when the secondary earner's previous employment period is more recent and her income is higher.⁹

Jobless Recoveries

Employment losses are less severe for female workers relative to male workers during recessions. What about during the expansionary phase of the business cycle? It turns out that female employment also recovers at a slower pace relative to males. However, this pattern applies to relatively recent expansions.

Recovery of male employment has always been slow, while recovery of female employment was fast during recessionary episodes prior to the 1990s. However, the pace of recovery in female employment began to slow and become more in line with male employment recovery. A 2014 paper explains the change in female employment dynamics during expansion based on the changing family structure.¹⁰ Recessions before the 1990s took place while female participation was rising. Recessions after the 1990s took place while female participation was stable or slightly declining.

A 2023 paper studies this mechanism with a particular focus on crowding out male employment from female employment.¹¹ The authors conclude that "without female convergence — i.e., if the growth rate of female employment had been as high in recent recoveries as in the 1970s — recent recoveries would have looked dramatically different." According to their estimates, 60 percent of the slowdown in recoveries since the early 1980s can be explained by the convergence of female to male employment rates.

Conclusion

In this article, we analyzed key aspects of female labor supply, including participation rates, business cycle volatility, responsiveness to economic conditions and its role as a household insurance mechanism. The rise in female labor market participation was influenced by factors such as reduced child care costs, narrowing gender wage gaps, the growing importance of the service sector and shifting marriage patterns.

Examining the volatility of female labor supply, we observed that, on average, females exhibit lower sensitivity to economic downturns compared to males, attributed in part to industry composition disparities. Despite higher individual labor supply elasticity among females, their responsiveness appears lower at the aggregate level, potentially influenced by the insurance role of female labor supply.

Understanding female labor supply dynamics is crucial for interpreting broader labor market phenomena, such as jobless recoveries. While historical recoveries were rapid for females, a slowdown in female employment recoveries since the 1990s has generated an overall slowdown in the labor market expansions.

Marios Karabarbounis is a senior economist in the Research Department at the Federal Reserve Bank of Richmond.

To cite this Economic Brief, please use the following format: Karabarbounis, Marios. (February 2024) "How Female Labor Supply Shapes Aggregate Labor Market Dynamics." Federal Reserve Bank of Richmond Economic Brief, No. 24-04.

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