Inequality and Household Labor Supply
Stefania Albanesi, Columbia University, NBER and
CEPR
Maria J. Prados, Columbia University
June 2011
Abstract
The entry of married women into the labor force and the rise in women's relative wages are amongst the most notable economic developments of the twentieth century. These phenomena were particularly pronounced in the 1970s and 1980s, when participation of married women grew from 57% in 1975 to a peak of 76% in 1996 and the male/female ratio in hourly wages dropped from 1.60 to 1.34. Since then, these indicators have stalled, especially for college graduates. This development is puzzling in light of the continued rise in women's educational investments relative to men and their entry into professional occupations.
This paper links the decline in married womenÕs participation and wages relative to trend since the early 1990s to the growth of the skill premium, which substantially accelerated in those years. Our hypothesis is that the growth in wages for highly educated men generated a negative wealth effect on the labor supply of their female spouses, reducing their labor supply and their wages relative to men. Disaggregated evidence on skill premia by gender, gender wage gaps by education and labor force participation of wives provides descriptive support for this mechanism. Specifically, starting in the early 1990s , the growth in the skill premium was lower for women, while convergence in wages across gender slowed more for college graduates. Finally, participation of married women declined starting in the early 1990s especially for college women, women married to men with a college degree or to men in the top percentiles of the earnings distribution.
We develop a collective model of household labor supply which can qualitatively reproduce a negative effect on wives' participation of a rise in husbands' earnings. We show that a calibrated version of the model can account for more than half the decline relative to trend in married womenÕs participation in 1995-2005, and more than 2/3 for college women. The model can also account for 1/3 of the rise in the gender wage gap for college graduates relative to trend in the same period.
JEL Classification: E24; J2; J3.
Keywords: Labor force participation; Married
women; Skill premium.