A taxing question

None of this would matter much if low female employment rates and the output forgone were purely a matter of choice. Mr Daly argues that they are not. Many women would like to work, or to work more, if they could find affordable child care; subsidies for child care, not surprisingly, tend to raise the probability that a mother returns to work. And in many countries, second earners (usually women) face higher average tax rates than the main breadwinner. In Sweden, an exception, average tax rates are the same; in Italy and Spain second earner’s rates are 60% more than their partners’. Alberto Alesina and Andrea Ichino, two Italian economists, hae suggested going further than merely equalizing tax rates. Because women’s labour supply is more sensitive to tax rates than men’s, theory suggests that their rates should be lower – in Italy, they say, as much as 32%.

A higher rate of female employment could help to deal with the difficulties posed by an ageing society. With a higher share of people in work, the ratio of retired people to workers would fall. And Mr Daly argues that it would not reduce fertility rates, as some people may fear. In fact, where the gap between male and female employment rates is small, women tend to have more babies. The reason seems to be that in countries where taxes on second earners are high or affordable child care is hard to find, women must often choose between children and work, especially if their incomes are low. Where second earners are not penalized by taxes or where child care is cheap (or subsidized), they can have both.

As Mr Daly says, he is describing a changing picture. Even in Italy and Spain, female employment rates have climbed rapidly in the past decade. A narrowing of the gap between men’s and women’s employment rates has accounted for half of the rise in the euro area’s overall employment rate and for 0.4 points of its 2.1% trend annual increase in GDP since 1995. This has done more for Europe’s labour markets, he avers, than have “conventional” reforms. America’s female employment rates, meanwhile, has recently declined – perhaps for cyclical reasons. Japan’s low rate has not risen much.

Even with no change in politics, the employment sex gap is likely to close further. Probably the biggest changes are under way in Spain. The participation rates of Spanish women of different ages are similar to France’s or Germany’s 15 years ago. Those in their 20s are now more likely to work than their American sisters. A continuation of this trend, Mr Daly thinks, may add almost half a percentage point to Spain’s annual growth rate over the next ten years, and maybe more if policies change. In the euro area as a whole, a quarter of a point is on offer.

The countries with most to do are Italy and Japan. But by the same token they also have most to gain. In Italy, even on recent trends an extra 0.3 points a year of GDP growth may be had. Japan is heading for only an extra tenth of a point, but could gain half a point a year if politics change. Men run the world’s economies; but it may by up to women to rescue them.

(The Economist April 21^st 2007)