For effective policy, economic models must include women

Women represent 49 percent of the labor force, 44 percent of hours worked, and 37 percent of earnings. Yet, many economic models of government policy ignore gender differences and use data on men only. This would not matter if women’s behavior and outcomes were the same as men’s. But they are not.

Our research highlights significant differences based on gender and marital status in labor participation rates, hours worked, earnings and saving. Economic models that account for these differences will likely yield more reliable predictions of how people react to changes in the economic environment, such as changes in wages and taxes.

{mosads}Economic models are an important tool in government policymaking. They are used extensively to examine the effects of government policies and programs that have far-reaching impacts — including Social Security, taxation and welfare programs. As such, these models have real, albeit indirect, effects on our lives. We all stand to benefit from models that use meaningful and comprehensive data to represent the labor force accurately and support sound government decisionmaking.

All economic models incorporate simplifying assumptions that make them less “real” in order to make calculation and interpretation easier. Often, these assumptions will have some impact on the usefulness of the results. The exclusion of women from models aimed at understanding reality and the consequences of policy undoubtedly undermines the credibility of the lessons we learn from these models.

If women behave differently from men as a group, as our research suggests, then the standard models will miss aspects of the data that are important to correctly gauge the effects of government taxes, transfers and even shocks to the economy more generally. 

To understand this better, we studied a generation of workers born in 1941-45. Because these workers have completed their working lives and retired, we can examine their behavior at different stages of life and compare the behavior of women and men at similar stages of life. 

We find that, on average, married women participate in the labor force less than single women, single men and married men. Their participation rate starts growing around age 30 and continues growing until age 50. In contrast, single women start participating at higher rates at age 25 and their participation stays flat past age 50.

Married men and single men have high and stable labor force participation rates until ages 50 and 40, respectively, when their participation starts to decline. These patterns also hold for yearly hours worked and labor earnings. The conclusion we reach from these sets of facts is that both gender and marital status have large impacts on labor supply over the life cycle. 

To explore how accounting for gender and marriage improves model results, we compared actual data with the results of three versions of an economic model: 1. only using data for men, as usually done; 2. using individual-level data for both men and women together, regardless of marital status; and 3. explicitly accounting for marriage and gender.

We find that the results from the model using data on men only are very different from what the actual data look like. Overall, labor force participation is severely overestimated in the men-only model, and the patterns of increasing participation that are evident at the start of the life cycle are not reflected. The estimates for hours worked and labor income are also higher in the model than in reality. 

Including women, regardless of marital status, yields a model that matches the data closely from age 45 onward but overestimates participation early in the life cycle. The same holds true for hours worked. The same model accurately estimates labor earnings over the life cycle.

When we refine the model further by explicitly modeling men and women, both single and in couples, the overestimation of participation in the middle years of the working life cycle is small, and results for hours worked and earnings closely match the actual data. 

Gender and marriage play important roles in people’s choices about whether and how much to work and save. Models aimed at providing serious policy evaluations need to include these characteristics for their results to be credible and reliable.

As important tools in government policymaking, economic models affect our lives, albeit indirectly. As such, society stands to benefit from models based on meaningful and comprehensive data. It is hard to see how those criteria are met when women are left out.

Mariacristina De Nardi is a senior economist and research advisor at the Federal Reserve Bank of Chicago. Margherita Borella is an assistant professor at the University of Torino. Fang Yang is an associate professor at Louisiana State University.Sharada Dharmasankar is an associate economist at the Federal Reserve Bank of Chicago.

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