Chapter

Chapter 7A. Unlocking Female Employment Potential in Europe

Editor(s):
Kalpana Kochhar, Sonali Jain-Chandra, and Monique Newiak
Published Date:
February 2017
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Author(s)
Lone Christiansen, Huidan Lin, Joana Pereira, Petia Topalova and Rima Turk 

Why is Increasing Female Labor Force Participation Relevant?

Europe’s population is aging, and productivity growth has declined. Potential output growth in Europe has declined markedly in the aftermath of the global financial crisis (IMF 2015), owing in particular to slower growth in employment and productivity. In addition, the working-age population is expected to continue to shrink over the coming decades, with fewer people entering the labor force and old-age dependency ratios rising. To the extent the recent slowdown in productivity is not fully explained by cyclical factors, concerns about continued subdued productivity growth also linger.

Gender gaps in participation and senior positions are prevalent in Europe. Women remain less active participants in the labor force than men. In 2014, only 89 women were working for every 100 men of prime working age. Furthermore, in many countries, working women supply significantly fewer hours of work than men. Gender gaps are even more glaring in senior corporate positions. As of April 2015, for every 100 corporate board members of large publicly listed firms, only 23 were women.1

Gender equality in the labor market is an important social and development goal and can bring significant macroeconomic benefits (World Bank 2011; European Commission 2011; Elborgh-Woytek and others 2013; Gonzales and others 2015a). This operates in particular through two channels:

  • Increasing labor supply—In the context of a rapidly aging population, increasing the share of women in the workforce could help mitigate the impact of a shrinking labor force. Closing the gender participation gap by increasing the number of women in the labor market would raise the European labor force by 6 percent. The impact could be as large as 15 percent if the gap in hours worked by men and women were also eliminated (Figure 7.1).2 In turn, the resulting increase in labor input could have sizable effects on Europe’s measured potential output. According to the Organisation for Economic Co-operation and Development (OECD), closing the gender participation gap could raise GDP by 12 percent over the next 15 years (OECD 2012).

  • Improving firm financial performance—Greater involvement of women in senior management and in the board room could help strengthen firms’ performance by broadening the talent pool and better representing the changing demographics of the workforce (OECD 2012).3 To the extent that higher representation of women in senior positions improves corporate sector profitability, it would help support corporate investment and productivity, mitigating the slowdown in potential growth.

Figure 7.1.Europe’s Economic Challenges

Note: Data labels in the figure use International Organization for Standardization (ISO) country codes.

This analysis contributes to the debate by addressing two important questions: First, what can be done to boost female employment and close gender gaps in the labor force? Second, are there gains from greater female representation in senior corporate positions?

  • Increasing labor supply—After taking stock of the evolution of female labor force participation and its key drivers in Europe, the analysis revisits the relative importance of various demographic characteristics and policy variables in women’s employment decisions. A key contribution of the analysis is the ability to disentangle the effects on women’s employment decisions arising from individual (or household) choices and from macro-level policies.4 The analysis highlights the significant role of demographics and attitudes in driving women’s employment decisions, and it confirms that policies matter as well.

  • Improving firm financial performance—Using data from more than 2 million firms in Europe, we investigate whether firms benefit from more gender diversity in senior positions and provide new empirical evidence on women’s representation in senior positions and firm financial performance. There is a strong positive association between female representation and firm performance, particularly in high-tech and knowledge-intensive sectors and in sectors where women represent a large share of the workforce.5

How Has Women’s Labor Supply Evolved?

More Women in the Labor Force

During the past few decades, European female labor force participation has increased substantially but progress has been uneven across countries and has stalled in recent years. From participation rates of about 40 percent in the early 1980s in a number of advanced European countries, including Spain and Ireland (where participation rates were then below 40 percent), most advanced economies now stand at about 80 percent for women ages 25–54—the European Union (EU) 2014 average. As a result, European female labor force participation is now almost on par with that of North America and east Asia (Figure 7.2). However, labor force participation among prime working-age women in some emerging and northern European countries has traditionally been about 80 percent or higher, leaving less space for further significant increases. In fact, most of these countries have remained at broadly unchanged levels during the past two decades, and participation in Romania has declined moderately.

Figure 7.2.(Uneven) Progress in Female Labor Force Participation

(Percent of same-age population)

Sources: Eurostat; and IMF staff calculations.

Although there has been a marked increase in female labor force participation rates, they remain well below male participation rates, and many working women are employed at less than full time. As of 2014, the gender participation gap was above 10 percentage points in a majority of countries, above 20 percentage points in Malta and Italy, only around 5 percentage points in Sweden and Norway, and virtually closed in Lithuania. The gender gap also varies across age groups and education levels. In Italy, it is most prevalent among people older than age 30, whereas in Poland it narrows for people in their forties and fifties, when women are past their prime childbearing years. Gender gaps also tend to narrow at higher education levels. The average number of hours worked each week has remained broadly stable over the past decade for the average EU country, with substantial variation across countries. In the Netherlands, a high female labor force participation rate coincides with a considerable gap in hours worked between women and men, as more than half of women between the ages of 25 and 54 are employed part time. In Germany, women work around 30 hours a week and men work nearly 40 hours a week, whereas in Bulgaria, they work equally long work weeks. Although part-time work can lift participation rates through a reconciliation of family life and employment, part-time employment may also result from policy-induced constraints to taking up full-time work (such as high taxation of second earners in a household or underprovision of childcare).6

Few Women in Corporate Leadership Roles

More European women have entered corporate board rooms, but most countries are still a long way away from gender parity in senior corporate positions. Since 2003, when Norway passed a law mandating 40 percent representation of each gender on the board of publicly listed companies, many European countries have followed suit (Profeta and others 2014). Germany passed a law requiring publicly listed companies to have 30 percent of supervisory seats occupied by women as of 2016. Overall, the introduction of quotas has supported a substantial rise in the share of women on the boards of Europe’s largest publicly listed companies (Figure 7.3). While legal requirements have boosted the share of women in the board room to about 19 percent, only 14 percent of executive positions among Europe’s 620 largest listed companies were held by women in 2015. In the broader corporate sector, women have made greater strides. Analysis of the gender composition of senior positions—both in management and on corporate boards—of more than 2 million companies in 34 European countries reveals that almost a quarter of such positions are held by women.7 However, the cross-country variation is large. Furthermore, in all countries, there is still a sizable gap between the gender composition of the workforce and that of senior positions.

Figure 7.3.Women in Senior Positions

Note: Data labels use International Organization for Standardization (ISO) country codes.

Do Policies Matter?

Both individual characteristics and policies likely affect a woman’s decision to work (Figure 7.4).8

Figure 7.4.Gender-Related Characteristics and Policies

  • Individual characteristics—When making the decision whether or not to join the labor force, women compare the value of home production relative to the return to working outside the house (Becker 1965). For example, the return from household work increases with the number of children, and higher education strengthens incentives for labor force participation through higher potential earnings. Gender attitudes or beliefs about women’s role in society are also important as they determine the disutility of market work from violating personally held beliefs or social norms (Fernandez 2013).

  • Policies—Policies can create substantial (dis)incentives for women to work, in particular for women with children. First, the tax system can create disincentives to work, or to work full time, for the second earner in a household (often a woman) through a relatively high marginal tax rate (Bick and Fuchs-Schündeln 2014; Dao and others 2014; Colonna and Marcassa 2015). However, there has been no clear direction of change in this area, and taxation for married couples across countries varies from completely joint to separate. In contrast, specific family-oriented policies have generally moved in the direction of supporting women’s participation in the workforce (Carta and Rizzica 2015). Public spending on early education and childcare has increased in most countries since the early 1990s, facilitating mothers’ return to work (Jaumotte 2003; Steinberg and Nakane 2012; Thévenon 2013). At the same time, family allowances in the form of cash lump-sum transfers have been generally reduced. Although parental leave policies are adjusted only infrequently, a number of countries, including the United Kingdom, Ireland, and Slovak Republic, now provide more than 30 weeks of maternity leave for women, further supporting the return of mothers to work (Ondrich and others 2003; Edin and Gustavsson 2008).

Our analysis confirms that both individual characteristics and policies are important for understanding women’s employment decisions (Figure 7.5). A substantial literature examines the drivers of female labor force participation. However, without microlevel data it is difficult to fully account for individual attitudes and choice and establish the role of changes in policies. Using such data on individuals, Christiansen and others (2016b) examine the role of both individual characteristics and policies.9 Specific policy recommendations would vary, however, depending on each country’s circumstances.

Figure 7.5.Marginal Effects of Individual Characteristics and Policies on Female Employment

(Percentage points)

Source: Christiansen and others 2016b.

Note: Impact per one-standard-deviation increase (during 2002–12 across countries) in the given variable. Coefficient on “Married” is Insignificant.

  • Individual characteristics—The analysis highlights that although more education is associated with a higher probability of a prime-aged woman working, education does not help explain the extent of full-time versus part-time work. In contrast, although marriage in itself does not significantly alter women’s employment decisions, among working women, the data reveal that married women do tend to work shorter weeks than unmarried women, and each additional child is associated with a lower probability of a woman working. A woman’s self-reported attitude toward working, which helps capture her personal employment choice, is a strong predictor of whether or not she is working. Likewise, intergenerational patterns should not be dismissed: women who grew up with working mothers are more likely to work themselves, suggesting that the gender gap can be gradually closed over time to the extent that policies do not discriminate against women working today.

  • Policies—As working women often earn the secondary income in a family unit, higher relative tax rates on the secondary earner discourage women from participating in the labor force (particularly in advanced European economies) and from working full time. However, the positive association between the probability of employment and public spending on childcare and early childhood education (particularly in emerging European economies) supports the hypothesis that public spending can facilitate the return to work after childbirth. In contrast, lump-sum cash transfers may lessen the necessity for a woman to work, given the associated increase in nonwage household income. Excessive parental leave may deter a woman from returning to work at full time, but more parental leave is associated with a higher likelihood of employment. Finally, changes in these policies matter more for women than for men, which underscores that removing disincentives created by policies can help narrow the gender participation gap.

Recent changes in policies have supported female employment in a number of countries. A decomposition of the actual change in employment rates across countries between 2002 and 2012 suggests that the positive evolution of attitudes toward women working have helped lift women’s employment rates (Christiansen and others 2016b; Figure 7.6). However, even after accounting for demographics and personal choices, policies have had significant influence. In particular, lower taxes on the second household earner in a number of countries, including Norway and the United Kingdom, have helped support female employment. Across a number of countries, including the Czech Republic, Poland, and Norway, increased spending on childcare and reduced family allowance have also positively contributed.

Figure 7.6.Decomposing the Change in the Female Employment Rate, 2002–12

(Percentage points; based on data for countries with both years in regressions)

Source: IMF staff calculations.

1 Captures time dummy and other macro controls.

Corporate Performance May Improve

Policies that strengthen women’s attachment to the labor force could help build the pipeline of women for senior corporate positions. One of the potential causes of the persistent gender gaps in senior positions is the limited supply of women willing and/or able to take on these positions. Indeed, across European countries, there is a strong negative correlation between the share of women employed on a part-time basis and the presence of women in senior corporate positions. While part-time employment is a useful entry point to the labor market for women whose labor supply is constrained by family responsibilities, policies that boost the overall labor supply of women and facilitate their eventual transition from part-time to full-time employment could help narrow gender gaps at the higher rungs of the career ladder.

In turn, greater gender equality in senior positions could generate significant benefits at the firm level. Diversity might improve corporate productivity to the extent that it fosters complementarities in skills, generates knowledge spillovers, stimulates critical and creative thinking, makes the workplace more enjoyable, or stimulates demand.10 Given the existing differences in preferences and behavior along gender lines, important complementarities arise between the managerial style of men and women.

Moreover, the economic returns to gender diversity in senior positions may have risen.

  • More women in the labor force—Over the past three decades, millions of women have joined the labor force in Europe, but senior corporate positions continue to be held mostly by men. Bridging the widening gender gaps between those who hold senior positions in the corporate world and the workforce could improve firm performance.11 Women in leadership positions may be more likely to support family-friendly changes in corporate policies or serve as role models for other women, thereby raising the productivity of female workers. Women’s leadership style may also be more effective in female-dominated or female-oriented settings (Eagly, Karau, and Makhijani 1995).

  • High-tech and knowledge-intensive sectors—Relative to traditional industries, sectors characterized by complex tasks and innovative output stand to benefit more from greater diversity—including along gender lines—to the extent that it increases the set of ideas and potential solutions.12 At 40 percent of GDP, high-tech and knowledge-intensive sectors now account for a sizable fraction of economic activity in Europe.

Nevertheless, existing evidence on the impact of gender diversity on firm performance is inconclusive, often relying on small sample sizes.13,14 Influential work by McKinsey (2007, 2009) and Catalyst (2007) documents a strong positive association between the representation of women on the boards of Fortune 500 companies and corporate performance. However, later studies, which plausibly identify the causal impact on firm performance of raising the share of women in corporate boards, challenge the early evidence (see, for example, Ahern and Dittmar 2012). Common to all studies is an important limitation: data availability typically constrains the analysis to publicly listed companies in individual countries.15 The resulting small sample sizes make it hard to detect a statistically significant effect of gender diversity, particularly if its magnitude is small.

The empirical evidence we present here suggests a strong positive association between firms’ financial performance and gender diversity in senior positions. Using a large sample of both listed and unlisted firms in Europe, we compare financial outcomes of firms within narrowly defined sectors based on the gender diversity of the senior management team and the corporate board (Christiansen and others 2016c). Firms with a larger share of women in senior positions have higher return on assets (Figure 7.7). Adding one more woman in senior management or on the corporate board, while keeping the size of the board unchanged, is associated with an 8- to 13-basis-point higher return on assets, about 3–8 percent.16

Figure 7.7.Female Representation in Senior Positions and Firms’ Financial Performance

(Estimated change in return on assets from one additional woman in a senior position, basis points)

Sources: Orbis; and IMF staff calculations.

Note: Point estimate and 95 percent confidence interval. Return on assets computed using net income, profit before tax, and earnings before interest and taxes, respectively.

Greater female representation could shape firm performance through two channels. Because firm performance and gender composition of its board and senior management are jointly determined, it is difficult to give a causal interpretation to the positive association. To shed light on the underlying mechanisms, we examine how sectoral characteristics shape the consequences of gender diversity. As discussed, the effect of greater female representation in senior positions is expected to be more pronounced in sectors with a larger share of women in the workforce and in sectors that demand greater creativity and innovative capacity, such as high-tech and knowledge-intensive industries. We find evidence for both of these channels at work.

  • Women in the labor force—The positive correlation between gender diversity and firms’ financial performance is more pronounced in sectors where women form a larger share of the labor force (Figure 7.8). In the services sector, where more than 50 percent of employees are women and there is a large gap between the gender composition of senior positions and the labor force, changing the composition of the board or management to include one more woman is associated with a 20 basis point higher return on assets. At the other end of the spectrum, in the construction sector, where there are relatively few women both in the labor force and in senior positions, changing the composition of the board or management to include one more woman is associated with about a 6-basis-point higher return on assets—an estimate that is not statistically different from zero.

  • High-tech and knowledge-intensive sectors—The positive association between gender diversity and firm performance is significantly higher in high-tech and knowledge-intensive sectors. For firms operating in these sectors, improving gender balance in senior positions is associated with a much larger increase in profitability (Figure 7.9).

Figure 7.8.Correlation between Gender Diversity and Firm Financial Performance in Light of Women’s Share of the Workforce by Sector

Sources: Orbis; and IMF staff calculations.

Notes: Gap represents the share of women in sectoral work force less the share of women in senior positions. The diamond denotes the estimated increase in return on assets (ROA) from an additional woman in a senior position. ROA is computed using net income.

Figure 7.9.High-Tech and Knowledge-Intensive Sectors versus Other Sectors

(Estimated change in return on assets from an additional woman in a senior position, basis points)

Sources: Orbis; Eurostat; and IMF staff calculations.

Notes: Point estimate and 95 percent confidence interval. Return on assets (ROA) computed using net income, profit before tax, and income before interest and taxes, respectively. Following Eurostat, industries are classified as high-tech (based on research and development expenditures) and knowledge-intensive (based on the share of workers with tertiary education).

Policies Should Focus on Leveling the Playing Field

For women in Europe, whether or not to work is not just a personal choice—policies do have an influence. Our study shows that more education, lower birth rates, exposure to working mothers, and favorable attitudes toward women working are all important drivers of women’s decisions to work outside the household. But even after accounting for all these factors that influence personal choice, we find that supportive policies matter. Specifically, the tax policy for the second earner in a household could strongly shape incentives for or against work and therefore should be carefully designed. Public spending on childcare may support mothers’ return to work, while lump-sum cash allowances may deter women from working through the income effect.17

Having more women in the labor force paves the way for greater diversity in senior corporate positions and higher firm performance. Our empirical evidence suggests a strong positive association between firms’ financial performance and gender diversity in senior positions. Such correlation is more pronounced in sectors where women form a larger share of the labor force (such as the services sectors) and where complementarities in skill and thinking and greater creativity and innovative capacity are in high demand (such as high-tech and knowledge-intensive sectors). To the extent that higher involvement by women in senior positions improves firm profitability, it may also help support corporate investment and productivity, mitigating the slowdown in potential growth.

Moreover, policies should aim at removing disincentives for full-time employment. For many women, part-time employment is a useful entry point to the labor market, as it allows them to combine labor force participation with family responsibilities. However, it may reduce their prospects of reaching the higher rungs of the corporate ladder where their participation could have important positive spillovers on corporate performance. The strong positive association between the incidence of full-time employment among working women and the share of women in senior positions suggests that the current low representation of women in the board room or senior positions may be partly due to the scarcity of candidates who are willing and/or able to take more responsibilities at work.

Finally, this analysis considers the potential role of boosting female labor participation in raising measured GDP but abstracts from other implications. Whereas leveling the playing field could be welfare enhancing (for example, removing tax distortions), this analysis abstracts from effects on overall welfare arising from women’s switch between household work and labor force participation. It does not take a normative stance on women’s participation in the labor force (Gonzales and others 2015b). Rather, it lays out the importance of leveling the playing field through policy actions and providing services to allow women to reach their full employment potential if they so choose.

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A version of this analysis was published as Christiansen and others 2016a.

This is an illustrative exercise, which assumes that the population and unemployment rate of both genders as well as the male labor force participation rate and number of hours worked for men remain constant. This exercise also abstracts from the cohort dimension of participation gaps.

The goal of bringing greater gender equality at the higher rungs of the career ladder, along with the potential benefits this may bring, has prompted many countries to institute quotas for women on the boards of publicly listed companies. The EU has also called for actively recruiting qualified women to replace outgoing male board members (European Commission 2012).

We use “individual choice” and “personal choice” interchangeably and acknowledge that personal choice may be the result of household decision.

We use “industry” and “sector” interchangeably when discussing firm financial performance.

For European countries, part-time work has been found to be more prevalent when fertility rates are higher, employment regulation is more favorable, and employment protection is stricter for permanent contracts. The share of the services sector in the economy and of young adults in tertiary education are also important determinants. Part-time work can also allow employers to adjust hours worked to cyclical conditions, although the responsiveness is higher for male workers (Buddelmeyer, Mourre, and Ward 2008). Finally, tax incentives to work part time also seem to have a significant effect on part-time participation rates (Thévenon 2013).

The analysis relies on the Orbis database, compiled by Bureau van Dijk. The reported figure refers to the simple mean of the average share of women in senior positions in the 34 countries considered.

The structure of the economy also likely affects the level of female labor force participation through expansion of sectors which have historically been much more likely to employ women, such as the services sector.

As noted in Christiansen and others 2016b, a causal interpretation of the correlations documented here is difficult. Policy changes may simply reflect changes in social norms and preferences, they may be put in place in response to the rise of female labor force participation, or may be correlated with other factors that influence women’s decisions to work but are not accounted for in our empirical framework. Similarly, women’s attitudes could be driven by their participation in the labor market rather than the reverse.

Female managers could be better positioned to serve consumer markets dominated by women (CED 2012; CAHRS 2011). Greater gender diversity would increase the heterogeneity in values, beliefs, and attitudes, which would broaden the range of perspectives (OECD 2012) and stimulate critical thinking (Lee and Farh 2004).

Giuliano, Levine, and Leonard (2006) document large negative effects of demographic differences between managers and subordinates in terms of subordinates’ rate of quits, dismissals, and promotions.

Prat (2002) and Jehn, Northcraft, and Neale (1999) examine the role of sectoral characteristics, such as complexity of tasks, in shaping optimal labor diversity. Garnero, Kampelmann, and Rycx (2014) provide empirical evidence on the heterogeneous effects of workforce diversity across sectors in Belgium.

See Rhode and Packel 2014 for a survey of the literature on the gender composition of boards and financial performance.

We refer to “increased gender diversity” and “greater female representation” interchangeably because an increase in female representation from current levels will lead to increased gender diversity.

Studies that use the introduction of quotas for women on corporate boards as an exogenous source of variation to gender diversity understandably focus only on publicly listed companies, for which the legal requirement is binding (see, for example, Matsa and Miller 2013 and Bertrand and others 2014).

In Christiansen and others 2016c, we look for the presence of nonlinearities between the share of women in senior positions and firm performance and establish that indeed there is an inverted U-shaped relationship between the two, with the marginal return to raising female representation turning negative beyond a certain point.

Although female-employment-friendly policies can entail a fiscal cost in the short term, there would be long-term (fiscal) benefits through the support to women’s long-term attachment to the labor force, to full-time employment, and thereby to households’ income levels (which would be taxed).

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