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Islamic Republic of Iran: Selected Issues

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
March 2018
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Fostering Incentives for Women to Work to Promote Long-Term Growth in Iran1

• Iran’s highly educated women are an untapped source of growth and productivity.

• A broad range of policies could enhance female participation in the labor market, including education campaigns to reduce discrimination against women, strengthening legal rights for women, and subsidizing affordable child care for lower income women.

• Simulations suggest that reducing the gender pay gap by half has the potential to boost GDP by up to 26 percent. Policies that reduce the costs for women to work outside the home could boost GDP by about 9 percent.

A. Introduction

1. Iran has made tremendous strides in eliminating gender gaps in education and health indicators. For about a decade now, there has been virtually no gap between male and female enrollment in primary and secondary education. The gender gap in tertiary education enrollment is small and, in some fields of studies such as engineering and science, women are now in the majority (IMF, 2016a). Years of schooling attained by women have expanded by 40 percent within in one generation (World Bank, 2016a) to reach an average of 9 years. The fertility rate in Iran has fallen sharply in the last 30 years and has been below two children per woman since the 2000s, and on par with the average of advanced economies. Life expectancy at birth for women is higher than men by 2 years (76.7 versus 74.5 years).

School enrollment by gender

(Female to male ratio, 2015)

Source: World Bank.

1/ Missing data for 1990.

2. Despite these laudable achievements, female participation in the labor force is low. Female labor force participation (FLFP) was 16.2 percent in 2016, lower than countries with similar income per capita, including within the MENAP region. Some 83.8 percent of all females over the age of 10 are inactive and out of the labor force—the fourth highest rate in the world— 3.2 percent of women were unemployed, and only 13 percent were working. Women represent 13.3 percent of legislators, senior officials and managers and hold 3.1 percent of seats in the parliament. Iran has two Vice Presidents who are women.

Female Labor Force Participation and GDP per Capita, 2016

Source: World Bank; and IMF staff estimates.

3. Once in the labor force, women in Iran are also more likely to be unemployed. In 2016, the female unemployment rate of 18.9 percent was twice as high as males. Although the average male and female unemployment rates are broadly in line with the MENAP region average, the female unemployment rate exceeds the emerging market average (EM) of 11 percent. Furthermore, a woman in Iran is likely to remain unemployed longer. While 30 percent of men remain unemployed for less than 3 months (versus only 11 percent of women), almost 48 percent of women remain unemployed for more than 19 months (versus only 28 percent of men).

Unemployment by gender

% of female/male labor force, 2016

Source : ILO, National authorities, and IMF staff calculations.

Notes: MENAOE stands for MENA oil exporting countries, MENAOI stands for MENAOI oil importing countries, and EM stands for emerging markets countries.

4. Iran’s highly educated female population represents an untapped source growth and productivity gains. Increasing FLFP can significantly boost GDP, productivity, tax collections and alleviate the expected burden of aging (see IMF, 2016b). Section B presents several factors contributing to the low rate of FLFP in Iran. Section C analyzes the macroeconomic impact of reforms to reduce gender gaps in the labor market using an overlapping generations model. It examines the macroeconomic impact of three reforms: reducing the gender wage gap, reducing the obstacles for women to join the labor force, and subsidizing childcare costs to low- and mid-income female workers in the formal sector.

B. Why is Female Labor Force Participation Low in Iran?

5. The low level of job creation in Iran, especially in the private sector, has limited womens’ opportunities to find work. One of the main determinants for women to enter the labor force is the availability of job opportunities. Due to the reliance of the Iranian economy on oil and the importance of the state-owned sector, each percentage point of non-oil GDP growth increases employment by just 0.2 percentage points. Although 614,000 jobs were created in Iran in 2017, the majority were in the agriculture and lower-skill service sectors and did not match the skill-set of Iran’s highly educated female college graduates.

6. The rate of FLFP in Iran is also underestimated due to the high prevalence of informal employment and underreporting of part-time work. The authorities estimate that the informal economy comprised 36.5 percent of total GDP in 2016. Informal employment is relatively high amongst women in Iran, including amongst high-skilled women (in contrast to international experience), who for social and economic reasons underreport work. The CBI reports that that part-time employment represented 5 percent of the 5 million total female jobs reported in the Labor Force Survey in 2016, but this estimate is likely understated.

7. Gender-based legal restrictions may also deter women from participating in the labor force. International studies have found that gender-based legal restrictions are correlated with low FLFP (World Bank 2016b, Gonzales, C., and others, 2015). The World Bank’s Women, Business, and the Law: 2016 study found that Iran had 23 gender-based legal restrictions on women’s employment and entrepreneurship, the third highest number in the world. For example, married women need to obtain their husband’s permission to start a business (Civil Code Art. 1117), to apply for a passport and can be required to ask permission to get a job (although typically not used). Income tax deductions are granted only to the husband (Direct Tax Act Art. 101). On the plus side, wage equality is explicitly guaranteed for women (Labor Code Art. 38). While job advertisements and hiring processes can exclude women, the authorities report that they have removed gender-caps in the civil service recruitment rounds for several ministries.

Gender-based legal restrictions, 2016
DZABHRIRNIRQKWTOMNQATSAUSYRUAEYMN
Apply for a passport
Be head of household
Choose where to live
Confer citzenship to children
Get a job without permission
Travel outside the home
Obtain a national identity card
Travel outside the country
Register a business
Source: World Bank’s Women, Business, and Law 2016.
Source: World Bank’s Women, Business, and Law 2016.

8. The fact that women often earn less than men may also have created disincentives for women to join the labor force. Although many countries across the world have equal pay legislation, all continue to have gaps in the salaries earned between men and women that cannot be explained by observable individual and job characteristics (the so-called “unexplained wage gap”). The lack of individual level data on wage earnings in the Iranian household survey has precluded an accurate estimate of the level of the wage gap between men and women in Iran. However, based on a survey conducted by the World Economic Forum, the pay premium between men and women for similar work is estimated to have been 42 percent in 2017, placing Iran 99th out of the 131 countries surveyed.

Unexplained wage gap in the MENA region

percent gap difference between male and female wage, 2017

Source: World Economic Forum’s Global Gender Gap Report 2017.

9. Personal and family responsibilities have also deterred women from seeking formal employment. In a 2015 labor force survey, conducted by the Statistical Center of Iran, 72 percent of Iranian women replied they were not looking for a job because of personal and family responsibilities, compared to only 2 percent for men.

Reason for the lack of job search

Share of female or male population of 10 years and +, 2015

Source: Statistical Center of Iran’s Labor Force Survey.

C. Policies to Encourage Greater Female Participation in the Labor Force in Iran

10. This section studies the impacts of three reforms that could help to narrow gender gaps in the Iranian labor market. Using a dynamic general equilibrium model with heterogeneous agents and overlapping generations, we examine the impact on long-term real GDP, male and female wages, formality, productivity and government revenue collections of three policies. The first policy simulation estimates the impact of a reduction in the “unexplained” wage gap between women and men. The second, reduces the cost to families of having women working outside the home. The third introduces a childcare subsidy payment to low-and middle-income formal female workers.

11. The model is calibrated using Iran’s macro and micro statistics. The general equilibrium model replicates key features of the Iranian economy, such as taxes, cash-transfer programs, pension systems, mean and variance of the income distribution, education spending, size of the informal sector, share of part-time labor, and female labor force participation.

12. The framework allows males’ and females’ decisions to differ across the income distribution. Agents differ from each other in terms of age, gender and the initial endowment each receives at birth. These differences generate distinct incentives and choices for agents to work throughout the life cycle. The model also features endogenous human capital formation.

13. The main sources for gender inequality in the model are the disutility a family experiences when a woman works outside the home and the wage gap between women and men. In the model, husbands and wives decide how much their families should consume, how much labor to supply to the formal and informal sectors, and how much to invest in their children’s education (human capital). Wives and husbands weigh different factors when making decisions to participate in the labor market. Husbands always work, and the only decision regarding males’ labor is how much time they should allocate between the formal and informal sectors, given their human capital and their household’s constraints. Wives, however, not always work. When a woman supplies labor, the family incurs a utility cost related to the difficulty of coordinating multiple household activities, such as home production and rearing children. This allows for low female labor force participation. Also, the model proxies gender discrimination in formal and informal labor markets in an unexplained gender wage gap (after controlling for factors such as type of job, education, age). These two sources of gender inequality create different outcomes for men and women in terms of labor force participation, number of hours worked (part-time or full time), formal versus informal jobs, and earnings. The full description of the model, its calibration and data sources can be found in Malta, Mendes Tavares and Pinat (2018).

Reducing the Gender Wage Gap

14. Reducing the ‘unexplained’ wage gap between women and men has the potential to double female labor force participation rate over the long-term. If the “unexplained” wage gap of 40 percent in the formal and informal labor markets is reduced by half, the number of women in the labor force doubles to 80 percent, as both higher and lower skilled females increase their supply of labor in response to more attractive wages. In equilibrium, the average wage of a female working in the formal sector increases by 23 percent (and by 36 percent in the informal sector). The inclusion of more females in the labor force lifts their income, boosting demand for consumption of both formal and informal goods. Formal firms hire more males and females. The males joining these firms have lower skills, since the higher-skilled male workers were already employed in the formal sector. Thus, average earnings of males in the formal sector falls by 10 percent.

15. Reducing the unexplained wage gap also boosts the size of economy and government tax collections. The expansion of FLFP increase female incomes, pushing the demand for goods and services up, and thus spurring firms’ production. This virtuous cycle helps the level of real GDP to grow by 26 percent in contrast to the scenario of no change in policy. Government’s total revenues grow 22 percent (from 15 to 18 percent of GDP) due to the higher collections of consumption taxes, labor taxes (due to higher number of workers in the formal sector) and corporate taxes (given the boost in the formal production).

16. Even in the case where the wage-gap between women and men is more moderate, a narrowing of this gap can still produce economic gains. Given the fact that Iran’s equal pay laws and its large share of public sector employment limit the possibility for wage discrimination, an alternative calibration where the unexplained wage gap in the economy is reduced from 20 percent to 10 percent is simulated. The reduction in the gender pay gap boosts real GDP by 2.6 percent and total revenue collections by 2 percent (from 15.1 to 15.4 percent of GDP). Women’s average earnings in the formal and informal sectors rise by 13 percent, reflecting both the lower pay gap and the extra incentives to pursue more education, which in turn improves females’ productivity and earning potential in the labor market.

Reducing the costs/obstacles for women to participate in the labor market

17. Lowering the costs for women to join the labor force can also enhance long-term growth. As noted above, 72 percent of Iranian women did not look for a job because of personal and family responsibilities. In our model, we capture this as a cost in the family’s utility function when a woman works outside the home. However, national education campaigns that limit gender bias and encourage women who wish to pursue careers outside the home can over time reduce the cost and stigma for women who wish to work. Such policies are captured in our model as a drop in the disutility cost, which in turn translates into an increase in FLFP participation by 10 percentage points. This increase in FLFP boosts real GDP by 8.7 percent in the long-run and increases government revenues by 6.8 percent.

18. The rise in FLFP boosts both female and male earnings. This reform encourages highly educated women (usually richer) to join the labor force, as their absolute returns from work are higher. The higher competition among skilled workers in the formal sector induces investment in human capital which in turn boosts workers’ productivity, leading to higher salaries for both men and women. Average earnings rise by 13 percent for women and 4 percent for men. Specifically, human capital of the formal economy increases because families invest more in education given the return in the form of higher earning capacity, more high-skilled women opt to join the labor force, and the increase in formal labor force participation also raises human capital formation through learning-by-doing, meaning, they get more skilled while working.

Subsidizing childcare costs to low- and mid-income formal female workers

19. Providing targeted subsidies for childcare costs to low- and middle-income mothers can boost female employment in the formal sector. We simulate the effects of a targeted childcare subsidy to mothers from the bottom 70 percent of the income distribution working in the formal sector. The subsidy is proportional to the number of hours worked in a formal job, and at its maximum it is equivalent in value to the universal cash transfer for a woman working full time.2 Such a reform generates a 40 percent increase in FLFP in the formal sector. However, there is a partial crowding-out effect, as older females can leave the labor market due to competition in that sector. In net terms, women work 10 percent more hours. While the framework assumes all men always work, they also benefit from this reform as their average earnings increase by 2 percent because the reform induces households to spend more on education, such that, at the steady-state, both men and women are more educated, increasing their expected earnings.

20. The childcare program boosts the economy and government revenues. The childcare subsidy reform increases the level of long-term real GDP by 2 percent. Government revenues increase by 3.2 percent due to higher income and labor tax payments collected from women working in the formal sector and offsets the expected cost of the child-care subsidy program (0.7 percent of GDP). Income inequality as measured by the Gini coefficient falls, since the reform targets women from lower deciles of the income distribution.

Impact of Policies to Support Higher Female Labor Force Employment: Changes of various variables (in percentage points) for each policy

References

Prepared by Vivian Malta (SPR) and Magali Pinat (MCD). The authors wish to thank Marina Mendes Tavares (SPR) for valuable inputs and guidance.

Around 450,000 2015 Iranian Rials per month.

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