Economists’ models miss the gains from more women in the workforce

The writer is professor of the practice at Georgetown University and a former IMF deputy research director

In a speech last month, US Treasury secretary Janet Yellen lamented the loss of economic potential across the globe from low female labour force participation. Meanwhile, commerce secretary Gina Raimondo has called attention to the urgent need for childcare policies to attract women back into the workforce following the pandemic. And recent research has produced eye-catching estimates of the economic growth dividend from higher FLFP.

Those estimates, impressive as they are, nevertheless considerably understate the economic gains from higher FLFP. Economists approach the question of how gender inclusion affects economic wellbeing through a so-called headcount exercise: adding a woman to the labour force yields the same benefits as adding a man. A worker is a worker, and the gender of the worker is immaterial. What matters for economic growth is the total headcount.

There is a range of microeconomic evidence, however, suggesting that female and male workers are not perfect substitutes in production. For example, financial performance (profits, stock market valuations) of large companies and banks has been shown to improve when women are brought into previously male-dominated management teams and oversight boards.

Some studies attribute this effect on performance to different attitudes toward risk and collaboration, as just two possible channels. As a former senior Federal Reserve official noted, the models researchers use to understand the macroeconomy are gender-blind, as if macroeconomic policies affect women the same as men. Increasingly, these look out of touch with reality.

A recent study that I led supports a fresh approach to the issue by asking the data to tell us whether economic gains from increasing labour force participation depend on the gender composition of the additional workers. Macroeconomic data strongly reject the notion embedded in most models that women and men are perfectly interchangeable in production, and point to economic gains from raising FLFP that could be up to a fifth larger than estimates from headcount exercises which ignore the gender composition of the headcount.

Women complement men in the production process, and there is thus value in gender diversity as such (as there is in diversity more generally in teams of workers). Hiring women can increase the productivity of women already in a company, by reducing within-firm discrimination. Gender inclusion also seems to have favourable effects on the value of companies whose strategies depend on innovation, including high-tech manufacturing and knowledge-intensive services.

Our interpretation of economic growth data is also affected by the complementarity of women and men in production: indeed, a portion of the measured gains in economic wellbeing over the past half century probably reflects the narrowing of gender participation gaps that has not been properly accounted for in our economic models.

In a world where women are under-represented in the workforce, and men and women are imperfect substitutes in production, the gains from gender inclusion are likely to be far larger than our standard models estimate. My research also finds that, because of the complementarity in production between women and men, boosting FLFP is likely to raise real incomes of men. Gender inclusion in the workforce is thus a positive-sum game: both women and men should see increases in their economic wellbeing as a result.

The unlevel playing field in the workplace is more costly than standard models allow for, and the urgency of levelling up is thus likewise greater. Gender blindness in macroeconomics is a poor operating assumption that leads economists and policymakers to understate the gains from gender inclusiveness.

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