Household Interaction and the Labor Supply of Married Women

The major increase in the employment rate of married women while that of men remained almost unchanged is one of the most dramatic socioeconomic changes to have taken place during the last century. In this paper, we argue that shifts in social norms regarding household interaction in determining a married couple’s labor supply can provide an explanation. Specifically, we formulate and estimate a dynamic discrete-choice labor supply model, assuming that there are two types of households – Classical and Modern. The Classical household follows a Stackelberg leader game in which the wife’s labor supply decision follows her husband’s already-known employment outcome. The Modern family is characterized by a symmetric and simultaneous game that determines their joint labor supply and has a Nash equilibrium. The family type – Modern or Classical – is exogenously determined when the couple gets married but is not observable for estimation. The model is estimated using the Simulated Moments Method (SMM) and data from the Panel Study of Income Dynamics (PSID) survey for the years 1983-93. The estimated model accurately predicts employment rates and produces a good fit of mean wages to the data. We estimate that 38 percent of families are Modern and that the participation rate of women in those households is almost 80 percent. The employment rate of women in Classical families is 10 percent lower than that while the employment rates of men is almost identical in the two household types. These results support our hypothesis that part of the increase in labor supply of married women may be due to an increase in the share of Modern families in the population.