Values and labor force participation in the Nordic countries

Hall, Axel; Zoega, Gylfi Working Paper Values and labor force participation in the Nordic countries Economics Discussion Papers, No. 2014-11 Provided in Cooperation with: Kiel Institute for the World Economy – Leibniz Center for Research on Global Economic Challenges Suggested Citation: Hall, Axel; Zoega, Gylfi (2014) : Values and labor force participation in the Nordic countries, Economics Discussion Papers, No. 2014-11, Kiel Institute for the World Economy (IfW), Kiel This Version is available at: https://hdl.handle.net/10419/93177 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Licensed under the Creative Commons License - Attribution 3.0 Discussion Paper No. 2014-11 | March 07, 2014 | http://www.economics-ejournal.org/economics/discussionpapers/2014-11 Values and Labor Force Participation in the Nordic Countries Axel Hall and Gylfi Zoega Abstract The Nordic countries are known for their success in combining an extensive welfare state with high labor force participation. This is explained by the origins of their welfare states that can be traced to a unique set of values and beliefs that emphasize the right of women to participate in the labor market. These values are currently shared by individuals born in other European countries of Nordic parents. Some possible causal explanations are proposed. JEL J21 J22 Keywords Employment; taxes; values; beliefs Authors Axel Hall, Reykjavik University, Reykjavik, Iceland Gylfi Zoega, University of Iceland, Reykjavik, Iceland, [email protected] The authors thank Lars Mjøset and Stefan Olafsson for comments and Arnaldur S. Kristjansson and Ólafur Halldórsson for research assistance. Citation Axel Hall and Gylfi Zoega (2014). Values and Labor Force Participation in the Nordic Countries. Economics Discussion Papers, No 2014-11, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/ discussionpapers/2014-11 2 1. Introduction This paper is about culture in the Nordic countries of Denmark, Finland, Iceland, Norway and Sweden, in particular aspects of culture that have to do with the participation of women in the economy outside their home. The roots of the values and beliefs discussed in this paper lie deep in history. A vivid demonstration is to be found at the end of Henrik Ibsen’s play The Doll’s House that premiered in 1879, when the character Nora tells her husband that she is going to leave him and the children because she is a human being before she is a wife and a mother, and that she owes it to herself to explore her personality, ambitions and beliefs. This conflict between the two roles of a woman, as a housewife and as someone participating in the labor market, was later explicitly addressed in the creation of the Nordic welfare states and resolved by enabling working women to become mothers. We will argue that the Nordic countries have managed to attain a better trade-off between efficiency and equity by developing a system of values, taxes and government spending that promotes the participation of mothers of young children in the labor force. We begin by reviewing previous work on the importance of culture in the economy. In order to demonstrate the importance of culture we then assume identical preferences, for the sake of the argument, and use a standard representative agent model to predict labor supply in several countries based on differences in tax rates. The results show that labor supply in the Nordic countries is higher than such a model predicts; a finding that can be explained by cultural variables. A brief history of the Nordic welfare state and a description of the unique values found in these countries follow. These values and beliefs regard women’s labor force participation and are shared by individuals born in other European countries of Nordic parentage and can possibly be traced to religious factors. 2. Culture Following tradition, we define culture as a system of beliefs and values that social groups transmit from one generation to another. Beliefs are the basis for making decisions in which people lack previous experience, such as which school to attend, whether to maintain labor force attachment following childbirth and which profession to choose. But culture also affects the values of individuals as described by a utility function. 3 Although the study of culture in economics has a history back to Adam Smith in his Theory of Moral Sentiments and Max Weber (1905) on the role of religion in economic development, the economics profession has until quite recently paid scant attention to the importance of culture for economic outcomes. While non-economists such as Putnam (1993) and Landes (1998), found culture to be important for economic performance, economists typically treated values and norms as resulting from optimization by groups. 1 However, recent years have seen a revival of interest by economists in culture. Knack and Keefer (1997) discuss differences in the level of trust between individuals across countries. Knowles and Postlewait (2005) find that children of high-saving parents also demonstrate high-saving behavior. Blanchard (2004) claims that (continental) Europeans have a stronger preference for leisure, which makes them take advantage of increased productivity by enjoying greater leisure rather than having higher income while Americans have done the opposite. Greif (1994) traces the success of the city state of Genova in the middle ages in comparison to Maghreb traders to differences in religion where Christianity in Genova fostered individualism while the Maghreb traders were influenced by Islam. Guiso et al. (2006) traces differences in the level of trust among Americans to their ethnic origin and found that individuals of Scandinavian origin have higher levels of trust, reflecting the higher level of trust in their countries of origin. Scholars working in diverse disciplines have tended to agree that there are cultural differences in beliefs about the role of women in the home and in the labor market between countries, even between countries at similar stages of development. 2 There are also cultural differences in voting patterns when it comes to taxes and spending intended to facilitate the labor force participation of women and there are differences between countries in how much individuals value equal rights in the labor market. Ingelhart and Norris (2005) argue that perceptions of the right division of labor in the home and in paid employment are shaped by the predominant culture, which they define as the social norms, beliefs and values existing in society, and that these in turn depend on the degree of modernization of the economy and religious traditions. Rich societies tend to have secular rather than traditional values and what they term self-expression values rather 1 Such as Coleman (1990). 2 See Nussbaum and Glover (1995), Pasternak, Ember and Ember (1997), and Harrison and Huntington (2000), Nanda (2000), 4 than survival values. An emphasis on the right of women to work is part of the selfexpression values. But the value system is also affected by countries’ historical and cultural heritage. In particular, Protestant societies rank higher on both the secular and the self-expression dimension than do Roman Catholic societies. Thus the richer and the more Protestant is society, the greater the emphasis on women’s rights to participate in the labor market. According to Oskarson (1995), Nordic women tend to be more left-leaning in politics than women in other parts of the world. Ingelhart and Norris (2003) attribute this gender gap in voting behavior to culture, in particular women have moved to the left ideologically because of a process of shifting towards more egalitarian attitudes. Krogstrup and Wälti (2011) discover that women in Switzerland have different economic preferences than men. In particular, they investigate whether female enfranchisement affects government budget deficits. The results of a difference-in-differences regression for Swiss cantonal panel data demonstrate that the inclusion of women in the electorate has reduced budget deficits. Cultural factors may explain why women are better represented in the parliaments of the Nordic countries than in most other countries. Ingelhart (1981) find that there is a strong positive relationship between the proportion of women in parliament and a scale that measures traditional versus modern values, indicating that differences in values explain differences in the political participation of women. In Fortin (2005), secular trends in gender role attitudes explain the recent leveling-off in female labor force participation in the OECD countries. Moreover, because women anticipate shorter and interrupted spells of employment they invest less in human capital, which produces flatter earnings profiles as shown by Mincer and Polachek (1974). Francis Vella (1994) used Australian microeconomic dataset to study the relationship between the gender role perceptions of women and labor market behavior and found that the attitudes of women towards working women are developed in their youth. Cornelia W. Reimers (1985) showed how married black women in the United States have a higher propensity to participate in the labour market than women belonging to other ethnic groups after adjusting for variables such as age, the number of children, education, location and wages and attributed this to cultural differences rooted in the historical experience of blacks in America. Heather Antecol (2000) studied male and 5 female labour force participation by ethnic group in the U.S. and found a positive correlation between the gender wage gaps of first generation immigrants and wage gaps in the countries of origin and concluded that cultural factors mattered, in addition to human capital and institutional factors, in explaining why some women earn more compared to men. The Nordic attitudes towards gender equality are also found in individuals of Nordic ancestry brought up in the U.S. and therefore facing the same institutions as their compatriots of other ancestry. Fernández and Fogli (2009) examined work and fertility behaviour of second-generation American women in 1970 and related this to values in their fathers’ country of origin. These values are exogenous in that they differ between individuals who are all raised in the same country and face the same institutions and economic opportunities. Women of Scandinavian origin were also found to have higher employment levels. In an earlier paper, Fernandez (2007) found that female labor force participation in 1990 in a woman’s country of origin had explanatory power for her work outcomes in the United States in 1970. 3. Taxes and labor supply In this section we follow Prescott (2004) to demonstrate the failure of the simple representative agent framework to predict employment in the Nordic countries, France and the U.S. when using tax rates alone as an explanatory variable. Following Prescott, we take France as an example of a country having an extensive welfare state with a different structure from the Nordic welfare states and the United States as a country with a welfare state that is very limited in scope. Assume that the production function takes the following form;   1 t t t t y k A h     . (1) The representative firm maximizes output net of wage costs wh giving the first-order condition   1t t t y wh   . (2) The labor supply decision is modeled by describing the consumption/labor supply decision of the representative household where preferences over consumption (c) and hours worked (h) now and in the future are described as 6   1 0 1 log( ) 1 t tt t h Ec                    (3) and t denotes time, β is the discount factor reflecting the pure rate of time preference, α is the parameter describing the intensity of the disutility from working,  is the employment tax rate,  is the inverse of the coefficient of inter-temporal substitution, and E is the expectations operator. The per-period time endowment is normalized to one. This means that if on average the working-age population works 25 hours a week, then h = 0.25 as there are about 100 hours of non-sleeping time a week. We let the parameter α capture the effect of cultural variables such as attitudes towards the labor force participation of women. The optimization is done subject to a constraint; ttttktthtitc Tkkrhwic   ))(1()1()1()1( , (4) where τc is the tax on consumption, τi the tax on investment, τh the marginal tax rate on labor income, τk the tax rate on net capital income, wt the real wage, rt the rental price of capital, δ the rate of depreciation and Tt denotes transfers as before. Solving equation (4) for consumption and inputting into equation (3) gives one equation in hours worked. The first order condition becomes   1 11 h c w h c           (5) where   1 1 1 1 1 1 1 1 1 h k i c c c c c c wh r k k i T                         . The left-hand side of equation (5) shows the marginal benefit of working longer hours h in terms of higher consumption while the right-hand side has the marginal cost of longer hours due to the disutility of working. Labor and consumption taxes can be combined into a redefined employment tax rate, which is the effective marginal tax rate on labor income τ. It is the fraction of additional labor income that is taken in the form of taxes c h       1 1 )1( (6) 7 where (1-τ) is the amount of consumption a worker can get net of taxes from a unit earned. This gives an equation for the effective marginal tax rate on labor income . 1 hc c     (7) Then assuming that =1 gives 3   1 11wh c    (8) where the left-hand side has the marginal rate of substitution between consumption and leisure and the right-hand side the marginal rate of transformation. Inserting the solution for w in equation (2) into equation (8) gives    11 1 y h hc      (9) which yields an equation for hours worked: 1 11 tt tt hc y        (10) This expression gives current labor supply as a function of the current value of the fraction of gross income consumed, ct/yt, the current tax rate τt and the values parameter . The variable ct/yt captures the inter-temporal effect of taxes and other factors on labor supply, whereas the variable (1-τt) captures the intra-temporal distortion to the relative prices of consumption and leisure. The inter-temporal effects can be explained as follows. Expectations of higher wages after taxes – due to higher productivity, more capital or lower taxes – will make c/y rise and hours worked fall. In this way workers respond to expected changes. Holding the future constant, lower taxes today will not affect c/y and will have the direct effect of raising hours worked. This is the intra-temporal effect. Assume that there are no differences in values and set α = 1.54 and  = 0.30 (as in Prescott, 2004) for all the countries. This we do in order to see how well the model predicts employment while maintaining the assumption of identical preferences. Based on the model description, tax rates for all of the countries can be calculated (see Appendix 1 3 The function becomes equal to log when  = 1. 8 for detailed derivations). The intra-temporal tax wedge defined by equation (7) gives the units of goods a worker pays in labor and consumption taxes per unit earned. Hence 1-  measures the units a worker can consume from a unit earned once taxes have been taken into account. The tax rates are shown in Table 1. Note that the tax wedge is higher in each of the five Nordic countries than in the U.S. and higher in Denmark, Finland and Sweden than it is in France. However, the inter-temporal effect of taxes ct/yt tends to be smaller. Table 1. The intra-temporal tax wedge  and the consumption-output ratio 2001-03 Denmark Finland Iceland Norway Sweden France U.S. h 0.62 0.51 0.36 0.39 0.57 0.42 0.31 Social security tax 0.02 0.20 0.05 0.16 0.24 0.27 0.11 Marginal income tax 0.59 0.31 0.30 0.23 0.34 0.16 0.20 c 0.37 0.31 0.30 0.31 0.31 0.20 0.10 1- 0.28 0.38 0.49 0.47 0.32 0.48 0.62 c/y 0.69 0.67 0.75 0.61 0.72 0.76 0.81 Source: OECD. Calculations of tax rates are found in Appendix 1. Equation (10) can then be used to calculate predicted hours and these are compared to hours actually worked in Table 2. In so doing we are testing whether differences in taxes across the countries can explain differences in weekly hours worked while assuming identical preferences. Predicted hours match actual hours for the U.S. and the French are predicted to work less, which they do, but the French work even less than their high tax wedge leads us to predict. In contrast, there is an underestimate for Denmark, Finland, Iceland and Sweden. What needs to be explained is why these nations work more than the model predicts while the French work somewhat less. The prediction error is very small for Norway. In order to explore how robust the results are to changes in attitudes over time the predicted number of hours was also calculated for the period 1970-1972. 15 wage negotiations. Andersen (2008) describes how the provision of employmentcontingent social insurance enhances the attractiveness of the labor market when compared to home production by offering not only a pecuniary compensation but also a social insurance system that protects income during sickness; occasional unemployment spells; pregnancies; disability, and so on. 6. Values and labor supply As shown in Table 4, the Nordic countries have significantly higher rates of labor force participation for women in the 25-64 age group than France and the U.S. as well as a lower ratio of the participation rates of men to the participation rates of women in the under 65 years age groups. For the youngest age group the ratio of the labor force participation rate of men to the rate of labor force participation of women ranges from 0.99 in Finland to 1.09 in Denmark and Norway, while it is higher in France and the U.S.; 1.17 in the U.S. and 1.25 in France. For the 25-64 years age group we find that the ratio ranges from 1.07 in Sweden to 1.11 in Denmark and Norway while it is again higher in France and the U.S. Table 4. Labor force participation, 2000-2004 15-24 years 25-64 years Men (1) Women (2) (1)/(2) Men (3) Women (4) (3)/(4) Denmark 75.17 68.76 1.09 85.84 77.41 1.11 Iceland* 75.02 74.64 1.01 95.60 87.60 1.09 Finland 50.45 51.08 0.99 82.60 76.99 1.07 Norway 67.47 61.76 1.09 88.35 79.44 1.11 Sweden 53.59 51.22 1.05 86.83 81.27 1.07 US 73.65 63.00 1.17 87.65 72.49 1.21 France 32.57 25.96 1.25 84.89 70.17 1.21 * Age categories for Iceland are: 16-24 and 25-54. Source: Statistics Iceland, Eurostat & U.S. Bureau of Labor Statistics. The same applies to the employment rate – defined as the ratio of employment to the number of individuals of working age as shown in Figure A1 in Appendix 2. The figures show that women in Scandinavia have higher employment rates for the age groups 15-39 and 40-64 years of age. In contrast, hours of work tend to be fewer in the Nordic countries for both part-time and full-time women than in both France and the U.S. while 16 the unemployment rates are lower than in the continental European countries (see also Sachs, 2011). The higher labor force participation rates and employment rates of women in the Nordic countries is due to higher rates among women with children, the effect being more pronounced the more children they have. Gustafsson et al. (1996) compared the participation of women in the labor force between Germany, the U.K. and Sweden and found that the difference in total labor force participation of women results primarily from fewer mothers entering the labor force and entering later in Germany and the U.K. than in Sweden. Before the birth of a first child there is no difference in the labor force participation rate of women between these countries. The attitudes towards women’s participation in the labor market revealed in Table 3 can explain the discrepancy between the predicted and actual hours of work in Table 2 and account for some of the differences between the Nordics and the rest in the table . Plotting the prediction error from Table 2 against the values described in Table 3 generates the surprisingly good fit as shown in Figure 1. With only seven observations, the correlation between the discrepancy in hours worked, on the one hand, and belief in women’s rights to a job, on the other hand, is 0.96 and the corresponding correlation between the discrepancy and the proportion claiming that pre-school children do not suffer from having working mothers is 0.85 with only five observations. A clear relationship, although not as strong as the first two relationships, is also visible for the last two scatter plots relating the prediction error to the proportion of people who tend to agree with the statement that working mothers can establish just as warm and secure a relationship with her children and the proportion agreeing with the statement that being a housewife is just as fulfilling as working for pay. 16 16 There are two outliers, Finland in the third scatter plot and France in the fourth scatter plot. 17 Figure 1. Values and labor supply 2001-2003 Source: World Values Survey (http://www.worldvaluessurvey.org). Lines are fitted with least squares (top two graphs) and robust least squares (bottom two graphs). Differences are taken from Table 2. 7. An expanded sample In this section we expand our sample by including, in addition to the previous seven countries, Austria, Canada, Germany, Ireland, Italy, the Netherlands, Spain, Switzerland, and the U.K. Table 5 shows actual and predicted hours for the countries as well as responses to the survey questions. While labor supply in the Nordic countries tends to be under-predicted – these nations tend to work more than their high tax rates would lead us to expect – the continental European countries have less labor supply than the model 65 70 75 80 85 90 95 -4 0 4 8 12 Belief in women's right to work and hours worked Belief in women's right to a job (%) Difference between actual and predicted hours Denmark Finland Iceland Norway USA France Sweden 40 45 50 55 60 65 70 75 80 -4 0 4 8 12 Effect of working mother on child and hours worked France Finland Sweden Denmark Iceland Difference between actual and predicted hours Effect of working mother (%) 70 75 80 85 90 95 -4 0 4 8 12 Finland Denmark Sweden Iceland U.S. France Norway Difference between actual and predicted hours Warm and secure (%) Working mother having a warm relationship with her children 15 20 25 30 35 40 45 50 -4 0 4 8 12 Sweden Denmark Iceland France U.S.Finland Fulfilling (%) Difference between actual and predicted hours Fulfilling being a housewife and hours worked 18 predicts. Canada, the U.K. and the U.S. have labor supplies that more or less conform to the predicted values. Comparing the Nordic and the continental countries, we find that a higher proportion of the Nordics disagree with the statement that men should have more rights to a job than women. The proportion is somewhat lower in Norway than the other Nordic countries and higher in the Netherlands than in the other continental countries. A higher proportion disagrees with the statement that pre-school children suffer with working mothers in the Nordic countries and a higher proportion agrees that working mothers establish warm and secure relationships with their children – Norway being the one exception that puts it on par with the continental countries. However, the difference between the two sets of countries disappears when we look at responses to the final statement on being a housewife being as fulfilling as working for pay. Overall, there does not appear to be a great difference between the continental and the English-speaking countries when it comes to the four questions. Comparing the Nordics and the English-speaking nations of Canada, the U.K. and the U.S. we find that the Nordics disagree more with the statement that men should have more rights to a job than women and that pre-school children suffer with working mothers (data not available for Canada and the U.S.). The same applies to the statement that a working mother establishes a warm and secure relationship with her children. Again, the difference between the two country groups is less clear for the final question, although Denmark and Sweden show much more disagreement than Canada, the U.K. or the U.S. 19 Table 5. Attitudes towards women participating in the labor market Period: 1999, except Norway and Switzerland, for which the data from 1996 are used, and Canada and Finland for which the data from 2000 are used. Source: World Values Survey (http://www.worldvaluessurvey.org). Actual hours worked are taken from the OECD Factbook 2007 and defined as average hours actually worked, hours per week per person in employment. Data on values of children of immigrants born in Europe by nationality are taken from the European Social Survey (http://nesstar.ess.nsd.uib.no) and refer to the question “men should have more rights to a job than women when jobs are scarce”. DE FI IC NO SW AU FR GE IR IT NE SP SW CA UK US Hours, h 23.0 22.6 30.6 20.3 23.1 21.7 18.6 18.4 21.2 20.0 19.0 20.8 25.4 24.4 24.0 26.0 Predicted h 15.1 19.9 21.5 21.5 16.5 21.9 21.7 22.0 32.1 22.1 24.3 25.3 28.1 26.1 23.8 25.2 Difference 7.9 2.7 9.1 -1.2 6.6 -0.2 -3.1 -3.6 -10.9 -2.1 -4.3 -4.5 -2.7 -1.7 0.2 1.2 Men should have more right to a job than women -- % disagree 87.7 82.2 93.5 79.4 93.1 54.4 67.6 55.7 77.0 56.8 83.7 65.3 55.7 78.5 63.7 81.3 Pre-school child suffers with working mother-- % disagree or strongly disagree 78.4 56.2 63.5 - 59.9 - 42.3 26.8 - 18.8 54.4 54.3 - - 53.7 - Working mother establishing a warm and secure relationship with her children -- % agree or strongly agree 86.4 94.7 85.9 71.0 84.0 - 77.3 62.0 - 64.1 81.1 78.7 - 77.5 73.0 78.7 Being a housewife is just as fulfilling as working for pay-- % disagree or strongly disagree 45.8 19.1 35.5 - 49.4 - 37.5 53.6 - 45.1 48.6 40.2 - 17.8 38.9 20.0 Father’s origin -- % disagree or strongly disagree 82.8 79.7 89.4 80.1 91.6 78.5 74.6 75 72.7 59.6 83.8 61.1 70.2 87.5 72.2 81.8 Mother’s origin -- % disagree or strongly disagree 92.3 83.3 92.1 85.5 97.9 76.4 66.9 81.3 69.5 54.1 90.6 63.4 42.1 86.2 74.0 88.2 20 Figure 2 shows the association between the prediction error and responses to the four survey questions in Table 5. A clear and positive relationship exists between the predication error and responses to all statements except for “being a housewife is just as fulfilling as working for pay.” Note that the Nordic countries find themselves in the upper right-hand corner of all the charts while some of the continental countries are in the bottom left-hand corner. The positive relationship disappears when the Nordic countries are dropped from the sample. The issue of endogenity of preferences remains. Perhaps the structure of public spending in the Nordic countries encourages mothers of your children to participate in the labor market as shown by Ragan (2006) and Rogerson (2007), which makes them acquire the values found in the surveys. But by looking at the preferences of people born in other European countries but having either one of parents from a Nordic country should dispel any doubts about the causal effect of values. The last two lines of Table 5 show the proportion of children of immigrants in Europe that disagree or strongly disagree with the statement that “men should have more rights to a job than women when jobs are scarce.” 17 The same pattern emerges for this group. A higher proportion of responders with either the mother or the father coming from one of the Nordic countries disagree with the statement than is the case for responders having parents from most of the other countries. Of the other eleven countries, it is only respondents having Dutch, Canadian and American parents that show similar disagreement with the statement. None of these three countries have more people disagreeing than Iceland, Sweden and Denmark (with Scandinavian mothers. This was also the case when using World Values Survey numbers for these same countries – that is measuring responses to the same question in the sixteen countries – as shown in line 3 of the table where Finland also had higher rates of disagreement than the three English speaking countries. 17 The data are taken from the European Social Survey, 2010 (http://nesstar.ess.nsd.uib.no). The possible answers differ slightly from those in the World Values Survey in that responders choose between “disagree strongly”, “disagree”, “neither agree nor disagree”, “agree” and “agree strongly”. 21 Figure 2. Values and labor supply – expanded sample Source: World Values Survey (http://www.worldvaluessurvey.org). 8. On the origins of Nordic family values There remains the issue of the origins of the values found in the Nordic countries. No study of the effect of culture on economic outcomes is complete without a consideration of the possible causes of differences in culture. Engels (1902) traced the causes of gender inequality to the rise of agriculture that created private property by men, which then allowed them to establish exclusive paternity over children, making wives dependent. A recent paper puts the emphasis on the type of agriculture practiced in different countries. Alesina et al. (2013) trace the historical origins of current differences in values regarding the role of women in society to traditional – or pre-industrial – agricultural practices. In their thesis, societies that 50 60 70 80 90 100 -15 -10 -5 0 5 10 Difference between actual and predicted hours Belief in women's right to a job (%) Denmark Finland Iceland Norway Sweden Austria Canada France Germany Ireland Italy Netherlands Spain Switzerland U.K. U.S. 10 20 30 40 50 60 70 80 -15 -10 -5 0 5 10 Difference between actual and predicted hours Effect of working mother (%) Finland France Germany Denmark Iceland Italy Netherlands Spain Sweden U.K. 60 64 68 72 76 80 84 88 92 96 -15 -10 -5 0 5 10 Difference between actual and predicted hours Warm and secure (%) Canada Denmark Finland France Germany Iceland Italy Netherlands Norway Spain Sweden U.K. U.S. 10 20 30 40 50 60 -15 -10 -5 0 5 10 Difference between actual and predicted hours Fulfilling (%) Canada Denmark Finland France Germany Iceland Italy Netherlands Spain Sweden U.K. U.S. 22 practiced plough agriculture during the pre-industrial period, requiring masculine muscle strength, did not value the labor market participation of women as much as societies where shifting cultivation was practiced. It follows that societies where plough agriculture was practiced developed a gender division of labor and the belief that the natural place for women was the home. These beliefs and values were then passed from one generation to another, outliving the plough agriculture that generated them and producing a positive correlation in the data between plough use in the past and current attitudes reflecting gender inequality. An alternative explanation for the uniqueness of the Nordic countries can be found in religion since they are all five predominantly Lutheran, in contrast to all other European countries, and have very small Catholic populations. The high proportion of the population belonging to the Lutheran church 18 opens up the possibility that the views and values on women’s labor force participation have religious origins. We would not be the first to use religion as a potential determinant of values and behavior. Guiso, Sapienza and Zingales (2003) study the determinants of the importance of thrift and find that Catholics and Protestants are more likely than nonreligious people to teach their children about the importance of thrift. The cross-differences in the values attached to the importance of thrift are then positively correlated with national savings rates. In a later paper, Guiso, Sapienza and Zingales (2006) find that Catholics and Protestant respondents dislike redistribution of income more than those with no religion. But why would the Lutheran church, more generally the Protestant church, promote values conducive to the labor market participation of women? And is there any empirical evidence supporting this hypothesis? The overall impression is somewhat ambiguous in that he both elevated the role of women as wives and mothers and also stated that men and women were equal under god and could serve god in many capacities, including motherhood and different types of religious and nonreligious occupations. 19 However, Luther demonstrated a more positive attitude towards women than that of many earlier 18 As of 1 January 2013, 79.1% of the population of Denmark are members of the National Church (Statistics Denmark); 76.2% of Norwegians were members of the state Church of Norway at of the end of 2012 (Statistics Norway); the Swedish Lutheran church has 67.5% of the population (Svenska kyrkan); about 79% of the population belong to the Lutheran Church of Iceland (Statistics Iceland); and 76.4% of Finns were members of the Church (Lutheran church member statistics). 19 See Karant-Nunn and Wiesner-Hanks (2003). 23 religious thinkers by asserting that both men and women are god’s creation and that neither sex should disrespect the other. Gudmundsdottir (2007) describes how Lutheran doctrine departed from the Roman Catholic one in several respects that contributed to women taking a more proactive role in society. First, marriage was no longer considered to be one of the holy sacraments. Moreover, women were encouraged to leave monasteries and find men to marry and raise families with. By being active members of society they could serve god just as they did within the confines of monasteries. Second, Luther put an emphasis on universal education, including the education of women. Third, Luther writes that fathers should participate in the bringing up of their children. Lastly, the ordination of priests is no longer considered to be one of the sacraments, having the effect of making all people equal before god. According to Luther, individuals of all vocations can serve god, both men and women. Or in the words of Max Weber (1905), in Luther “there remains, more and more strongly emphasized, the statement that the fulfillment of worldly duties is under all circumstances the only way to live acceptably to God. It and it alone is the will of God, and hence every legitimate calling has exactly the same worth in the sight of God.” 20 This change gave women a greater role within the church and opened the door for a greater engagement in society. 21 But what do the data reveal? In Figure 3 we take data from the European Social Survey and plot the proportion of responders who disagreed with the statement that “men should have more rights to a job than women when jobs are scarce” (sum of proportion who disagreed and disagreed strongly) against the proportion of responders who are Catholics and Protestants. 20 Max Weber, The Protestant Ethic and the Spirit of Capitalism (1905), Chapter III, Luther’s Conception of the Calling. See http://www.marxists.org/reference/archive/weber/protestantethic/ch03.htm. 21 Margaret Inglehart (1981) found that their political activism was greater in Protestant countries than in Catholic countries; a finding that she attributed to the Catholic Church being more hierarchical and authoritarian than the Protestant churches 24 Figure 3. Religions and disagreement with men having more rights to a job 40 50 60 70 80 90 100 020 40 60 80 100 Catholics (%) % disagree or strongly disagree Denmark Finland Iceland Norway Sweden Austria France Germany Italy Netherlands Portugal Spain Canada U.K. U.S. 40 50 60 70 80 90 100 020 40 60 80 100 Sweden Denmark Finland Iceland Austria France Germany Italy Netherlands U.S. Portugal Spain Canada U.K. % disagree or strongly disagree Protestants (%) Nor Source: European Social Survey (http://nesstar.ess.nsd.uib.no). Vertical axis measures the percentage agreeing or disagreeing with the statement “men should have more rights to a job than women when jobs are scarce.” Horizontal axis measures the proportion of the population being Roman Catholic (left-hand panel) and Protestant (right-hand panel). There is a clear downward-sloping relationship between the proportion of survey respondents who disagree with the statement that “men should have more rights to a job than women when jobs are scarce” and the proportion of Catholics and a positive relationship between the proportion disagreeing and the proportion of Protestants. 22 We note that the Nordic countries are in the upper right-hand corner of the graph making the relationship stronger. In order to further test for an effect of religion on values we can compare the values of Protestants and Catholics in Germany, Germany being a country with both a substantial group of Protestants and Roman Catholics, each amounting to around 30% of the population. Of the Protestant population, 40% belong to Lutheran congregations. A comparison of the values of individuals raised in the same country but belonging to different religious denominations may reveal if Protestants are more supportive of women’s right to work. 23 Table 6 shows the responses of Protestants and Roman 22 A univariate regression explains 50% of the variation of the proportion disagreeing in the left-hand side panel and 56% of the variation in the right-hand side panel. 23 However, cultural remnants of the old communist society of East Germany remain. Adler and Brayfield (1997) use data from the 1991 German Social Survey to examine East-West differences in work values 31 Knowles, John and Andrew Postlewaite (2005), “Wealth Inequality and Parental Transmission of Savings Behavior,” Working Paper, University of Pennsylvania. Kristjansson, Arnaldur S. (2008), “Velferðarkerfið og barnafjölskyldan,” manuscript, University of Iceland. 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Weber, Max (2001), The Protestant Ethic and the Spirit of Capitalism, Routledge, Classic, London. 33 Appendix 1: The tax wedge The theoretical framework has households paying all taxes. Consequently, it is necessary to adjust the national income accounts to be consistent with this framework. The adjustment consists of treating indirect taxes less subsidies as net taxes on final product by removing net indirect taxes as a cost component of GDP and reducing the final product components correspondingly. We adopt the Prescott (2004) methodology and assume that two-thirds of indirect taxes net of subsidies falls directly on private consumption expenditures and that the remaining one-third is split evenly between private consumption and private investment. Writing OECD variables in capital letters we have the following expression for indirect taxes on consumption, ITc; IT IC C ITc        3 1 3 2 (A1) where C is OECD private consumption expenditures, I is OECD private investment, and IT is net indirect taxes. In the model, consumption c and output y can now be calculated as cmil ITGGCc  (A2) and ITGDPy (A3) where Gmil denotes military expenditures. There are two taxes on labor income, the income tax τinc and the social security tax τss. The social security tax is calculated as ))(1( ITGDP SST ss     (A4) where SST denotes social security taxes, IT is net indirect taxes, and θ is measured by the share of capital in national income. The (average) income tax rate is calculated as onDepreciatiITGDP DT inc    (A5) where DT denotes government revenues from direct taxation. Direct taxes are those paid by households and do not include corporate income taxes. The expression for the consumption tax rate is 34 c c cITC IT    (A6) The Prescott methodology then calculates the marginal labor income tax rate as incssh   6.1 (A7) Equation (A6) can be used to describe the possible reasons proposed for differences in labor supply between countries. These either have to do with the slope of the budget line 1-  or the slope of the indifference curves. While Prescott (2004) emphasizes the effect of differences in tax rates  on the slope of the budget line and the point of tangency, Blanchard (2004) claims that preferences differ between Europe and the US. According to Prescott, lower output per capita in France can be accounted for by fewer hours of work that he attributes to a higher tax wedge that lowers the opportunity cost of leisure. Blanchard, in contrast, attributes fewer hours of work in France to the French having a stronger preference for leisure, which makes them increase their leisure as real income has increased. 35 Appendix 2: Figure A1. Labor supply The employment rate is calculated as the ratio of employment and working-age population. Source: Eurostat & U.S. Bureau of Labor Statistics. 50 55 60 65 70 75 80 64 68 72 76 80 84 88 Employment rates 15-39 year olds Women Men France EU Denmark Finland Sweden Iceland Norway USA 19 20 21 22 23 24 25 26 12 16 20 24 28 32 EU Denmark France Finland Sweden Iceland Norway USA Hours worked per week part-time workers women men 52 56 60 64 68 72 76 80 84 88 70 75 80 85 90 95 Employment rates 40-64 years of age Women Men EU Denmark France Finland Sweden Iceland Norway USA 35 36 37 38 39 40 41 42 43 38 40 42 44 46 48 50 52 Hours worked per week full-time workers women men EU Denmark France Finland Sweden Iceland Norway USA 0 4 8 12 16 20 24 010 20 30 40 50 Employment rates 65 and over Women Men Iceland USA Norway De Sw EU Fi Fr 3 4 5 6 7 8 9 10 11 2 3 4 5 6 7 8 9 Unemployment rate Women Men EU France Finland Sweden Iceland Norway USA Denmark 36 Appendix 3: The data Model calibration required data that are described in the table below. Furthermore for the national income accounts data to be consistent with the theoretical framework some modifications and assumptions are called for. Table A2 lists the variables used and their sources in the OECD database. Table A2. The data and their sources Our ref. Dataset table or variable: Currency or other reference Countries Years 1 Details of Tax Revenue – Government Total National currency, current prices, millions Individual table for each 2001-2003 2 11-Government expenditure by function National currency, current prices, millions Individual table for each 2001-2003 3 1-Gross domestic product National currency, current prices, millions Individual table for each 2001-2003 4 1-Gross domestic product US $, constant prices, constant PPPs, OECD base year, millions Individual table for each 2001-2003 5 12--Main aggregates of general government National currency, current prices, millions Individual table for each 2001-2003 6 Annual National Accounts - Volume 2, 1970-2005 - Detailed aggregates- Consumption of fixed capital & taxes less subsidies on products National currency, current prices, millions All countries in one table 2001-2003 7 Labor force survey by sex and age Population 15-64 annual frequency All countries in one table 2001-2003 8 Labor force survey by sex and age Total Employment annual frequency All countries in one table 2001-2003 9 OECD Factbook 2007: Economic, Environmental and Social Statistics Average hours actually worked. Hours per year per person in employment All countries in one table 2001-2003 For the period of 1970-1972, two main data sources were used in addition to the data sources previously described: United Nations 1980 Yearbook of National Accounts Statistics: Vol. 1 Part 1-2. Individual Country Data. New York: United Nations, 1982; and OECD Labor Force Statistics 1970-199, Paris, 1992. The same methodology in processing the data was applied as described previously. 37 Variables and references Variable: Reference table: Variable in table: Yt 3 B1_GE: GDP Ct 3 P31S14: Final consumption expenditure of households & P31S15: Final consumption expenditure of non-profit institutions serving households Gt 3 P3S13: Final consumption expenditure of general government Gmil 2 020: Defence It 3 P5: Gross capital formation ITt 6 Direct taxes less subsidies Social Security Tax 1 2000 Social security contributions Direct Taxes 1 Total tax revenue code: 1100 Of individuals Depreciation 6 Consumption of fixed capital t H 9 Average hours actually worked. Hours per year per person in employment Et 8 Total Employment, annual frequency Nt 7 Population 15-64, annual frequency Please note: You are most sincerely encouraged to participate in the open assessment of this discussion paper. You can do so by either recommending the paper or by posting your comments. 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