ABSTRACT
What are the important factors in the decision to work? The standard neoclassical model provides an explanation as to why such factors as the wage rate, education, age and past work experience, spouse’s income, as well as other personal and household characteristics can affect the decision. This model has been extremely useful in understanding labor supply decisions, but-not surprisingly-there are some cases inwhich it falls short of providing compelling explanations.We are particularly interested in the rise in the employment of married women in the United States in the twentieth century. Empirical estimates of the simple neoclassical model of married women’s labor force participation suggest that positive substitution effects outweigh negative own and husbands’ income effects, with the consequence that rising real wages draw women into the labor market (Mincer, 1962; Smith and Ward, 1985). But there is ample evidence that this simple model fails to fully explain the rise in the employment of married women in the United States. The theme of this chapter is that there may be important variables in women’s
decisions to enter the work force that are omitted from standard neoclassical models. We specifically focus on the possibility that a woman’s decision whether to be in the workforce may be affected by the decisions of other women in ways not captured by standard models. Other women’s decisions may affect a particular woman’s decision in many ways. For example, other women’s decisions will affect the “quality” of remaining out of the workforce if there are positive externalities among women who remain at home. Perhaps most importantly (although this remains an open question), to the extent that people care about their relative income position, a given woman’s employment decision can be influenced by other women’s employment decisions. In this chapter we develop amodel that augments the simple neoclassical frame-
work by introducing relative income concerns into women’s (or families’) utility functions. In this model, the entry of some women into paid employment can spur the entry of other women, independently of wage and income effects. We show that relative income concerns can help to explain why, over some periods, women’s employment rose faster than can be accounted for by the simple neoclassical model.1
