Women Prefer Larger Governments: Female Labor Supply and Public Spending

The increase in income per capita is accompanied, in virtually all countries, by two changes in the structure of the economy: an increase in the share of government spending in GDP and an increase in female labor force participation. This paper suggests that these two changes are not just overlapping in time, they are causally related. This paper develops a growth model with endogenous fertility, labor force participation and government size that illustrates this causal link. Economic development is accompanied by an increase in the female market wage, thus increasing the opportunity cost of staying at home. If government spending decreases the time cost of performing household chores - including, but not limited to child rearing and child care - it makes sense for women to enter the labor market and demand higher government spending, financed by increased taxation. As women make the decision to work outside the home, they increase their demand for services typically provided by the government, such as education and health care, which, in turn, decrease the cost of home and family activities that are overwhelmingly performed by women. Using a wide cross-section of data for developed and developing countries, we show that higher rates of female participation in the labor market are indeed positively associated with larger governments. Furthermore, we investigate the causal link between the two variables using as instrumental variables for female labor force participation newly collected data on the relative price of home appliances as well as the fertility rate. We find evidence of a causal link between female labor force participation and government size. A 10 percent rise in female participation in the labor market leads to a 7 to 8 percent rise in government size. This effect is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998).