The service sector and female market work

This paper develops a multi-sector model to: (i) quantify the feedback from women entering the labor force on the service sector size, and (ii) compute differences in hours worked by gender from taxes, structural change and female employment. Increases in female employment, due to rising wages and structural change, account for a sizable portion of services. Counterfactual results suggest that: (1) working women account for 32 percent of the rise in service employment; (2) using standard micro estimates of Frisch elasticities with two-person households, tax rates account for the majority of Europe-US differences in hours worked, and (3) subsidies to employment circumvent the tax effect on hours, but lead to welfare losses of 5 to 8 percent. The second result validates the relationship between tax levels and hours worked first proposed by Prescott (2004) without using large Frisch elasticities.