Encouraging women’s labor force participation in transition countries

Women under socialism

Countries at the onset of transition shared many characteristics—including the levels of female labor force participation and female educational attainment—because they had shared similar institutions and values for so long.

Under socialism, women’s participation in the labor market was considered crucial to the achievement of plan objectives, and female education was encouraged. The investment in women’s education was substantial in most countries, so much so that by the early 1990s in many countries women were more educated on average than men, a difference that remains largely true today. Women in transition countries are almost as educated as women in high-income countries and substantially more educated than women in developing countries.

Socialist countries actively encouraged female labor force participation through several means, from propaganda to a variety of policy measures. For example, the state provided working mothers with both maternity benefits and accessible childcare services—often including infant care—which was mostly enterprise based [1]. Women’s participation in the labor market was also encouraged by the compressed wage scales within each industry, which were decided in most countries at the central level. Wage compression worked through two channels to affect women’s employment. Because of wage compression, a woman re-entering the labor market after a prolonged absence would not receive a substantially lower salary than women who had stayed in the labor market. And the low average level of wages also meant that women had to work in order to complement family income.

Overall, these government efforts to encourage greater female labor force participation were successful. However, while women were asked to contribute to the achievement of the economic plan, the traditional perceptions of gender roles—in particular perceptions about women’s role in the household—remained relatively unchanged. Women continued to be expected to do the bulk of the household work and care-giving activities even as their participation in the labor market increased. This led to a double burden on women that was only partially alleviated by public policies such as the ones mentioned above. These traditional views of gender roles also affected women’s work outside the household. The perception that women were more fit for jobs resembling housekeeping and care-giving affected the opportunities available to women in the labor market. The persistence of traditional gender roles, combined with the fact that part-time employment was uncommon in socialist countries, led women to concentrate in semiskilled-professional occupations in such sectors as health care, education, and retail trades. These occupations tended to have shorter and more flexible working hours, which enabled women to reduce their working time outside the household and to achieve a better work−life balance, even if this meant earning lower wages [2].

The impact of countries’ economic and social transition on women

The collapse of socialist regimes led to fundamental changes in labor market institutions. These changes affected women in different ways and sometimes in opposite directions. For example, while decompression of the wage structure penalized women—who were concentrated in the lower part of the wage distribution—the increase in returns to education favored women, as they were on average more educated than men. These two opposing effects gave rise to different outcomes in different countries. In countries of the former Soviet Union, where minimum wages were not increased to compensate for their loss in real value, women’s wages typically lost value relative to men’s, while in Central and Eastern European countries, where real minimum wages were preserved to a larger extent, the opposite happened [2].

In the early days of the transition, the formerly socialist countries suffered severe economic and social crises. For women, the impact was intensified by sectoral and occupational segregation by gender and a strengthening of traditional gender roles. This confluence of factors led to substantial fluctuations in female labor force participation and to diverging trends in female and male labor force participation. Initially, in most transition countries, men were hit hardest, as the economic restructuring affected mostly male-dominated sectors. As men’s labor force participation declined sharply, women’s participation declined less or, in some cases, increased as women tried to compensate for the loss of income suffered by the household (a phenomenon referred to in the literature as the “added worker effect”; Figure 1).

However, in some countries women later lost their relatively stronger initial position as more women than men left the labor force, even women in female-dominated sectors [3], [4], [5]. This trend can be ascribed both to changes in the incentive structure and to women’s greater preference than men for job stability, which sometimes seems to have limited women’s ability to benefit from working in growing sectors. Another contributing factor to the widening of the gender labor force participation gap has been the failure of many countries to generate sufficient high-quality job opportunities for women. In several transition countries, especially where unemployment rates were high and during earlier phases of transition, men were preferred over women in hiring decisions. All these factors delayed the entry or re-entry of women into the labor market and might have contributed to an increase in the number of “discouraged” women who abandoned the labor force.

Government policies and female labor force participation

Government policies have played a crucial role in changing the incentive structure faced by women in transition countries. First, as a response to the downsizing of the state sector and to the associated increase in unemployment, many countries introduced incentives for early retirement that prompted many older women, especially those with lower skills, to exit the labor force. At the same time, due to the shrinking of the public budget and the closure or privatization of state-owned enterprises, the supply of public and firm-based childcare services shrank. The growth of new private childcare centers was initially too slow to make up for this loss. As a consequence, households were simultaneously confronted with a declining supply and quality of childcare and rising childcare cost. The increased uncertainty, reduced earnings, and reduced access to (more expensive) childcare services negatively affected fertility rates.

To offset some of the negative effects on fertility rates, a common solution was to increase maternity benefits by extending the length of maternity leave. This shift from external childcare to homecare created new incentives for women with young children to leave the labor force or, at the least, to delay their return to work. This had a negative effect on the labor force participation of women with children, reducing their likelihood of remaining in the labor force and the employment share of women in the labor market [1], [6], [7].

The cases of Estonia and Slovenia are particularly telling in this respect. At the outset of transition, these two countries had an almost identical approach to maternity leave and public childcare, Later, their systems diverged. Estonia lengthened pregnancy and maternity leave, while Slovenia left them unchanged. Moreover, in Estonia the number of childcare establishments shrank by 14% and prices rose, while in Slovenia prices did not change and the number of establishments increased by 1%. Not surprisingly, over the period under observation (the late 1980s and early 1990s), Estonian women were much more likely to leave the labor market than Slovenian women. Consequently, after the first five years of transition, the employment share of Slovenian women had increased, while that of Estonian women had decreased [6].

The smaller supply of childcare services also affected women’s labor force participation on the demand side, together with the more general contraction in the education sector. As these sectors employed mainly women, labor demand for women also contracted. The reduction in the number of jobs and in real wages in these sectors contributed further to the decline in female labor force participation. The impact of these changes was stronger on less-skilled women and increased the risk of poverty for their households.

Tax system changes are another way that governments of transition countries have influenced women’s incentives to work. Tax changes such as the introduction of joint taxation at the household level have affected the taxation of married women’s employment income. Joint taxation increases the marginal tax rate of secondary earners and lowers that of primary earners. The introduction of joint taxation in the Czech Republic in 2005, for example, reduced women’s probability of working and, to a lesser extent, the number of hours they worked [8].

Monetary transfers to poor families, intended to ease the condition of the most vulnerable households, also reduced labor force participation, particularly for women, by increasing the opportunity cost of becoming employed. This happened, for example, in Albania’s anti-poverty program, Ndihma Ekonomike, which was introduced to support poor households. The program had a negative impact on the labor supply, particularly among women and urban residents.

Governments have also attempted to stimulate labor force participation through active labor market policies, such as wage subsidy programs, training, education, and short-term interventions to strengthen job search skills. A recent survey of the evidence concludes that such measures have been effective in raising women’s probability of employment and their transition from unemployment to employment [9]. These effects were particularly strong for older and less-skilled women, the two categories for which labor force participation rates have declined the most since the beginning of transition.

Aging societies: A double challenge for women

Most transition countries are experiencing a demographic transformation, with the share of the population older than 65 years of age increasing steadily since the 1990s. This demographic trend presents a double challenge for most countries.

First, the share of the population that is of working age (generally those aged 15–64) continues to shrink. Despite recent reforms of the pension systems, in most countries the effective pension age remains below 65 years. Women are typically allowed to retire earlier than men. Slowing the shrinking of the labor force will require raising the effective retirement ages for men and, particularly, for women. This step is unlikely to be enough on its own, however. Workplaces will have to adjust to the needs of elderly workers, to facilitate their continuing participation in the labor force. Information campaigns and anti-discrimination policies should also be considered. All of this, however, makes sense only if the labor market is capable of generating opportunities for older workers as well as for younger generations.

There is also another way in which aging populations are inhibiting women’s labor supply. In addition to childcare, women’s care-taking responsibilities often extend to the elderly and to family members with disabilities. In transition countries, where fertility rates have often dropped below the replacement rate after transition, the need for elder-care has increased and will continue to do so inexorably. Informal elder-care—unpaid care provided by family members—is common in developed countries. The evidence suggests that this phenomenon is even more pervasive in transition countries. In a recent comparative study of EU countries, for example, the two Eastern European countries in the sample—Poland and the Czech Republic—had the highest incidence of informal care, at close to 100%. This finding suggests that informal care for the elderly and people with disabilities will be an increasingly relevant issue for women.

Under these conditions, theory predicts an increase in the opportunity cost (the cost of forgone alternatives) of out-of-home work and, therefore, a negative impact on female labor force participation. While there are no detailed and rigorous studies of the impact of informal elder-care on female labor force participation in Eastern and Central European transition countries, studies for China, which is also transitioning from a planned to a market economy, find that women’s care-taking responsibilities have been increasing. While simple co-residence with elderly family members is found to have positive impacts on women’s labor force participation, studies focusing on elder-care needs have found it to have a negative impact on women’s work outside the home [10]. The same is true in the case of co-residence with younger family members with disabilities.

Increasing female labor force participation by supporting female entrepreneurship

A potentially promising intervention in transition countries to encourage female labor force participation—and, more generally, greater social inclusion of women—is support for female entrepreneurship. Such support can be especially effective in countries with a culture that perpetuates traditional gender roles and with limited employment opportunities. Female entrepreneurs not only create jobs for themselves but may also generate employment opportunities for other women. Female entrepreneurs are less likely than male entrepreneurs to discriminate against women and more likely to hire them. Most important, female entrepreneurship can have powerful indirect and long-lasting effects by modeling entrepreneurship for younger generations of women and by helping to transform deeply rooted cultural norms and gender stereotypes that limit women’s options in the labor market [11]. Starting such virtuous cycles can lead to both greater labor force participation of women and, more generally, to their greater economic and social inclusion.

In most transition countries, unlike in developing countries, few women turned to self-employment as the transition process got under way. Most women held on to their formal jobs as long as they could and then looked for other formal or informal jobs or left the labor market. A possible (and partial) explanation for this pattern comes from a study of female entrepreneurs in Lithuania and Ukraine at the end of the first decade of transition [11]. The study suggests that the low initial levels of female entrepreneurship in transition countries might have been due to the difficulties women encountered at the onset of transition when they attempted to start their own businesses. Women faced more obstacles than men did because of the intensification of traditional cultural norms and gender stereotypes, whose effects were amplified by the female labor market segregation inherited from socialist times. For example, women were disadvantaged compared with men by the smaller size and the weaker power of their networks. Female entrepreneurs in Lithuania and Ukraine faced resistance because they were perceived as challenging traditional gender roles [11]. This resistance made it harder for women not only to access capital and government support but also to find experienced entrepreneurs who could mentor and advise them. But female survey respondents in Lithuania and Ukraine also reported several factors that supported their entrepreneurship, including backing from the men in their families and from emerging business associations.

As time passed, the number and the share of women engaged in entrepreneurial activities increased in most transition countries, reaching levels comparable to those in more developed Western European countries. The average share of enterprises owned by women was 36% in Europe and Central Asia (including Turkey) and 39% in the EU10 countries, according to the European Bank for Reconstruction and Development–World Bank Business Environment and Enterprise Performance Surveys (BEEPS). Women’s participation in firm ownership ranged from 60% in the Kyrgyz Republic to just under 11% in Albania and Azerbaijan. However, female entrepreneurs in transition countries appear to be mostly necessity driven (to cope with missing job opportunities or economic shocks to the household) rather than opportunity driven (to take advantage of the most profitable employment opportunities), the type of entrepreneurship that contributes most to job creation and economic growth. Necessity driven entrepreneurs typically have access to fewer resources, develop smaller firms, and generate less knowledge and positive economic spillovers than opportunity driven entrepreneurs. On a positive note, regardless of differences in motivation between male and female entrepreneurs and in the characteristics of the enterprises they establish, once women decide to become entrepreneurs, they are as likely to succeed as men [12].

The evidence for developing and transition countries suggests that governments can do a lot to support female entrepreneurs, in particular to increase the scale of their activities and their probability of success. But government policies have to be designed carefully, based on the needs of particular target groups of women. For example, female entrepreneurs, especially those who are poor, seem to benefit more when financial support is coupled with intensive training and follow-up visits tailored to their specific economic activities. Better-off women will need less comprehensive support. Another interesting finding for several transition countries is that receiving in-kind capital increases the probability of success of female entrepreneurs by helping women retain more control over their entrepreneurial activities and re-invest in their business. A similar effect has been associated with savings programs and payment instruments that allow women greater privacy and control over the revenues generated by their economic activities [13].

Path-dependency: Why links between the past and the future make acting now so important

Female labor force participation is the result of a complex interaction of factors, some of which can be changed and will have effects within a fairly short time, while others take much longer. Analyses of the labor market experience of women in transition countries and more broadly reveal the existence of strong path-dependency: the factors determining female labor force participation today will also affect female labor force participation many years from now, through a multitude of channels, including the transmission of gender roles from one generation to the next. This path-dependency means that government policies affecting women’s incentives to participate in the labor market can have long-lasting effects that extend well beyond women’s labor force participation in the short term.