Christine Lagarde: To boost growth, employ more women

At his swearing-in ceremony last year, Prime Minister Justin Trudeau was asked why he had appointed a gender-balanced cabinet, a first for Canada (and for most countries around the world). He replied “Because it’s 2015.”

He was right, of course, and his response demonstrated his government’s clear commitment to gender equality. But there is another important reason for promoting greater female participation in the workforce: women in jobs are good for growth. IMF studies have shown significant macroeconomic gains when women are able to participate more fully in the labor market.

Since the global financial crisis, countries around the world have been trying to grow their economies more quickly. Canada is no exception. Low oil prices and weak demand from major trading partners have hampered its exports, and an aging population is shrinking its labor force. The policy prescription is no secret. Canada must improve its labor productivity, which is about 20 percent below the level in the United States, and is growing at less than 1 percent a year.

Women are part of the solution. Tapping into Canada’s highly educated pool of women would help offset the shrinking labor force, boost growth potential in the medium term, and raise living standards for all Canadians. Moreover, a forthcoming study by the IMF suggests that a 1 percentage point increase in the labor force participation of women with an advanced degree would raise Canada’s overall labor productivity growth by 0.2 to 0.4 percentage point a year. So, if the current gap of 7 percentage points between male and female labor force participation were eliminated, the level of real GDP could be about 4½ percent higher today.

To be sure, Canada has already made impressive strides in boosting female labor participation over the past several decades. In 1980, only 60 percent of Canadian women aged 25–54 years old were in the labor market, below the United States and significantly lower than in the Nordic countries, which led the pack. Four decades later, Canada’s female labor participation rate is over 80 percent, comparing favorably with most advanced economies—including the United States, where the rate has actually fallen since the mid-1990s to about 74 percent (see Chart 1).

Canada’s rapid progress in female labor participation was no accident; it reflects deliberate and targeted policy measures. Two Canadian reform initiatives have been particularly effective in boosting female labor participation.

Tax reforms. A federal tax reform in the late 1980s replaced a number of deductions (including on income earned by secondary earners) with tax credits, broadened the tax base, and lowered the marginal tax rate structure. That encouraged more secondary earners (who are usually women—but that is a story for another day!) to participate in the labor force, partly because their tax burden would no longer be tied to the higher marginal tax rate of primary earners. And in the 1990s, the federal government introduced tax cuts and benefits for families with children, further improving work incentives for secondary earners.Family-support policies. Federal and provincial governments launched initiatives to support parenting and early childhood development starting in the late 1990s. They lengthened maternity and parental leaves from a maximum of 37 weeks to 52 weeks in 2001 and established a national system of early learning and child care, supported by increased government spending on early childhood development.

These targeted measures worked. Since 1980, Canada’s female labor force (aged 25–54 years) has increased by 3.2 million, compared with a 2.1 million increase in its male labor force.

Despite these successes, gender gaps still remain in Canada. The participation rate for women was 82 percent in 2015, well below the 92 percent level for men. But the more disappointing fact is that a substantial increase in women with an advanced academic degree has not led to a proportional increase in their participation in the labor force. In 2015, more women received university degrees than men, but their labor participation rate is 7 percentage points lower than men’s. Thus, there is still room to tap the underutilized female labor force to anchor strong growth.

A good place to start may be by narrowing the remaining policy gaps. While paid maternity and parental leave is the 7th longest in advanced Organization for Economic Cooperation and Development economies, public spending on early education and care still falls short of that in many advanced economies, and there could be further scope to improve work incentives for secondary earners (see Chart 2).

In addition, family support policies should be targeted at enhancing incentives to work. The Canada Child Benefit introduced in the 2016 federal budget is a step in the right direction, by providing benefits to low- and middle-income families (single mothers often fall in the low-income category). But the benefit program—and family support policies more generally—could be better targeted toward increasing childcare subsidies for working parents whose parental leave has expired.

To boot, Canada’s gender wage gap is well above the Organization for Economic Cooperation and Development average, and progress in promoting women’s representation in senior management has also been slow, with women making up only one in four senior managers. This “invisible glass ceiling” could discourage younger generations of women to pursue professional careers. Bold decisions are needed to change corporate cultures and shift social norms—for example, by providing incentives for women’s representation on corporate boards or reforming the current parental leave system so that more fathers are willing to take leave.

Prime Minister Trudeau recently tweeted “poverty is sexist.” Canada can grow its economy and improve prospects for all Canadian women, especially the poorest, by boosting their participation in the labor force. It is not only the right thing to do, it is the smart thing to do.