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Essays in Empirical Labour Economics Family Background, Gender and Earnings Lalaina Hirvonen

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Page 1: Essays in Empirical Labour Economics292783/FULLTEXT02.pdf · ©Lalaina Hirvonen, Stockholm 2010 ISSN 0283-8222 ISBN 978-91-7447-015-4 Printed in Sweden by PrintCenter US-AB, City

Essays in Empirical Labour Economics Family Background, Gender and Earnings

Lalaina Hirvonen

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©Lalaina Hirvonen, Stockholm 2010 ISSN 0283-8222 ISBN 978-91-7447-015-4 Printed in Sweden by PrintCenter US-AB, City 2010 Distributor: Swedish Institute for Social Research

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Ho an’ i Dada sy Neny, Lala sy Hanta Vololona Randriamanantena Reijolle

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Contents

ABSTRACT

ACKNOWLEDGEMENTS

INTRODUCTION

Essay I INTERGENERATIONAL MOBILITY AMONG SWEDISH DAUGHTERS AND SONS Evidence from Sweden and a Comparison with the United States

Essay II THE EFFECT OF CHILDREN ON EARNINGS USING AN

EXOGENOUS VARIATION IN FAMILY SIZE Swedish Evidence

Essay III ACCOUNTING FOR INTERGENERATIONAL EARNINGS

PERSISTENCE Can We Distinguish Between Education, Skills and Health?

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Abstract

All three essays in this thesis are concerned with the interrelation of family, gender and labour market outcomes.

The first paper investigates family earnings mobility between parents and sons, and parents and daughters, highlighting the role of assortative mating. The results suggest that daughters tend to be more mobile than sons. I also find that Sweden has a higher degree of mobility compared to the U.S., and that assortative mating is an important underlying channel for earnings transmission. The difference in mobility between the two countries does not inherently depend on factors affecting the marriage match. Moreover, adult economic outcomes are more dependent on family background for those at the lower end of the earnings distribution.

The second study analyses the long-run effects of an increase in family size on the 1980-2005 labour market outcomes of Swedish men and women. The decision to have (more) children is dependent on current and future labour market prospects. I use the exogenous variations in the sex composition of the first two children to overcome this endogeneity problem. My findings suggest that having an additional child has a stronger negative impact on earnings than on participation. However, mothers experience a substantial but not complete long-term recovery in earnings.

The third paper illustrates the difficulty in disentangling the underlying channels of intergenerational earnings persistence using a path analysis model. On closer examination, such a model has a potential shortcoming since the covariates are correlated to other unobserved factors. The results suggest that education is the most influential mechanism in the earnings transmission process, while IQ, mental ability and BMI are of secondary importance. However, education is sensitive to the inclusion of other covariates and the order in which these are entered into the equation.

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Acknowledgements

My interest in economics grew when I attended the mandatory Swedish as a foreign language course at Stockholm University. In those days, one of the topics in the curriculum was Swedish Civics. I remember the question I had to discuss during the Swedish oral exam, it was about household services and “the maid debate” (the debate on domestic work that erupted at the beginning of the 1990s when a proposed reform leading to tax credits for household services was introduced). This was of course a way for the teacher to test my general knowledge of the Swedish system and to judge my ability to conduct a “politically relevant” discussion in Swedish.

Later on, when I applied to different undergraduate courses, an opportunity to attend a course in economics emerged leading to my studies in economics and statistics. Economics was on a totally different wavelength compared to the subjects I had studied, linguistics and translation.

At first I was fascinated by macroeconomics, until I attended an undergraduate course on labour economics, where I met my present thesis supervisor, Anders Björklund, for the first time. At the end of the course, my friend Maria and I wrote about the returns of education for different fields of education. This was for our B. A. thesis and we had the privilege of having Åsa Rosén as our advisor. It was at this time that I first came into contact with the Swedish Institute for Social Research.

The empirical econometric course taught by Peter Skogman and Mahmood Arai, and working on the Level of Living Survey dataset for my master’s thesis as well as using the Panel Study of Income Dynamics as a research assistant, inspired me to try my wings and conduct my own research.

Now my thesis is ready and I am indebted to many people who have been supportive and helpful along the way.

This thesis would not have seen the light of day without the advice, assistance and expert knowledge of my advisor Anders Björklund. Not only has he shared his knowledge with me, he has also taken the time to help me through the different stages from idea to complete paper, and I am extremely grateful for his guidance and support.

I would also like to thank Åsa Rosén and Marianne Sundström for all their help, encouragement and support. They have taken the time to read

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and discuss my papers and they have always been available when I have needed advice on different matters. Thank you also to Anders Stenberg for being especially generous with his time and helpful insights concerning the drafts of my papers. I also enjoyed working as an assistant teacher with Anders, and our discussions on the French language and France.

Moreover, I have appreciated the opportunity of working in the stimulating environment of the Swedish Institute for Social Research, with its spirit of collaboration. I would like to thank Matthew Lindquist, Markus Jäntti and Mikael Lindhal for sharing their knowledge with me at different stages of my work on my papers. Their constructive comments have helped improve the quality of this thesis.

Tuomas Pekkarinen, the discussant at my final seminar, provided much appreciated comments and suggestions. I am also grateful to Marie Evertsson and Tommy Ferrarini for kindly offering to read drafts of my papers and for providing useful references from sociological literature.

Let me also thank Ante Farm, Anne-Maj Folmer-Hansen, Jean Parr, Inger Höglund and Ingela Arvidsson who have never hesitated to offer their administrative help in different matters. I would also like to thank Louise Ratford for her skilful review of my English, and Kristian Koerselman, Markus Jäntti and Martin Sjölander for kindly providing much needed computer assistance at short notice.

While participating in the PhD programme, I have been fortunate to meet and get to know people who have contributed in different ways to making my everyday struggles easier to endure. I would not have got through the pressures of the first few years of the programme without the help and friendly company of Patrik, Christer, Johan and the girls in corridor F: Helena P., Gabriella, Pernilla, Helena and Åsa O.

I would also like to thank my colleagues, both economists and sociologists, who all contributed to a pleasant and easygoing atmosphere, in particular Marieke, Marta, Krister, Lena, Jon, Therese, Cecilia and Lotta.

The road has not always been easy but the long process of writing a dissertation has taught me a lot more than just the empirical tools to study research questions. It has provided me with experiences that have helped me to develop self-knowledge and a sense of prioritization. In the middle of everyday stress and deadlines, I have also been able to enjoy the company of Susan, Karin, Jenny and Anders B. for a great workout together.

A special thank you goes to Susan, Aycan and Hans for being such great friends during my later years at Sofi. Thanks for all the good times and laughter, but also for the encouragements and advices, for taking the time to listen and to discuss my papers.

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During my struggle with my graduate studies, I have also received tremendous support from my friends and relatives outside the academic world. I am especially grateful to Henrik and Jaana, Paul and Helen as well as Georg and Carina for your understanding, and for letting your doors always remain open for me, whether I have needed to resolve problems, needed help with my English or have simply needed company.

I wish to thank Pearl and Roland for their continuous support. Pearl has been like a mother to me when I came to Sweden, and has always been there for me through the hard times and the good times as well.

I would not have managed to sit so many hours in front of the computer had it not been for the time I have spent having fun with Jaana, Merrilee and Helen during our card making and scrapbook evenings. Thank you for your friendship and for all the creative support.

I would also like to thank Martin and Solange for their friendship and hospitality. Thank you for being so generous with your time and for helping us out when we got into trouble with the computer.

Despite the long distance between us, I am thankful that I still receive warm and unfailing support from my oldest and dearest friends Jenny, Berline and Mialy. Thank you for all the great times we have spent together, for understanding my busy schedule, and for still keeping in touch.

Finally, thank you dear parents for showing me the importance of education, for making many sacrifices so that I would have a good start in life. And to my brothers Rado and Zo, thank you for all the precious and sunny memories of our times together, which I keep in my heart. Dada sy Neny, Rado sy Zo, thank you for believing in me, for your constant encouragement and your prayerful support.

This thesis would have come to nothing had it not for the invaluable support and faith that Reijo has had in me. Reijo has been my safe haven in the middle of the storms and a great source of courage during trying times. Thank you for always letting me and my studies go first. I know it has not always been easy but you have put up with me throughout. I could never have done it without you. You are my soulmate and I love you.

And last but not least, I thank my Heavenly Father for all His blessings, and for leading me throughout this incredible journey. May I always bring honour to His name.

Stockholm, February 2010 Lalaina Hirvonen

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Introduction

This thesis consists of three self-contained but interrelated empirical papers covering different topics: the intergenerational mobility among Swedish sons and daughters, the effect of children on men’s and women’s earnings, and the mechanisms behind the intergenerational earnings persistence. Accordingly, all three papers are concerned with family, labour market outcomes and gender differentials. In this introduction I begin with a more general outline of the research traditions related to my papers, and thereafter proceed with a short presentation of the contribution of each paper.

Intergenerational mobility is one of the aspects of equality of opportunity. A strong association between incomes across generations indicates weak intergenerational mobility and a persistence of inequality, which may mean that those born to poorer parents have restricted life chances and do not achieve their economic potential. However, equality of opportunity does not imply complete intergenerational income mobility, nor does it require society to eliminate all sources of economic resemblance between parents and children. Instead, equality of opportunity is considered to prevail in society if the chances that individuals have to succeed depend only on their own efforts and not on extraneous circumstances that may impede or increase those chances (Roemer, 1998 and 2004, Jencks and Tach, 2006).

Sociologists and economists have long contributed to the extensive literature on intergenerational mobility. While sociologists have often examined this issue from the viewpoint of the individual's social class, economists have studied income and earnings as channels through which socioeconomic status is transmitted across generations (Eriksson and Goldthorpe, 1992, Solon, 1999).

Recent research on intergenerational income mobility has focused mostly on improving the measurement of the extent of mobility and on cross-country comparisons across time (See Corak, 2006, Björklund and Jännti, 2009 for an overview). Empirically, socioeconomic mobility can be measured using two distinct types of correlation: the intergenerational correlation and the sibling correlation. The intergenerational correlation in earnings, to which my studies are confined, provides information about the degree of responsiveness of offspring’s earnings with respect to a change in parental earnings. The sibling correlation in earnings is a

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broader measure of intergenerational resemblance. It summarizes influ-ences common to siblings in the same family, not only parental charac-teristics but also community characteristics and neighbourhood norms which siblings normally share. However, a sibling correlation leaves out all family influences not shared by siblings. Psychologists and econo-mists, for instance, argue that the non-shared influences may be impor-tant since birth order has a great deal of influence over the frequency and type of interaction that exists between parents and children (Sulloway, 1997, Black, Devereux and Salvanes, 2005).

In both economics and sociology, most of the studies focus on the father-son relationship. It is reasonable to say that a considerable part of the picture is missing by only taking the intergenerational link between fathers and sons into consideration since the socioeconomic characteristics of both parents affect the mobility patterns of their offspring. The gender issue is obviously relevant for the goals of equality of opportunity and equality of outcome that today’s society strives to attain. This encompasses equality of opportunity for daughters as well as sons, which I study in my first and third papers and gender equality for men and women, which I consider in my second paper.

Another strand of literature that my research is related to is the classical topic of the gender differentials. A wave of recent studies has established the persistence of a gender wage gap in most industrialized countries (Blau and Kahn, 2003). According to the Level of Living Surveys, the gender wage gap in Sweden has constantly been in the range 0.17-0.19 log points since 1981. Recent Swedish official statistics indicate that women's wages on average are about 18 percent lower than men's (SCB, 2008). This may seem small in comparison to the pay differentials between men and women in other countries, but this figure is still substantial, considering the small wage dispersion in Sweden. Likewise, the equality of opportunity might also pave the way towards gender equality. It has often been suggested that the gender gaps in the labour market reflect the negative effect of motherhood on female labour supply (Waldfogel, 1998). The fact that parenthood affects women in many different ways compared to men, not least in the labour market, risks also to stand in the way of women when it comes to enjoying the same opportunities as their male counterparts. The subject of fertility and female labour force participation has received attention in other disciplines such as demography and sociology, and in economics as well (Bumpass, 1990, Hoem and Hoem, 1998, Mincer, 1962).

Literature on the interplay between fertility and female labour force participation is closely linked to studies on the welfare state (Sundström and Stafford, 1992, Ferrarini, 2006). The high labour force participation of women goes hand in hand with the expansion of the welfare state. Sweden is often seen as one of the more gender equal countries in the

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world, with family-friendly policies and strong female participation in the labour market and political representation (Gornick and Meyer, 2003, Korpi, 2000).

Other strands of literature in this field call into question the impact of family-friendly policies with regard to the position of women in the labour market. It might be the case that generous parental leave and high compensation rates, which encourage mothers to take considerable time off work, may have a reverse effect on the status of women in the labour market. It is possible that lower career chances for women may be a consequence of the Swedish family-friendly policies (Hakim, 2000, Gupta, Smith and Verner, 2008). For instance, a relatively large share of Swedish women work part-time to some extent as a result of legislated partial parental leave (Sundström, 1997, Mandel and Semyonov, 2006). My second study makes some contribution to this discussion on fertility, family policies and the gender gap.

One of numerous aspects of the equality of opportunity might be reflected in marriage sorting. Marriage markets and intergenerational mobility are connected through various channels. Low rates of assortative mating may increase mobility by spreading economic resources across more households (Kremer, 1997). The connection between overall levels of inequality and the degree of sorting in marriage markets can be measured using the correlation of spouses’ earnings. There is a concern that marriage patterns may contribute to growing economic and educational inequalities (Kremer 1997; Mare 2000). Changes in assortative marriage patterns are indicators of changes in the rigidity of social boundaries and are important components of changes in the makeup of families and households, regardless of whether increases in the earnings resemblance of spouses increase inequality for future generations. The first paper in this thesis looks into the role of assortative mating in the context of socioeconomic mobility.

Another avenue to explore to gain more information about the equal-ity of opportunity is the extent of intergenerational mobility in different parts of the earnings distribution. Although the average measure of so-cioeconomic mobility often used in previous studies is informative, a more analytical way to improve our understanding of the mobility proc-ess is to look at the top and the bottom of the earnings distribution, and peel the layers off to obtain a more relevant and hopefully a better un-derstanding of society. My papers combine different perspectives to un-cover possible differences in the degree of mobility for those at the ex-treme of the earnings distribution. Answering questions such as: “are sons and daughters who belong to the lower end of the earnings distri-bution as mobile as those who are at the top?” is of particularly high policy relevance. Likewise, it serves to assess whether an increase in par-ents’ earnings or in an individual’s level of education raises earnings in a

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different way for offspring at the bottom of the earnings distribution as compared to those at the top. This implies that those born of rich versus poor parents would enjoy the same opportunities in the labour market and that in particular, their family’s socioeconomic background would not interfere with later outcomes nor limit their life chances later on in life.

Using the appropriate data for the analysis of a specific research question is crucial for all empirical studies. In all the empirical analyses in this thesis, I have been fortunate to have access to the most suitable data for the study of intergenerational earnings mobility. I have used a high-quality Swedish data set which originates from Statistics Sweden’s population registers. The multigenerational nature of the data has the advantage of providing a clear identification of both parents and offspring, and helps to match them with each other. In addition, the data offers a large representative sample that adds statistical strength to the results. Furthermore, the data is matched with tax registers and educational registers to provide detailed measures of income and education. In the third paper, I have also benefited from the unique information from the Swedish Military Enlistment data set to access important measures of skills for the analysis of the underlying mechanisms behind the persistence in earnings.

Paper I

Intergenerational Mobility Among Swedish Daughters and Sons: Evidence from Sweden and a Comparison with the United States. It has been complicated to measure and to include women’s earnings in the intergenerational analysis since female labour force participation was still low in the 1970s. In this paper, I use family earnings as the sum of the father’s and mother’s earnings to get around this problem. Also, instead of studying only sons, I include daughters in the analysis to balance findings in the previous literature. Since the marriage market may reshuffle the economic (dis)advantages from the family of origin, assortative mating clearly influences the correlation between the family earnings of parent and children. This study investigates whether marriage matching enhances the socioeconomic mobility of daughters.

Since the United States and Sweden have long been known to repre-sent two extreme cases in a comparison of income inequality among developed countries, I consider how they relate to each other in terms of intergenerational transmission of family income. Chadwick and Solon

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(2002) find, using U.S. data, that a daughter’s husbands’ earnings are correlated with her parents’ earnings.

My results suggest that Swedish sons and daughters exhibit a rather similar scheme of intergenerational earnings transmission. However, daughters tend to be slightly more mobile than sons. My findings corroborate previous research that Sweden has a higher degree of mobility compared to the U.S. Assortative mating has also been revealed to play an important role as a channel through which economic status is transmitted across generations in Sweden. Nonetheless, the difference in intergenerational mobility patterns between the two countries does not, inherently, depend on factors that affect the marriage match. Thus, other explanations for the cross-difference between the U.S. and Sweden must be found elsewhere.

Paper II

The Effect of Children on Earnings Using an Exogenous Variation in Family Size: Swedish Evidence The decision to have (more) children is dependent on current and future labour market prospects. This issue is primarily relevant for women who strive to combine family life with a labour market career. To study the long-run causal effect of fertility on participation and earnings, I use the fact that parents first endowed with two children of the same sex tend to proceed to higher parity in the hope of having a third child of the missing sex. This identification strategy was originally applied by Angrist and Evans (1998) on U.S. data, where they find negative short-term effects of an increase in family size on female labour supply.

This method makes use of a natural experiment when trying to understand the long-term effect of having one more child on men’s and women’s labour market outcomes. Researchers often have to resort to natural experiments in order to remedy the problem of not being able to control for other unobserved factors that are correlated with the outcome variables in the study of causal effects. It is an experiment which mimics what scientists do in a laboratory when they administer a drug on a treatment group and simultaneously observe a control group. It is a natural experiment because the treatment, in this case, is assigned by nature as opposed to a random assignment implemented by the scientist himself.

Swedish men and women have a preference for mixed-sex siblings in-stead of two boys or two girls. This might seem incompatible with the

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fact that Sweden is a country with high gender equality and that female labour force participation is almost on a par with its male counterpart. However, a demographic study by Andersson, Hank, Rønsen and Vikat (2006) using Swedish data from 1960 to 2000, confirms the presence of parental preferences in a balanced sibling sex composition. My study covers a lengthy period of time, 1980-2005, and gives a preview of the long-term consequences of childbearing on women's careers and lifetime earnings. To my knowledge, it is the first study to use exogenous varia-tion to examine this issue with Swedish data.

My findings suggest that having an additional child has a stronger negative impact on wages than on participation. However, mothers experience a gradual but not complete recovery in earnings in the long run. Moreover, my study suggests that in all probability it is mechanisms other than childbearing that lie behind the gender wage gap in Sweden. These results remain stable despite changes in individuals’ preferences and different labour market conditions, as well as the rapid expansion of Swedish family policies.

Paper III

Accounting for Intergenerational Earnings Persistence: Can We Distinguish Between Education, Skills and Health?

As mentioned above, recent economics literature on intergenerational income mobility has provided interesting insights and an enhancing picture of cross-national patterns in mobility. Subsequently, the next step for researchers is to uncover the mechanisms underlying these differentials. One seemingly appealing approach is to formulate and estimate a recursive model in which parental earnings have a direct impact on the offspring’s earnings, but also have an impact via other factors such as education. A handful of contemporary papers have applied this approach.

This paper illustrates the difficulty in disentangling the impact of edu-cation, cognitive and non-cognitive abilities as well as health on the transmission of earnings persistence, by means of a path analysis model. A close examination of this approach suggests that such a model has potential shortcomings since the covariates are correlated with each other and also with other factors not observed in the analysis. The re-sults show that it is not possible to discern the effect of IQ and mental ability from education. Education is revealed to be the most important mediating variable between a father’s earnings and his son’s earnings.

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Meanwhile, education is also extremely sensitive to the inclusion of other covariates and the order in which these are entered into the equation. To be more specific, considering education alone as a transmission mecha-nism appears to overstate its impact in the transference of economic status. Therefore, studying various factors together, as opposed to solely focusing on one factor in the analysis, gives a broader picture of the un-derlying structure of intergenerational transmission.

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