On 25 October 2024 the IMF launched the latest Regional Economic Outlook for the Western Hemisphere. A background paper to the report with the title Closing the Gap: Labor Market Participation in Latin America examined ways to increase labour force participation, in particular by encouraging more women to enter the labour market.
Economic growth in Latin America in the past few decades has been driven by population growth and increases in the numbers of working age people. However, as the demographic situation changes and population growth decelerates, this driver of growth will no longer be effective. To combat this tendency, countries of Latin America must encourage more labour force participation among key social groups.
Women are less engaged in paid employment than men in Latin America, both in overall employment and hours worked. Given women’s higher responsiveness to changes in net wages, the evidence suggests that governments can increase female labour force participation by appropriate reforms to the tax system such as taxing on an individual basis and increasing the progressivity of the personal tax, while also strengthening the social safety net by expanding parental benefits. Participation by women could also be encouraged by implementing policies to improve the availability and affordability of childcare and making work schedules more flexible.
The labour supply of women is very responsive to changes in income; and actions to increase labour income for women can therefore boost their participation levels. On average, it is estimated that working women in Latin America and the Caribbean earn around 30% less than men and are often paid less for doing the same work. This lower earning potential is a disincentive for women who may choose not to enter the workplace.
Participation by women could be strengthened by reforms to the tax and benefits systems to reduce the tax burden for second earners within households. The decision by women to look for employment could be influenced by taxation on the basis of the individual; increasing the progressivity of taxation rates; and eliminating asymmetries in parental benefits between men and women.
Individualized tax systems, which consider the individual’s income separate from that of their partner, maximise work incentives of secondary earners who are often women. By contrast, household-level tax systems generally lead to increased marginal tax rates for women, because the higher-earner spouse uses up the lower income tax brackets as well as any family-based benefits.
Despite the fact that it raises the secondary earner’s marginal tax rate, joint taxation of spouses tends to be at least as attractive as separate filing of returns at the household level because it reduces the household’s average tax rate. As of 2022, some Latin American countries such as Brazil and Peru provided for optional joint taxation, while the tax systems of Argentina, Brazil, and Colombia included family-based provisions that led to an additional tax burden for married women.
Progressive tax systems can strengthen women’s incentives to take up work, to work more hours, and (for those in the informal sector) to potentially shift towards formal employment. In emerging markets and developing economies that have more progressive personal income tax and social security contributions systems, women tend to work longer hours.
Parental care policies are important in maintaining participation by women in the workplace after they become parents. Access to paid employment-protected parental leave such as maternity allowances is important in supporting labour force participation and increasing their financial independence. Analysis suggests that female labour force participation rates are higher where the duration of paid maternity leave is longer, up to certain point. The incentives resulting from parental policies therefore depend on their duration and on the eligibility requirements.
Childcare services are another important element in encouraging female labour force participation. Women are more likely to look for employment if there are policies to improve the availability, affordability, and quality of childcare. Governments might consider subsidized childcare or tax credits, and stipulate quality standards for childcare providers. Brazil’s offers state guarantees of access and priority enrolment to vulnerable families; and the “Chile Crece Contigo” program provides childcare subsidies for young children of low-income families. Colombia provides for childcare tax deductions.