Relative income concerns and the rise in married women's employment

Abstract

We ask whether women's decisions to be in the workforce may be affected by the decisions of other women in ways not captured by standard models. We develop a model that augments the simple neoclassical framework by introducing relative income concerns into women's (or families') utility functions. In this model, the entry of some women into paid employment can spur the entry of other women, independently of wage and income effects. We show that relative income concerns can help to explain why, over some periods, women's employment rose faster than can be accounted for by the simple neoclassical model. We test the model by asking whether women's decisions to seek paid employment depend on the employment or incomes of other women with whom relative income comparisons might be important, including sisters and sisters-in-law. The evidence is largely supportive of the relative income hypothesis.