Economics: Working mothers are the economy's flexible friends

Economics: Women's value as workers is too high to lose just because they become mothers

ONE OF the core debates about how relaxed we can afford to be over inflation concerns the wages outlook given the fall in unemployment.

Although wage inflation has certainly picked up in the course of the recovery, it has not accelerated as much as seasoned observers feared. Inflation optimists say that pay is unlikely to prove a problem this time around because of structural improvements in the jobs market. These could have reduced what economists call the "non-accelerating inflation rate of unemployment" - Nairu - allowing joblessness to fall further than in previous cycles without fuelling wage and price rises.

The precise nature of these structural improvements is usually left vague: it is put down to the greater flexibility of the jobs market without spelling out exactly what is more flexible. Has weaker employment protection legislation helped tame wages? Or the spread of temporary work and contracting out?

This matters when assessing government policies that will temper Conservative policies, such as the Social Chapter and the fairness at work White Paper. An article in the latest Bank of England "Quarterly Bulletin" offers an important and surprising clue to the type of flexibility that has allowed a step fall in unemployment: it is mainly babies or, more precisely, their mothers.

As someone who is on maternity leave looking after my contribution to the future labour supply, the suggestion that working mothers have made such an important contribution to taming inflation caught my eye. Phil Evans, the author, notes that while the male unemployment rate has fallen since the trough of the recession, it has not yet regained the low point it attained at the peak of the last business cycle. On the other hand, female unemployment has fallen significantly lower than it did last time around.

On the new survey-based measure of joblessness, the overall unemployment rate dropped by 1.9 percentage points between its peak in 1984 and the subsequent one in 1993, with the female rate was down 5 percentage points and the male rate actually up by 0.5 points. Likewise, female unemployment is now below its 1990 trough, whereas male unemployment has not yet matched its low (see Chart 1).

So it seems that if this economic recovery has been able to go further in expanding the jobs market than last time around, the explanation must be sought in the employment patterns of women. Logically, there are three ways measured unemployment can fall. Fewer women can become unemployed, more can leave unemployment, or the length of time for which they are typically out of work can shorten.

All these measures vary in the obvious way over the business cycle - for example, redundancies, and therefore inflows into unemployment, rise during recessions. The evidence shows that women have always had shorter spells of joblessness than men. Before 1990, however, they had a much higher rate of inflow into unemployment.

This has changed dramatically during the 1990s. All of a sudden, in 1991, the female inflow rate dropped below the male rate in the kind of decisive change rarely apparent in economic data (chart 2). The abrupt change could more than account for the overall trough-to-trough decline in the jobless rate. But why did it happen?

A further clue is that the lion's share of the decline can be accounted for by a sharp fall in unemployment among the mothers of young children. The jobless rate of this subgroup fell from 27.2 per cent in 1984 to 9.8 per cent in 1996.

The paper has two explanations for this. One is the introduction of Family Credit in 1988. The new benefit made it financially more rewarding to be in work after the birth of each child. Family Credit was also paid to the mother directly in almost all cases. In 1987, 210,000 families claimed Family Income Support, but in 1988, 470,000 claimed Family Credit. The government's new Working Families Tax Credit, which will replace Family Credit, could benefit more families, but will transfer payment from mothers to fathers in many cases, so it will have a mixed effect on female unemployment.

The other influence has been a change in the behaviour of employers. It might not feel like it to most working mothers, but many companies have become more willing to introduce suitable work arrangements. More have maternity leave arrangements that tempt women to return to their old job after the birth of their child. There have also been dramatic increases in arrangements such as job-shares, flexi-time, some working from home and longer career breaks.

As a result, according to surveys carried out by the Policy Studies Institute, the probability that mothers of young children return to work climbed from 46 per cent in 1988 to 67 per cent in 1996. The proportion returning to their old employer rose from 35 to 58 per cent.

Companies have not become more family-friendly from the goodness of their hearts, however. The economist's explanation for the spread of favourable practices lies in the fact that the benefits to employers of retaining female employees has risen relative to the cost of the schemes. With many women also having their children later, their value as workers is too high to lose just because they become mothers.

A fascinating implication of this is that, while greater flexibility has helped make Britain's jobs market work better, it is not the kind of flexibility that usually springs to mind. It is not greater flexibility for employers to exploit workers, but greater flexibility for employees that seems to account for an improvement in the supply-side performance of the economy. There is a gratifying moral here for all parents who work - and, indeed, for all employees.

"Why has the female unemployment rate in Britain fallen?" by Phil Evans, Bank of England Quarterly Bulletin August 1998.

d.coyle@independent.co.uk