Moody's: Effective policies to promote female employment will boost sovereign creditworthiness

Moody's Investors Service says that policies to promote greater female labor market participation in high-income countries will, if they are successful, boost sovereign creditworthiness.

In particular, sovereign creditworthiness will improve through three main channels: economic growth by partly offsetting shrinking labor forces, government balance sheets by widening the tax base and easing pension pressure, and, potentially, financial stability by shoring up household finances.

Among high-income economies in member countries forming the Organisation for Economic Co-operation and Development, Moody's sees the greatest scope for positive credit impacts in countries where populations are ageing fastest and where governments have highlighted female participation as a key priority, particularly Japan (A1 stable) and Korea (Aa2 stable).

Moody's report identifies three main advantages to sovereigns of higher female employment: 1) a higher number of workers and higher productivity growth would partly offset the growth impact of shrinking of working-age populations, 2) a broader tax revenue base would enhance public finances, and 3) a higher share of two-income households would likely support greater financial stability.

Moody's estimates that Korea's and Japan's potential growth could be lifted by 1.0 and 0.75 percentage points respectively, if the gap between female and male labor force participation rates closed over the next 15 years. Evidence also suggests that higher female participation can boost productivity, for example, when higher educated women become fully integrated into the work force.

Moody's also points out that raising female employment rates widens the tax base, which helps offset the negative fiscal effect of rising spending, as the population ages. And, a broader revenue base mitigates in turn the need for spending cuts or tax increases to preserve the health of public finances; thereby maintaining a sovereign's competitiveness.

Moody's explains that policies to boost female participation entail near-term fiscal costs through infrastructure spending and fiscal incentives. While the nearer-term net fiscal impact depends on overall fiscal policy choices and cultures, in the longer term, the boost to revenue from higher female participation should offset the initial costs.

Moody's notes that household debt has increased in many advanced economies over the past decade. The increase in and diversification of household income sources as a result of increased female integration into the labor market should act as a buffer to higher individual debt levels and consequently reduce the risk of broader financial instability.

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