Corts OutsourcingHouseholdProduction 2013

NORC at the University of Chicago
Outsourcing Household Production: Foreign Domestic Workers and Native Labor Supply in
Hong Kong
Author(s): Patricia Cortés and Jessica Pan
Source: Journal of Labor Economics , Vol. 31, No. 2 (April 2013), pp. 327-371
Published by: The University of Chicago Press on behalf of the Society of Labor
Economists and the NORC at the University of Chicago
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Outsourcing Household Production:
Foreign Domestic Workers and
Native Labor Supply in Hong Kong
Patricia Cortés, Boston University
Jessica Pan, National University of Singapore
We explore how the availability of affordable live-in help provided

by foreign domestic workers ðFDWsÞ in Hong Kong affected na-
tive women’s labor supply and welfare. First, we exploit differences
in the FDW program between Hong Kong and Taiwan. Second,
we use cross-sectional variation in the cost of a FDW to estimate
a model of labor force participation and FDW hire. FDWs in-
creased the participation of mothers with a young child ðrelative
to older childrenÞ by 10–14 percentage points and have generated
a monthly consumer surplus of US$130–US$200. By reducing child
care costs through immigration, this is a market-based alternative to
child care subsidies.
I. Introduction
In the past decade, there has been a surge in the number of low-skilled
female workers from developing countries such as the Philippines, In-
We are grateful to David Autor, Marianne Bertrand, David Card, Matthew

Gentzkow, Chris Hansen, Divya Mathur, Jesse Shapiro, Wing Suen, and seminar
participants at the University of Hong Kong; University of Chicago; Society of Labor
Economists annual meeting; Princeton University; Federal Reserve Bank of Atlanta;
University of California, Berkeley; Boston College; Boston University; Dartmouth;
National Bureau of Economic Research Summer Institute; and the 3rd Asia Joint
Workshop in Economics for numerous helpful comments and suggestions. We are
also grateful to the Hong Kong Census and Statistics Department for providing the
[ Journal of Labor Economics, 2013, vol. 31, no. 2, pt. 1]

© 2013 by The University of Chicago. All rights reserved.
0734-306X/2013/3102-0004$10.00
327

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
328 Cortés/Pan
donesia, Thailand, and Sri Lanka migrating to newly industrialized

countries as domestic helpers. These women enter the host countries
under explicit programs that grant temporary visas permitting them to
work as private household workers but restrict them to this sector. These
movements generate large labor flows for both the source and the host
countries. For example, each year, close to 100,000 Filipinas migrate to
work as domestic helpers and caregivers. In Singapore, by 2000, there
were approximately 100,000 migrant domestic helpers in the workforce,
amounting to one foreign maid in eight households ðYeoh, Huang, and
Gonzalez 1999Þ. In Hong Kong, the proportion of households hiring at
least one foreign domestic worker ðFDWÞ increased from less than 2% in
1986 to close to 8% in 2006. Among households with young children,
more than one in three hired at least one FDW. FDWs are also very
common in Bahrain, Kuwait, and Saudi Arabia.
Temporary domestic worker programs have also been present in the
West for some time, albeit at a much smaller scale. Since the mid-1980s,
the United States and the United Kingdom have had au pair programs that
allow temporary domestic workers, usually students, to work in house-
holds. Canada has a foreign live-in caregiver program, and Israel has a spe-
cial visa program for foreign caregivers. Notably, even though the United
States does not have a formal foreign domestic helper program, Cortes
and Tessada ð2011Þ estimate that low-skilled immigrant women represent
more than 25% of the workers in private household occupations, al-
though they represent only 1.9% of the labor force. They also find that
low-skilled immigrants in the United States are generally regarded as pro-
viding more flexible household services at lower prices than those pro-
vided by native workers and companies. In the light of the “nannygate”
controversies in the Clinton administration in the early 1990s, formal guest
worker programs have also been discussed as part of immigration reform
in the United States.1
The economic implications of the temporary migration of private
household workers can differ substantially from that of conventional low-
skilled migration. As these temporary domestic helpers generally substi-
tute for time spent in household production, they potentially influence the
labor supply and fertility decisions of women, particularly the middle and
highly skilled ðKremer and Watt 2008; Cortes and Tessada 2011; Farre,
Gonzalez, and Ortega 2011Þ. Moreover, FDWs are not permitted to work
in other occupations, thereby limiting their effect on the labor market out-
comes of similarly skilled natives.
data and for their invaluable assistance. Contact the corresponding author, Patricia
Cortes, at pcortes@bu.edu.
1
For example, in 2006, Senator Arlen Specter introduced a bill to create a Guest
Program, where workers would not have the right to become permanent residents or
citizens ðComprehensive Immigration Reform Act, S. 2611, 109th Cong. ½2006Þ.

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Outsourcing Household Production 329
This article exploits a policy change in the late 1970s that enabled the
systematic importation of FDWs into the Hong Kong labor market to
investigate the effects of the availability of affordable and flexible full-
time, live-in domestic help on native Hong Kong women’s labor supply
decisions and the welfare consequences of this policy. This is a unique
setting to analyze the labor market effects of FDW programs, thus pro-
viding implications for debates surrounding such temporary worker pol-
icies in other countries.
This study also adds a different dimension to the growing literature that
studies the link between child care costs and maternal labor supply. Most of
the recent work in this area assesses the effects of government policies that
reduce the cost of child care through child care subsidies ðe.g., Baker,
Gruber, and Milligan 2008; Lefebvre and Merrigan 2008Þ, admission rules
to public schools ðGelbach 2002Þ, and the introduction of public kinder-
gartens ðCascio 2009Þ.2 The FDW program in Hong Kong allows us to
consider the effects of an alternative market-based intervention that re-
duces the price of child care through the increased availability of domestic
helpers. By allowing FDWs to enter the labor market, the government does
not incur direct costs of providing child care subsidies. Moreover, native
women choose, on the basis of the prevailing market prices, whether to
purchase domestic services. To our knowledge, this article is the first em-
pirical study that attempts to causally establish the labor supply effects of
this alternative market-based approach to reducing child care costs through
the systematic importation of foreign domestic helpers.3
Furthermore, day care subsidies only reflect a fraction of the total costs
that married women face in child rearing and household production. Most
child care centers do not admit children below age 3 and are open only
during limited hours ðTam 2001Þ. Live-in foreign domestic helpers, how-
ever, not only provide essentially all-day child care but also perform other
household tasks such as cooking and cleaning ðChan 2006; Kremer and
Watt 2008Þ. In some respects, one can regard FDWs as providing one of the
most complete forms of outsourcing household production. Therefore,
this is a unique setting to consider the responsiveness of maternal labor
supply to the availability of an affordable and flexible alternative to their
time in the household and how much this option is valued.
Our empirical strategy is based on two complementary approaches—
the macro approach exploits differences in the availability and relative
2
Earlier work exploring this question uses variation in household expenditures
in day care to estimate the price of child care ðe.g., Blau and Robins 1988; Connelly
1992; for a summary, see Blau and Currie 2006Þ. These studies find a very large
range of elasticities of labor supply, stretching from 0 to 21.26 ðBlau 2003Þ.
3
Suen ð1993Þ and Chan ð2006Þ provide some evidence that hiring a live-in do-
mestic worker is associated with a higher likelihood of female labor force partici-
pation ðLFPÞ in Hong Kong, but neither study addresses causality concerns.

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330 Cortés/Pan
cost of hiring a FDW in Hong Kong and Taiwan over time and within-
country variation in the demand for child care services. The micro ap-
proach uses cross-sectional variation at the individual level in the cost of
hiring a FDW to calibrate a structural model of female labor supply and
the decision to hire a domestic helper. Given that both approaches have
their limitations, comparison of the estimates from the two approaches pro-
vides a test of the robustness and validity of our results.
The macro approach uses variation in the availability of FDWs in Hong
Kong and Taiwan over time as well as differences in the demand for
household production across mothers with older versus younger children.
This triple-difference procedure compares the growth in employment
rates of mothers with a younger child ðyoungest child aged 0–5Þ to moth-
ers with an older child ðyoungest child aged 6–17Þ in Hong Kong and
Taiwan from 1978 to 2006. This approach allows us to separately identify
the impact of the availability of FDWs on female labor supply from effects
that might arise from jurisdiction-specific labor market shocks that may
differentially affect female employment trends in Hong Kong and Taiwan
ðcaptured by the comparison of mothers with children of different agesÞ and
unobserved differences in the demand for mothers of older versus younger
children ðcaptured by the cross-country comparisonÞ.4
Our triple-difference estimates indicate that, on the aggregate, the for-
eign worker program in Hong Kong is associated with an 8–12 percentage
point increase in employment of females with a young child, compared
to females with a relatively older child, from 1978 to 2006. Consistent with
the view that natives with a higher opportunity cost of time are more likely
to purchase such domestic services and supply more labor, we find that this
increase is almost entirely driven by the increase in employment rates of
middle and highly skilled females.
The micro approach uses pooled cross-sectional data from the 2001
and 2006 Hong Kong population censuses to estimate a model of female
labor supply, where the decision to participate in the labor force and the
decision to hire a FDW are modeled jointly. One advantage of the struc-
tural model is that because the model is derived from utility maximiza-
tion, the estimates can be interpreted as structural determinants of the de-
mand for outsourcing household production. In particular, we can estimate
the degree of complementarity between the two decisions and thus infer
the extent to which foreign domestic helpers substitute for native wom-
4
While the focus of this article is on the effects of FDWs on maternal labor
supply primarily through their effect on child care costs, we acknowledge that
FDWs may also be hired to take care of elderly parents. We consider some im-
plications of this on female labor supply decisions but find little evidence that
labor supply decisions were affected for women with elderly parents due to the
availability of FDWs.

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en’s time spent in household production. Finally, we can also use the esti-
mated parameters to calculate welfare effects of the availability of FDWs
and simulate counterfactual labor supply decisions in the absence of the
program.
We use a multinomial probit model to study how women choose be-
tween the four possible LFP-FDW states. To separately identify the de-
gree of complementarity between the two decisions from correlation in
unobservables, we propose using the number of rooms in a house as an
instrument. The identification assumption here is that the number of
rooms affects the utility derived from hiring a FDW but does not directly
affect the utility from participating in the labor force. This exclusion re-
striction is motivated by the fact that most Hong Kong households are
relatively space constrained and that conditional on household wealth, the
number of rooms should be uncorrelated to a woman’s unobserved pro-
pensity to work.
To provide some assurance that the instrument is not merely spuriously
picking up the effects of unobserved preferences for work, household
wealth, or income effects, we estimate a series of placebo tests on the
reduced form of the effect of the number of rooms on the LFP decisions
for groups of women with very low demand for domestic help, such as
married women with no children and low-income households. We also con-
sider a sample of households in government-subsidized sale flats, where
the particular nature of the housing allocation restricts the mobility of
these households. We also provide suggestive evidence that the validity
of the instrument is not compromised by households moving into houses
with a larger number of rooms when they wish to hire a domestic helper.
We find evidence of strong complementarity between LFP and the
decision to hire a FDW: reductions in the relative wage of FDWs signif-
icantly increase the probability that a woman decides to join the labor
force. This complementarity is especially strong for mothers of very young
children, implying a significant degree of substitution between the moth-
er’s time and the domestic worker’s time in caring for the child. Our welfare
estimates indicate that mothers of very young children, women with a high
education level, and women with high unearned income have benefited
most from the availability of FDWs.
To compare the estimates from our micro and macro approaches, we
use the structural estimates to simulate the optimal labor supply decisions
of women, assuming that they faced the 1981 relative cost of hiring a
FDW instead of the 2001 relative cost. The simulated micro difference-
in-difference estimate of the effect of the FDW program on female labor
supply is between 12 and 13 percentage points. While each approach has
its limitations, the similarity between the macro and the micro estimates,
despite the use of different sources of variation, suggests that our estimates

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332 Cortés/Pan
of the effect of the FDW program on female labor supply are robust and
reliable.
These findings have important implications for understanding the
sources of persistent gender differences in employment. Our findings are in
line with previous studies that have demonstrated that maternal labor
supply is sensitive to the availability and price of child care. Our estimates
imply an elasticity of the LFP of mothers of young children ð0–5Þ to the
cost of hiring a FDW of 20.74, which is about twice as large as well–
identified elasticities for the United States and Canada, which gravitate
around 20.35 ðBaker et al. 2008Þ. This larger elasticity is possibly due to the
substantially more flexible household services offered by FDWs as com-
pared to child care centers. Finally, our results also suggest that an immi-
gration policy that permits temporary FDWs can have important policy
implications for encouraging skilled women to enter the labor market and
to bridge the gender gap.
II. Data and Background

A. Data Description
The data for Hong Kong are from the 1976–2006 population census
and bi-census and the 1985–2006 General Household Survey ðGHSÞ. For
Taiwan, we use the 1978–2006 Manpower Utilization Survey ðMUSÞ. Ad-
ditional details on the data sources and variable construction are provided
in appendix B, available in the online version of Journal of Labor Econom-
ics. For the cross-country macro approach, we combine the 1976–81 Hong
Kong census, 1985–2006 Hong Kong GHS, and the 1978–2006 Taiwan
MUS. For the micro approach, we use data from the 5% sample of the
2001 and 2006 Hong Kong population census and bi-census.5
B. Foreign Domestic Helper Policy in Hong Kong

In 1974, the Hong Kong government opened a legal immigration channel
that permitted domestic workers from other Asian countries to work in
Hong Kong. Before this, only unskilled workers from mainland China
were allowed to enter the region. Concurrent developments in the Phil-
ippines ensured a ready supply of domestic helpers; the Labor Code of
1974 initiated by President Marcos marked the beginning of the Phil-
ippines’s formal labor migration program. Coupled with the demand for
domestic help among highly skilled natives in Hong Kong, these develop-
ments led to a rapid rise in the number of FDWs in Hong Kong starting in
the late 1970s and early 1980s.
5
We are not able to use earlier censuses or the GHS, as these data sets do not
have information on the number of rooms in the household, which is needed to
identify the structural model.

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Hong Kong has a relatively liberal policy toward these foreign work-
ers.6 There is no quota on the number of foreign domestic helpers in Hong
Kong, and employers are free to hire these workers so long as they fulfill
the requisite conditions set out in the standard contract ðChan 2006Þ. The
main restrictions are that the FDW has to work and reside in the em-
ployer’s residence and that households have to meet an income criteria in
order to hire a foreign maid. In 2008, this was set at the median household
income ðHK$15,000Þ or the equivalent in assets ðHong Kong Immigration
Department 2008Þ. These workers are entitled to a minimum wage and are
protected under the Employment Ordinance and the Standard Contract
for the Employment of a Foreign Domestic Helper. Figure 1 shows the
evolution of the minimum monthly wage for FDWs ðthere is no mini-
mum wage for nativesÞ and the average monthly wages for native married
women who were full-time employees ðdefined as those working 35-plus
hours per weekÞ.7 As observed, the relative price of FDWs decreased
monotonically until 2001. Since then it has stayed relatively stable, with
a slight increase from 2000 to 2005. Figure 2 shows the evolution of the
relative wage of native married women to the minimum wage for FDWs
separately by the education level of native women.
To provide a sense of how rapidly this program has expanded, figure 3
presents the share of native married women with a child aged 0–17 with at
least one FDW. Consistent with the patterns of the change in relative wages
of native women and FDWs by education group over time in figure 2, we
find that skilled women are more likely to hire FDWs and that this trend
increased steadily from the mid-1970s to the late 1990s. Starting in 2000, the
share hiring a FDW has remained fairly constant, and, by 2006, close to
60% of highly educated married women with a child had a FDW compared
to 20% of middle-educated women. For unskilled women, the share hiring
FDWs has increased slightly over time but continues to be significantly
smaller than that of the other two groups. In figure A1, available in the
online version of Journal of Labor Economics, we also consider the trends
separately for women with their youngest child aged 0–5 or 6–17 and those
with no children. We find similar patterns overall, with the demand for
domestic help coming almost exclusively from households with children.8
6
Women from mainland China are not eligible to enter Hong Kong as FDWs
ðChiu 2004Þ.
7
The minimum wage binds throughout. For example, on the basis of our cal-
culations from the 2001 Hong Kong census, 45% of households with a FDW paid
exactly the minimum wage ðHK$3,670Þ, and the average was only slightly higher
at HK$3,757. Historical information on the minimum wage for domestic helpers
is from the Labour Bureau ð2003Þ.
8
This is true even among highly skilled women and might be explained by a
number of factors such as the cost in terms of the privacy loss of having a non-
family member living in the house and the high cost of space in Hong Kong.

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FIG. 1.—Trends in foreign domestic worker ðFDWÞ minimum wage and native
married women’s average wage in Hong Kong. Sample includes all married women
aged 25–54 in Hong Kong who are not foreign domestic helpers. Monthly wages are
deflated using the consumer price index based on 2000 Hong Kong dollars.
FIG. 2.—Relative wage of native married women to minimum wage of foreign

domestic workers by education level in Hong Kong. Low education is defined as
having at most a primary education, medium education as having more than a
primary education but less than a college degree, and high education as having a
college degree or a graduate degree. Sample includes all married women aged 25–54
in Hong Kong who are not foreign domestic helpers. Monthly wages are deflated
using the consumer price index based on 2000 Hong Kong dollars.

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FIG. 3.—Share of native married women with a child aged 0–17 with a foreign
domestic worker ðFDWÞ, by education level in Hong Kong. Sample includes all
married women aged 25–54 with at least one child aged 0–17 in Hong Kong who
are not foreign domestic helpers.
A couple of statistics show the amount of substitution of household

work that takes place in households that decide to hire a FDW. In the
time-use supplement of the 2001 GHS, 35% of FDWs report doing 100%
of the household work, and at least 70% report doing more than 70% of
the household work. In sum, the FDW program in Hong Kong has
provided native women with a relatively inexpensive and reliable source of
housekeeping and child care services.
III. Macro Approach: Hong Kong versus Taiwan

As shown in figure 1, there has been substantial time-series variation in the
relative cost of hiring a domestic worker in Hong Kong over the past couple
of decades. To estimate the effect of the FDW program on the female labor
supply, the ideal quasi experiment would involve comparing female em-
ployment rates in regions that introduced a FDW program to regions that
did not, assuming that regions exogenously decide whether to implement
such a scheme. As Hong Kong is a relatively small country and the FDW
policy was implemented at a national level, we cannot exploit geographic
variation within Hong Kong. Looking outside Hong Kong, however, sug-
gests that we can use Taiwan as a possible control group given the close prox-
imity as well as the economic and cultural similarity of the two countries.9
9
Ideally, we would have liked to use Taipei as the control group, as Taiwan is a
much larger country with a significant fraction of the population living in smaller
cities and rural areas. Unfortunately, this is not feasible, as doing so would dras-

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336 Cortés/Pan
The identification strategy that underlies the macro approach exploits

differences in the ease of engaging a foreign domestic helper in Hong
Kong and Taiwan. The official foreign domestic helper scheme in Taiwan
began in 1992 when the Council of Labor Affairs granted work permits to
domestic caretakers. When the program was first introduced, FDWs could
only be employed to take care of the severely ill or disabled. Subsequently,
a limited number of quotas were released for the employment of domestic
helpers to care for children under age 12 or elderly members above age 70
ðLan 2003Þ. Currently, there are two main programs through which for-
eign nationals can work as domestic helpers in Taiwanese households—the
foreign domestic helper scheme and the foreign caretaker scheme. In recent
years, the program has been scaled down even further and only permits
special applications for foreign investors and families requiring special
child or elderly care. The bulk of FDWs to Taiwan have since entered under
the foreign caretaker scheme. This scheme, however, requires applicants to
demonstrate that the person under their care has a medical condition that
requires 24-hour care. This is in sharp contrast to the program in Hong
Kong, where household income is the only eligibility requirement.
As a result of these restrictions, the magnitude and scope of the FDW
program in Taiwan is far smaller than that of Hong Kong’s. In 2001,
FDWs composed approximately 1.1% of the labor force in Taiwan, com-
pared to 5.3% in Hong Kong.10 This is reflected in tabulations from the
Female Employment and Marriage Survey, which is similar to the MUS but
includes additional questions about women’s family and career situations.
In 2000, 72% of children aged 0–3 had their parents as primary caregivers,
21% were taken care of by grandparents, 6.5% by nannies, 0.33% by day
care, and a mere 0.2% by FDWs.11
A. Identification
The basic idea of the macro approach is to exploit differences in the
scope of program adoption in Hong Kong and Taiwan and to examine
how female LFP changed differentially over time across both countries.
Hong Kong experienced rapid economic growth during the period in
tically reduce the sample size. We discuss some results from restricting the focus to
the larger urban cities in Taiwan in Sec. III.C.2.
10
The Taiwan estimate is from the Yearbook of Labor Statistics published by
the Council of Labor Affairs ðhttp://statdb.cla.gov.tw/html/year/d13010.htmÞ. For-
eign domestic helpers in Taiwan are defined as the sum of nursing workers and home
maids. The Hong Kong statistic is based on our tabulations from the Hong Kong
census.
11
The exact question asked in the Female Employment and Marriage Survey is,
“Who is/was the primary caregiver of your youngest child when he/she was less
than 3 years old?”

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which the FDW program was established.12 As the economy grew, wages
and unearned incomes of women rose; therefore, changes in the observed
quantities of foreign domestic helpers and the LFP of women cannot be
fully attributed to the creation of the FDW program. That is, part of the
increase in female LFP in Hong Kong over this time period is due to de-
mand shifts, unrelated to the FDW program. Furthermore, we do not have a
clear before-and-after policy change within Hong Kong, as the FDW pro-
gram was adopted gradually starting from the late 1970s. Nevertheless, as
Taiwan experienced a similar growth path and shares important economic
and cultural similarities to Hong Kong ðthis is further elaborated in Sec. III.
BÞ, the comparison of female LFP rates across the two countries allows us to
address these empirical challenges. Assuming that Taiwanese women expe-
rienced labor demand shifts similar to those of their counterparts in Hong
Kong, the differential change in female LFP over time across the two
countries can be attributed to the differential increase in female labor supply
induced by the availability of FDWs.
A natural concern with the simple difference-in-difference comparison
of female LFP rates between Hong Kong and Taiwan over time is that it
is likely to pick up country-specific shocks that are unrelated to the FDW
program.13 To alleviate these concerns, we introduce a third difference by
comparing the LFP rates of mothers with older children ðyoungest child
aged 6–17Þ to that of mothers with younger children ðyoungest child aged
0–5Þ. As the age structure of the youngest child is a reasonably good proxy
for the demand for household services, mothers with younger children are
likely to have a greater response to declines in the relative prices of domes-
tic help, as compared to mothers of older children. As shown in figure A1,
among native women with high education, starting from the early 1980s,
just a few years after FDWs were first allowed into Hong Kong, mothers
with a youngest child aged 0–5 were about 20–30 percentage points more
likely to hire a FDW than were women whose youngest child was 6–17
years old. Among native women with medium education, demand for
FDWs only started increasing in the early 1990s. By the late 1990s, those
with youngest children aged 0–5 were about two times more likely to hire a
FDW than were women with older children. Among mothers with low
12
The gross domestic product per capita in Hong Kong ðTaiwanÞ increased
steadily from about US$7,500 ðUS$4,500Þ to US$45,000 ðUS$31,000Þ from 1980 to
2008.
13
For example, Hong Kong and Taiwan have experienced large demographic
and economic changes over the past 2 decades that may have differentially affected
female LFP rates across the two countries ðLui and Suen 2005; Vere 2005Þ. Sec-
tion III.B provides some suggestive evidence that observed compositional changes,
e.g., in terms of age, education, presence of a young child, and unearned income, have
evolved quite similarly over time for both countries.

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
338 Cortés/Pan
education, the employment of FDWs remains very low for women with
and without young children over the entire time period.
The third difference, by child age structure, allows us to introduce
country and country-year fixed effects to account for differences in un-
derlying trends in female employment across countries and unobserved
country-specific demand shocks. Similarly, differential trends and unob-
served shocks that affect mothers of younger versus older children can
also be captured in the model. This triple-difference strategy implies that
differential trends in demographic and economic conditions in Hong
Kong and Taiwan that are unrelated to the FDW program will only bias
our estimates if they have differential effects across women with younger
versus older children within each country. We interpret the difference in
the growth of female LFP of these two groups, adjusting for composition
changes, as providing a measure of the impact of the foreign worker policy
on female labor supply in Hong Kong. The key identifying assumption is
that in the absence of the FDW program, the relative growth of female
LFP rates across mothers with younger and older children in Hong Kong
would be similar to that in Taiwan.
B. Taiwan as a Control Group

1. Economic and Demographic Trends in Hong Kong and Taiwan
As first evidence that Taiwan is a reasonable control group for Hong
Kong, we show that the two countries experienced very similar trends in
the main observed determinants of the labor supply for women. Figure 4
depicts the predicted LFP of mothers in Taiwan and Hong Kong from a
cross-sectional model using as explanatory variables age dummies, ed-
ucation dummies, husband’s income percentile dummies, a dummy for
youngest child aged 0–5, and a dummy for Hong Kong. The model is
estimated using all available years. As observed, the evolution of LFP due
solely to compositional changes in the explanatory variables is remarkably
similar across the two countries. Basic descriptive statistics of demographic
and economic variables are in table 1. Although most of the differences
between Hong Kong and Taiwan are statistically significant, the magni-
tude of the differences are relatively small considering that Hong Kong
and Taiwan constitute two different countries. In appendix A, available in
the online version of Journal of Labor Economics, we further motivate the
use of Taiwan as a control group by providing a description and com-
parison of the structure of the child care market in Taiwan and Hong
Kong.
2. Shifts in the Demand for Child Care

As in many other countries, higher returns to education and the increase
in the price of women’s skills have generated a substantial increase in the

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FIG. 4.—Evolution of the labor force participation ðLFPÞ of mothers due to

changes in the distribution of observables in Hong Kong and Taiwan. Sample in-
cludes all native married women aged 25–54 in Hong Kong and Taiwan. The cross-
sectional model, estimated using all available years, uses the following explanatory
variables: age dummies, education dummies, husband’s income percentile dummies,
a dummy for youngest child aged 0–5, and a dummy for Hong Kong.
LFP of married women and mothers in Hong Kong and Taiwan. Figure 5
presents the evolution of the average monthly wage and the 10th per-
centile wage ðin constant local unitsÞ for women in Hong Kong and Tai-
wan, and for Hong Kong, the minimum wage for FDWs. The purpose of
this figure is threefold; first, to show that the average female wage has
followed similar paths in the two countries; second, assuming that maids
and nannies are drawn from the bottom of the wage distribution, to show
the prices of outsourcing household production in the absence of FDWs;
third, to show that the presence of FDWs has significantly reduced the
relative price of outsourcing household production in Hong Kong as
compared to Taiwan.
C. Triple-Difference Estimates
1. Graphic Evidence
Figure 6 provides graphic evidence that the trends in LFP of females
with a younger child aged 0–5 and females with a relatively older child
aged between 6 and 17 has evolved quite differently across the two coun-
tries starting in the late 1980s. In particular, while the change in employ-
ment of females with younger and older children was relatively similar

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340 Cortés/Pan
Table 1
Descriptive Statistics for the Macro Approach: Married Mothers Aged 25–54
Youngest Education
Child Aged Number of
0–5 Age Low Medium High LFP Observations
1978–81:
Hong Kong .487 38.085 .718 .262 .020 .391 9,348
Taiwan .465 35.645 .776 .205 .019 .360 17,551
Difference
p-value .000 .000 .000 .000 .835 .000
1985–87:
Hong Kong .458 36.645 .561 .413 .026 .424 18,151
Taiwan .457 34.836 .611 .359 .031 .480 29,658
Difference
p-value .873 .000 .000 .000 .004 .000
1989–93:
Hong Kong .407 37.067 .446 .522 .032 .411 38,760
Taiwan .423 35.143 .429 .529 .042 .504 47,540
Difference
p-value .000 .000 .000 .040 .000 .000
1994–98:
Hong Kong .381 38.087 .347 .606 .048 .443 144,305
Taiwan .416 35.963 .260 .681 .059 .552 46,476
Difference
p-value .000 .000 .000 .000 .000 .000
1999–2002:
Hong Kong .340 39.090 .270 .660 .070 .488 127,549
Taiwan .397 36.697 .136 .783 .081 .581 34,003
Difference
p-value .000 .000 .000 .000 .000 .000
2003–6:
Hong Kong .294 39.818 .196 .700 .104 .532 110,105
Taiwan .361 37.374 .076 .815 .109 .609 30,016
Difference
p-value .000 .000 .000 .000 .021 .000
SOURCES.—Hong Kong data—1976, 1981 Hong Kong census and 1985–2006 General Household
Survey; Taiwan data—1978–2006 Manpower Utilization Survey.
NOTE.—LFP 5 labor force participation. Sample is restricted to married women aged 25–54 who have
at least one child aged 0–17. Low education is defined as having at most a primary education, medium
education as having more than a primary education but less than a college degree, and high education as
having a college degree or a graduate degree.
before 1981 in both countries, LFP rates of women with younger children
in Hong Kong accelerated starting in the late 1980s, such that by 2006, it
actually exceeded that of women with older children. This is in stark
contrast to Taiwan, where the growth in employment for the two groups of
women remained virtually parallel over the entire sample time period from
1976 to 2006.
In figure 7, we separately graph the trends in LFP rates of women in the
two countries by education level. All of the catching up in LFP of younger
women in Hong Kong can be attributed to trends in the LFP of higher-

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FIG. 5.—Evolution of married native women’s wages in Hong Kong and Tai-
wan. Monthly wages are deflated on the basis of 2000 local currency units. The ex-
change rate between the Hong Kong and the Taiwan dollar fluctuated between 3.4
and 4.4 Taiwan dollars per Hong Kong dollar over this period.

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342 Cortés/Pan
FIG. 6.—Labor force participation ðLFPÞ of native mothers by age of youngest

child in Hong Kong and Taiwan. Sample includes all native married women aged
25–54 with at least one child aged 0–17.
and middle-educated women. Highly educated mothers, whose youngest

child is less than 5, started participating in the labor market at almost
the same rate as mothers of older children before 1986. Since then, they
generally have higher participation levels compared to mothers of older

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FIG. 7.—Labor force participation of native mothers by age of youngest child

and education level in Hong Kong ðHKÞ and Taiwan ðTWÞ.
children. Highly educated mothers of young children in Taiwan, however,

show very high levels of LFP, and although the gap between their LFP rates
and that of mothers with older children is small, it has stayed permanently
below. The catch-up in LFP of medium-skilled mothers with young chil-
dren in Hong Kong started in the early 1990s. They reach participation
levels comparable to those of mothers with older children by the late 1990s
but diverge again at the end of our period of analysis.
These employment patterns are broadly consistent with trends in the
relative wages of native women as a fraction of the wages of FDWs as
shown in figure 2. Relative wages of high-skilled women increased rapidly
in the early 1980s and, by the mid-1980s, were about four times that of the
minimum wage of FDWs. The relative wages of medium-skilled women

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
344 Cortés/Pan
increased steadily over the time period, albeit at a slower pace than that of
high-skilled women. Convergence in LFP rates for medium-skilled mothers
with younger children occurred in the mid-1990s, when relative wages
were about three times that of the minimum wage of FDWs. The em-
ployment trends of lower-educated females in both Hong Kong and Tai-
wan appear to be mostly similar for both groups over the sample time
period. Relative wages for this group of mothers increased relatively slowly
over time but appears to be too low to justify the cost of hiring a FDW.
Overall, these findings are consistent with the view that higher-educated
women are more likely to respond to changes in the price of domestic
services due to their higher opportunity cost of household production.
Nonetheless, these figures do not control for changes in the composi-
tion of both groups of women over time—to the extent that there may be
differential changes in the composition of mothers with older or younger
children across time, these effects may confound the aggregate trends that
we observe in the graphs. In the next section, we will provide formal
econometric evidence that adjusts for such composition effects.
2. Formal Econometric Evidence

We estimate the regression analogue of figures 6 and 7, adjusting for
relevant individual covariates such as age and education:
Yijgt 5 gjt 1 ltg 1 tjg 1 bt Djgt 1 dXijgt 1 εijgt ; ð1Þ
where i is the individual, j is the country, g is the group ðwhether female

has older or younger childÞ, and t is the time period. The time period, t,
can take the values of a dummy for 1976–84, 1985–87, 1989–93, 1994–98,
1999–2002, and 2003–6. Note that the Taiwanese data only start in 1978,
while the closest census year available for Hong Kong is 1976. For most
of our cross-country analysis, we will compare 1976 LFP rates in Hong
Kong with 1978 LFP rates in Taiwan.14 Vector Xjgt are individual-level
controls for age and education. And D represents the relevant indicator
variables; Djgt 5 1½HK 5 1; young child 5 1; period 5 t. All the specifi-
cations for the macro approach control for year, country, and child-age
fixed effects as well as country year and child age year fixed effects.
This approach enables us to identify the causal effect of the expansion of
the foreign domestic helper program on female LFP rates in Hong Kong,
provided that there are there are no differential shocks affecting mothers
of younger versus older children across Hong Kong and Taiwan. To fur-
ther control for possible demand shocks that may have differential effects
14
In some figures, employment data for Hong Kong in 1976 are labeled as 1978
for ease of comparison with the 1978 employment data in Taiwan. Note also that
some figures and the econometric analysis omit the year 1988 due to concerns
about the quality of the data.

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across older versus younger children in both countries due to the fact that
the presence of a young child is likely to be correlated with the mother’s
age and education and that the returns to these characteristics may be
changing over time, we also estimate specifications that allow the effects of
the mother’s age and education to vary by year by including age year and
education year fixed effects. Finally, to more adequately control for
secular changes in the composition of mothers across groups, for example,
due to delays in childbearing over time, we also estimate specifications that
include a full set of interactions among age education year. This will
capture cohort-specific shocks to labor demand and allow us to compare
women with younger versus older children within cohort and education
levels across Taiwan and Hong Kong, making it less likely that differences
in composition or the returns to characteristics such as age and education
across mothers with older versus younger children over time are con-
founding our estimates.
The main results are presented in panel A of table 2. The first column of
each time period is the raw, unadjusted difference obtained from the co-
efficient on Djgt . The second column adjusts for an individual’s age and
education, and the third column includes age and education fixed effects
interacted with year and age education year. In the fourth column, we
also allow the effects of education to vary by country by including a full
set of interactions for education year HK and age education year
HK. Standard errors are clustered at the country-year level.15 Across the
four specifications, the coefficient estimates are very similar. The first row
suggests that, relative to mothers of older children, mothers of younger
children participated less in Hong Kong than in Taiwan. The results for the
most flexible specification indicate that relative to 1976–84 ðthe base pe-
riodÞ, the gap between Hong Kong and Taiwan started closing in 1985–87;
by 1989–93, there was no difference between the two countries, and by the
mid-1990s to early 2000s, the relative participation of mothers of young
children versus older children in Hong Kong was 7%–9% higher than the
relative participation of mothers of young children in Taiwan. In 2003–6
the difference decreased slightly to 3–6 percentage points. Summarizing,
between 1976 and 2006 the gap in LFP rates between mothers of younger
15
It is likely that the error terms are correlated not only within country year
groups ðwhich we address by clustering by country yearÞ but also across time,
generating serial correlation issues. A common approach is to cluster at a higher
level. In our case it will imply clustering at the country level, but that will leave us
with only two clusters. We increase the number of clusters by assuming inde-
pendence across education groups within countries and clustering at the country
education group. Standard errors clustered at this level are presented in brackets in
panel A of table 2.

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Table 2
Triple-Difference Estimation of the Effect of Foreign Domestic Workers in the LFP of Mothers of Young Children versus Mothers
of Older Children: Taiwan versus Hong Kong, 1978–2006
All Women By Education Level
ð1Þ ð2Þ ð3Þ ð4Þ Low Medium High
HK child05 ðbase period 1978–84Þ 2.035*** 2.042*** 2.053*** 2.062*** 2.063*** 2.035*** 2.208***
ð.007Þ ð.004Þ ð.005Þ ð.011Þ ð.008Þ ð.009Þ ð.034Þ
½.042 ½.019 ½.023 ½.034
346
HK child05 p85–87 .017 .043*** .034** .030* .000 .038*** .268***
ð.012Þ ð.012Þ ð.013Þ ð.018Þ ð.014Þ ð.013Þ ð.069Þ
½.014 ½.020 ½.018 ½.030
HK child05 p89–93 .034* .056*** .064*** .040*** 2.010 .063*** .200***

ð.018Þ ð.015Þ ð.017Þ ð.014Þ ð.012Þ ð.019Þ ð.042Þ
½.028 ½.031 ½.017 ½.030
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HK child05 p94–98 .110*** .114*** .135*** .076*** .008 .125*** .240***
ð.009Þ ð.005Þ ð.008Þ ð.012Þ ð.011Þ ð.011Þ ð.037Þ
½.040 ½.035 ½.016 ½.038
HK child05 p99–02 .126*** .112*** .134*** .129*** .014 .123*** .277***
ð.007Þ ð.004Þ ð.006Þ ð.012Þ ð.021Þ ð.009Þ ð.035Þ
½.058 ½.020 ½.006 ½.036
HK child05 p03–06 .099*** .076*** .085*** .116*** .034*** .067*** .255***
ð.011Þ ð.010Þ ð.012Þ ð.016Þ ð.012Þ ð.017Þ ð.034Þ
½.068 ½.015 ½.013 ½.031
Year FE Yes Yes Yes Yes Yes Yes Yes
Year HK FE Yes Yes Yes Yes Yes Yes Yes
Child05 year FE Yes Yes Yes Yes Yes Yes Yes
Controls:
Age group, education No Controls Controls Controls Controls Controls Controls
year year year year year
Age education year No No Yes Yes ... ... ...
Education year HK No No No Yes ... ... ...
Age education year HK No No No Yes ... ... ...
Observations 653,462 653,462 653,462 653,462 217,127 397,429 38,906
SOURCES.—Hong Kong data—census 1976 and 1981, General Household Survey 1985–2006; Taiwan data—Manpower Utilization Survey, 1978–2006.
NOTE.—Each column corresponds to a separate linear probability model with female labor force participation ðLFPÞ as the dependent variable. The sample is restricted to
married women aged 25–54 who have at least one child aged 0–17. HK is a dummy variable if the respondent is from Hong Kong; child05 is a dummy variable if the youngest child
is aged 0–5; p85–87, p89–93, p94–98, p99–02, p03–06 are dummy variables that denote the time period considered; FE 5 fixed effects. Controls include age-group dummies ðin 5-
year intervalsÞ and three dummies for the education level of the woman. Controls year indicates that all the controls are interacted with year dummies. Age education year
indicates the full set of interactions for age group, education level, and year. In col. 4, the full set of interactions for education year HK and age education year HK is also
included. Standard errors in parentheses are clustered at the country-year level, and standard errors in brackets are clustered at the country-education level. Reported standard
347
errors are robust to heteroskedasticity. Asterisks report significance levels of estimates clustered at the country-year level.
* Significant at 10%.
** Significant at 5%.
*** Significant at 1%.

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
348 Cortés/Pan
and older children decreased by between 7.6 and 11.6 percentage points
more in Hong Kong than in Taiwan.
Panel B of table 2 analyzes whether the evolution of female LFP rates
varies by the educational attainment of the women. Highly educated moth-
ers of young children were the first to significantly increase their LFP. By
the mid-1980s ða few years after the first FDWs came to Hong KongÞ,
their relative labor supply had achieved its maximum. However, medium-
educated mothers of young children only started to significantly increase
their relative LFP in the early 1990s, in line with the secular decline in the
relative price of hiring a FDW. As predicted by the model in the next sec-
tion, declines in the relative cost of the FDWs prompted more and more
women to start hiring them and participating in the labor force. Finally,
we observe very small effects on mothers with the lowest education levels,
at least until the last period. This is consistent with the fact that the po-
tential wage of most mothers in this group is below what it needs to be
to justify hiring a FDW. Hence, changes in the prices of domestic help had
little effect on their LFP.16 In the later two periods from 1999 to 2006, the
estimated program effects for mothers with low education are larger and
statistically significant. This is not entirely surprising, as the relative wage
of low-educated mothers has been steadily increasing from 1980 to 2000
and was twice that of the FDWs by around the late 1990s, making hiring a
FDW an option for some low-educated mothers as well.
As mentioned previously, ideally, we would have liked to compare LFP
trends in urban Taiwan and Hong Kong, as urban and rural areas in
Taiwan may be quite different. However, doing so would result in a large
reduction in the sample size, making it difficult to investigate trends in
LFP rates separately by education groups.17 We estimate the main re-
gression specification for the subset of Taiwanese women residing in the
seven largest urban cities in Taiwan. The results are shown in table A2,
available in the online version of Journal of Labor Economics—the esti-
mates are quite similar to the first four columns of table 2. This suggests
that our estimates are not primarily driven by potentially dissimilar LFP
trends in rural Taiwan.
3. Potential Confounds
One limitation of this approach is that if underlying trends or unob-
served shocks to female LFP vary across Hong Kong and Taiwan by child
16
Note that unskilled women are much more likely to belong to lower-income
households and, thus, might not be eligible to hire a FDW due to the minimum
household income requirement.
17
The urban sample is about 20% of the overall Taiwan sample. Furthermore,
the number of Taiwanese women in the urban sample with low and high education
is very small in the later and earlier years of the sample period, respectively.

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age, this may confound our triple-difference estimates. The graphic and
empirical analysis by mother’s education level provides some suggestive
evidence that the patterns we document are not entirely driven by the pres-
ence of such confounds.
The household production model and income restrictions on hiring a
FDW suggest that mothers with low income are less likely to respond to
the availability of FDWs, at least in the earlier time period of our study.
This suggests that low-educated mothers can be used as a “placebo” group
to test our identification assumptions. A casual inspection of the trends in
female LFP over time for mothers of younger versus older children in
Hong Kong and Taiwan for low-educated mothers in figure 7 indicates
that within each country, the trends in female LFP are virtually parallel.
This is further corroborated by the empirical estimates in table 2. Hence,
while it is possible that differential economic shocks and other sources of
differential trends in female labor supply by the age of children in Hong
Kong and Taiwan may confound the estimates, such a shock will have to
affect only highly skilled mothers and not mothers with low education
levels. Moreover, as mentioned previously, the magnitude and timing of
the program estimates for each education group matches the trends in the
relative wages of FDWs very well ðsee fig. 2Þ, suggesting that potential
confounds would have to fit these employment and relative wage patterns
across education groups as well.
4. Are the Estimates Driven by the Comparison with Taiwan?

Finally, one concern with the use of Taiwan as a comparison group is
that unobserved labor demand shocks due to business cycle fluctuations,
differences in underlying trends in female LFP, or differential trends in
wage inequality across the two countries may make it hard to draw any
inference about policy impacts. For example, one might be concerned that
wages are much more unequal in Hong Kong than in Taiwan ðsee fig. 5Þ
and that our estimates could be picking up some of these underlying dif-
ferences across the two countries. The use of a within-country comparison
group, namely, mothers of older versus younger children, helps to ame-
liorate this concern to some extent. In table A3, available in the online
version of Journal of Labor Economics, we test whether the estimates are
driven primarily by the comparison with Taiwan by looking at a difference-
in-difference specification within Hong Kong alone that compares the
growth in female labor supply for mothers with older versus younger
children. These overall estimates are quite similar in magnitude to that of
the triple-difference approach for the overall sample of women and exhibit
largely similar patterns by mother’s education level. This suggests a some-
what limited role for unobserved shocks that differentially affect Hong
Kong and Taiwan to fully account for the time series patterns in female
labor supply that we document.

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350 Cortés/Pan
As a robustness check, we also explore female LFP trends in the United

States. To address the concern that our estimates may be driven by dif-
ferential trends in wage inequality in Hong Kong and Taiwan, looking at
female LFP trends in the United States may be instructive because, like
Hong Kong, the United States experienced a large increase in inequality
since the early 1980s. Moreover, since the United States had no foreign
worker program, we can consider the United States as an alternative
control group. Using the March Current Population Survey, figure A2,
available in the online version of Journal of Labor Economics, shows the
overall LFP rates of mothers by age of youngest child in the United States
and separately by education level. Strikingly, both the overall patterns as
well as patterns by education group are very similar to those found for
Taiwan—trends in LFP rates of mothers are virtually parallel for mothers
of younger versus older children from 1978 to 2006.
IV. Micro Approach: A Structural Model

of Female Labor Supply
In this section, we develop and estimate a structural model of LFP and
the decision to hire a FDW using pooled cross-sectional data from the
2001 and 2006 Hong Kong population census. The advantage of deriving
our empirical specification from an economic model of behavior is that we
can interpret the estimated coefficients as meaningful parameters related
to women’s labor supply and perform welfare calculations. We can also
simulate the counterfactual supposing no foreign domestic program to es-
timate the microeconomic effects of the program on female labor supply.
This will enable us to compare the estimates from the structural model to
the macro difference-in-difference estimates.
A. Model
We consider a static model of utility maximization, where we assume
that fertility and education are exogenously determined. Women maxi-
mize a utility function that depends on the consumption of a market good
M and a home produced good C ðe.g., child qualityÞ, subject to budget and
time constraints. There are two discrete choice variables: LFP and the
decision to hire a FDW.18 The woman’s problem is
18
We do not model or estimate the effect on intensive margin of labor supply
because the number of hours worked is not reported in the census. Note, however,
that in Hong Kong part-time jobs are very rare—only 10% of the working women
in our GHS sample report working less than 35 hours per week. Our wage mea-
sure refers to monthly employment earnings.

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maxUðM; CÞ such that
I 1 LFP w 5 M 1 FDW wn
ð2Þ
T 5 d 1 LFP h
f ðd; FDWÞ 5 C;
where I is unearned income, w is the woman’s salary, wn is the monetary

cost of hiring a FDW, T is total time, d is the woman’s own time devoted
to household production, and h is the fixed number of working hours.
Good C is produced using the woman’s time and the FDW. We do not
impose any constraint on the degree of substitution between the wom-
an’s time and that of the FDW; U and f will depend on the household
composition of the family, in particular, the presence of children younger
than 5.
We assume the utility function is additively separable in the two types
of consumption:19
UðM; CÞ 5 U1 ðMÞ 1 U2 ðCÞ: ð3Þ
The woman faces four mutually exclusive alternatives denoted by j: j 5 0
if LFP 5 0 and FDW 5 0, j 5 ð pÞarticipate if LFP 5 1 and FDW 5 0,
j 5 f ðdÞw if LFP 5 0 and FDW 5 1, and j 5 pd if LFP 5 1 and FDW 5 1.
Normalizing U0 5 0, we approximate the utility attached to each al-
ternative relative to j 5 0 using the following reduced-form empirical
model:
Up 5 b1 1 b2 xi 1 b3 lnw 1 ε2
Ud 5 d1 1 d2 xi 1 ε3
ð4Þ
Upd 5 Up 1 Ud 1 complementarity=substitution
5 ðb1 1 d1 1 p1 Þ 1 ðd2 1 b2 1 p2 Þxi 1 b3 lnw 1 ε2 1 ε3 :
We interpret ε2 and ε3 as unobserved components of the utility from hiring

a FDW and working in the labor market. Variable b1 is a proxy for the
19
We need separability for the validity of the identification assumption. Our
instrument, the number of rooms, enters in the utility equation of hiring a FDW
but not in the utility equation of participating in the labor force ðthe instrument is
discussed in Sec. IV.CÞ. Note, however, that it is a strong assumption, and studies
have found evidence against it ðShaw 1989; Browning and Meghir 1991; Ziliak and
Kniesner 2005Þ. Ziliak and Kniesner ð2005Þ, in particular, find that hours worked
and consumption are complements and that assuming separability leads to under-
estimation of the wage elasticity of the labor supply.

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352 Cortés/Pan
disutility from working in the market ðcoming from lower levels of home-
produced good consumptionÞ, while d1 is a proxy for the utility of higher
levels of home-produced good consumption ðor more leisureÞ to the
woman from hiring the FDW net of the monetary and psychic costs of
hiring her ðwe cannot separately identify the benefits from the costs be-
cause there is no variation in the FDW’s minimum wage across house-
holdsÞ, and through b2 and d2, we allow these parameters to vary with
observable characteristics of the woman ðdenoted by xiÞ.
The utility of both working and hiring a FDW ðUpdÞ is defined as the
sum of the utilities of each action separately modified by potential in-
teractions ðpositive or negativeÞ between the two, which we model with
the p’s. Specifically, the complementarity/substitution effect is modeled as
p1 1 p2 xi , where p1 is the constant effect across all women, and p2 allows
the interaction effect to vary across different groups of women.
A positive interaction coefficients implies that the decisions of whether
to hire a FDW and of working in the market are complements, and, there-
fore, changes to variables that affect the utility of hiring a FDW, for ex-
ample, a reduction in the minimum wage of foreign domestic helpers, will
induce women not only to outsource more household production but
also to join the labor force. This complementarity is closely related to the
degree of substitution between a woman’s time and that of the FDW in
caring for children and doing household chores. Given that most people in
Hong Kong work full time, if a woman participates in the labor market,
hires a FDW, and has a young kid, most of the child care is likely to be
provided by the FDW without the mother being present ðunlike the case
when a FDW is hired but the mother stays at homeÞ. The complemen-
tarity might also come from a woman’s ability to work in higher-paying
jobs because of the flexibility in working hours allowed by hiring the FDW.
Note that we allow the interaction p2 to vary by observable characteristics
of the woman. In particular, for the reasons stated above, we might expect
the complementarity term to be especially large for women with very
young children. The interaction terms are key in predicting the effect of the
FDW program on the labor supply of women and to studying which groups
of women are most likely to change their participation decisions as a result
of the program.
We restrict the d’s, b’s, and p’s to be constant across individuals and
assume the x’s to be independent from the error terms. The variance-
covariance matrix of the error terms takes the following form:

ε2 1 j
∼ N 0; :
ε3 : 1
As the above expression suggests, we are modeling our discrete choice
maximization problem as a multivariate probit. Note that we are impos-

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
ing an additional restriction beyond what is needed to set the scale of

utility, by assuming there is no unobserved complementarity component
ðε2 1 ε3 5 ε4 Þ.
B. Identification of the Complementarity between LFP

and FDW Hire
We have already normalized the model to account for the fact that the
level and scale of utility are irrelevant. While a normalized multivariate
probit is formally identified as long as the model includes at least one
variable that varies at the individual level ðHeckman and Sedlacek 1985Þ,
in the absence of exclusion restrictions, the model is extremely fragile
ðKeane 1992Þ. Without an exclusion restriction, there is no variation in
the data that allows us to discern whether women who work and hire a
FDW choose this alternative because of the complementarity between the
two choices or because of a strong correlation between the unobserved
determinants of the choices’ utilities. Identification relies solely on func-
tional form assumptions.
To solve the identification issue, we use the number of rooms, specif-
ically having four or more rooms, as an instrument. We argue that this
variable is likely to have a direct effect on the utility from hiring a FDW
but arguably does not enter the utility from working in the market di-
rectly. Intuitively, the idea behind how this exclusion restriction identifies
the complementarity term is as follows: suppose there are two identical
households that only differ in the number of rooms in the house. Com-
plementarity between LFP and hiring a FDW implies that the woman
living in the house with an additional room will be more likely to work in
the market. In the absence of an interaction between the two choices,
women in both households should be equally likely to participate in the
labor force. We will discuss the validity of the exclusion restriction in
detail in the next section.
Before turning to the discussion of the instrument, in table 3 we present
the summary statistics for the sample that will be used in the empirical
analysis in this section.20 As mentioned before, the sample is drawn from
the 5% sample of the 2001 and 2006 Hong Kong census. We restrict our
sample to married mothers aged 25–54; the lower limit is set such that
most women would have completed their education by that age.
20
Note that the share of mothers with a FDW is lower than in fig. 3. The reason
is that the sample used in the micro approach includes only women who live in
places with three or four rooms. See table A4, available in the online version of
Journal of Labor Economics, for the distribution of the number of rooms across the
population.

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Table 3
Descriptive Statistics of Mothers Included in the Micro Approach Sample
Education
Subsidized
All Housing Nonmovers Low Medium High
Sample Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD
Has a foreign domestic worker .13 .33 .10 .30 .11 .31 .03 .16 .20 .40 .43 .50
Participates in the labor force .54 .50 .55 .50 .54 .50 .44 .50 .64 .48 .74 .44
Wage ðHK$Þ conditional on working 13,177 11,306 11,556 8,055.5 12,636 10,592 8,287 6,238 14,785 10,064 28,269 18,590
Age 39.35 6.00 39.73 5.86 40.81 5.57 40.38 6.08 38.41 5.76 37.47 5.48
Low education .51 .50 .55 .50 .54 .50
Medium education .42 .49 .42 .49 .41 .49
High education .07 .25 .03 .18 .05 .22
Household size 4.07 .99 4.06 .93 4.13 .98 4.32 1.02 3.84 .90 3.62 .81
Dummy for child 0–5 .32 .46 .28 .45 .22 .42 .21 .41 .39 .49 .62 .49
Share of mothers of young child
with foreign domestic worker .24 .43 .23 .42 .25 .43 .06 .24 .30 .46 .51 .50

Number of children 1.81 .79 1.81 .77 1.89 .80 2.06 .84 1.58 .65 1.43 .596
Dummy for member 651 .11 .32 .13 .33 .12 .32 .11 .32 .12 .32 .09 .29
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Husband’s wage ðHK$Þ 17,357 15,131 15,403 10,366 16,632 14,022 13,005 8,893 19,893 15,908 34,302 27,131
Number of observations 39,367 9,606 23,951 20,088 16,606 2,673
SOURCE.—Hong Kong census, 2001 and 2006.
NOTE.—Sample is restricted to married women aged 25–54 with at least one child aged 0–17 who live in places with three or four rooms. Low education is defined as having at
most a primary education, medium education as having more than a primary education but less than a college degree, and high education as having a college degree or a graduate
degree.
C. Proposed Instrument
The instrument that we use is the number of rooms in the household,
specifically having four or more rooms. We would have preferred to use
the number of bedrooms, but the census question does not distinguish be-
tween bedrooms and other types of rooms.21 The motivation behind this
instrument is that space limitations in Hong Kong coupled with restric-
tions on lodging for domestic workers imply that all else equal, a house-
hold living in a house with more rooms is more likely to hire a domestic
worker.22 Hence, assuming we are able to control adequately for household
wealth and other characteristics of the household, we would not expect
the number of rooms in the house to be correlated to an individual’s un-
observed work propensity. There are a number of concerns with using the
number of rooms as an instrument. We discuss each of these concerns in
detail.
1. Endogeneity of the Number of Rooms

A primary concern with using the number of rooms as an instrument is
that it may ð1Þ be correlated with an individual’s unobserved preferences
for work and ð2Þ be a proxy for household wealth. Table A4 shows basic
demographic and economic characteristics by number of rooms of the
households. It is clear that there are statistically significant differences
between households with a different number of rooms. Larger, richer, and
more educated families live in places with more rooms. While the model
conditions on all available observable household characteristics, the
concern that arises is that the instrument may nonetheless be correlated
with unobserved determinants of female labor supply.
To address the concern that our instrument is merely a proxy for an
individual’s unobserved propensity to work or unobserved household
wealth, we run placebo tests of the reduced form of having four or more
rooms on LFP for subsets of households that have a very low probability of
maid hire, such as married households without children and low-income
households who are not eligible to hire a foreign maid. The idea here is that
if our instrument merely is a proxy for an individual’s unobserved pref-
erences for work, we would expect to find a significant positive relation-
ship between the number of rooms and the employment status of females
of these households, regardless of their low demand for domestic services.
21
The exact question in the census is, “Number of rooms in the accommoda-
tion, excluding kitchens and bathroom/toilets/cocklofts/bedspaces.” The possible
options range from zero rooms to six rooms or more.
22
For example, it is stated in the employment contract that they cannot sleep in
the kitchen or share a room with an adult of the opposite sex. It is very common,
however, for the FDW to share a room and even the bed with at least one of the
children ðChan 2005Þ.

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
356 Cortés/Pan
However, if the reduced-form relationship is only significant in the sample of

households that have a relatively high demand for domestic help ðour main
sampleÞ, then this suggests that the number of rooms affects employment
decisions of females through its impact on maid hire, as opposed to merely
being a proxy for some unobserved variables that might be correlated with
the individual’s propensity to work.
Further, to circumvent the issue that omitted household wealth might
understate the degree of complementarity between the two decisions, we
restrict our sample to households that have three or four rooms and de-
fine our instrument as a dummy for having four rooms.23 We do this for
two reasons. First, given that we are looking at families with at least one
child and assuming one room is the couple’s bedroom, the second is the
child’s, and the third is the living or dining room, going from three to four
rooms will surely relax the space constraint. Second, even after control-
ling for the husband’s wage, owning very large houses ðfive, six, or more
roomsÞ or very small ones ðone and two roomsÞ is likely to be a good
proxy for unearned income, especially given how unusual it is.
More specifically, for our placebo tests we estimate the following linear
regression,
LFPi 5 a 1 dIðnumber of rooms 5 4Þi 1 gXi 1 vdq 1 εijt ; ð5Þ
and its probit counterpart, where i is a woman, and vdq are fixed effects for
Hong Kong districts ðdÞ and quarter types ðqÞ.24 The covariates ðXiÞ in this
regression include those in the structural model: age and age2 of the
mother, education dummies, number of children, dummy for child 5 or
younger, dummy for person 65 or older in the household, log of husband’s
wage, and household size. We run the above specification for three groups
of women: ð1Þ married women with children ðour main sampleÞ, ð2Þ mar-
ried women with no children, ð3Þ low-educated mothers whose husband
earns less than HK$10,000 per month ðthe bottom quartile of the wage
distributionÞ. The share of households with a FDW for the three groups is
14%, 2.6%, and 1.5%, respectively.
23
Our main results and placebo tests are robust to alternative definitions of the
sample and of the instrument. Estimations using ð1Þ the original definition of the
instrument but a sample extended to include households living in places with five
rooms and ð2Þ the instrument defined as having five rooms and a sample restricted
to places with four or five rooms are presented in tables A5 and A8, available in the
online version of Journal of Labor Economics.
24
There are 30 districts and seven types of quarters identified in the census
questionnaire. Results are robust to excluding these fixed effects from the placebo
test estimation. Fixed effects for district and quarter type could not be incorpo-
rated into the multivariate probit model ðstructural modelÞ given the large number
of dummies that would need to be included in the estimation.

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Table 4 presents the results: the coefficient on the number of rooms for
the sample of married women with children is positive and highly sig-
nificant. By contrast, the coefficient is close to zero and not significant for
married women with no children and positive, but half the size and not
statistically significant, for low-educated mothers with low unearned in-
come. The lack of a significant reduced-form relationship between our
instrument and the employment probability of females in these house-
holds that have a relatively low demand for maid services is reassuring and
reinforces the validity of our instrument. One limitation of these placebo
tests is that we cannot reject the possibility that the number of rooms may
have different effects on female labor supply decisions unrelated to a
FDW hire that vary systematically across different types of households.
Nevertheless, given that each of these groups considered ðmarried women
without children and low-educated womenÞ represents a nontrivial seg-
ment of the female working population, this possibility appears unlikely.
2. Moving Concerns
The second concern is that exogeneity of this instrument implicitly
requires either that individuals face prohibitively high moving costs or
that some frictions in the housing market limit the ease of moving. Since
we only have cross-sectional data, it is not clear whether the observed
Table 4
Placebo Tests: Reduced Form
Low Education,
Married with Married with No Husband’s Wage
Children 0–17 Children 0–17 < HK$10,000
OLS Probit—ME OLS Probit—ME OLS Probit—ME
ð1Þ ð2Þ ð3Þ ð4Þ ð5Þ ð6Þ
Dummy for four rooms .045*** .048*** .009 .010 .015 .016
ð.005Þ ð.006Þ ð.006Þ ð.007Þ ð.014Þ ð.015Þ
Demographic controls Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Quarter type FE Yes Yes Yes Yes Yes Yes
District FE Yes Yes Yes Yes Yes Yes
Number of observations 39,367 22,756 7,134
NOTE.—Each column corresponds to a separate regression with female labor force participation as the
dependent variable. Sample is restricted to women aged 25–54 with at least one child aged 0–17. The
omitted category for the dummy for four rooms is staying in a place with three rooms. Demographic
controls include age, age2, three dummies for educational attainment, household size, number of children,
an indicator for the presence of children aged 0–5, an indicator for the presence of a live-in parent aged
above 65 years, and log spouse income. Additional controls include fixed effects ðFEÞ for year ð2001 or
2006Þ, type of living quarters, and residential district. Specification ð5Þ in the text is estimated for three
groups of women: ð1Þ married women with children ðmain sampleÞ, ð2Þ married women with no children,
and ð3Þ low-educated mothers whose husband earns less than HK$10,000 per month. OLS 5 ordinary
least squares; probit—ME refers to the marginal effects obtained from the probit model. Reported
standard errors in parentheses are robust to heteroskedasticity.

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
358 Cortés/Pan
relationship between the number of rooms and the probability of maid

hire reflects space constraints or households moving to a larger place when
they decide to hire a maid. Such actions by the household may lead to
endogeneity in the choice of the number of rooms in the household.
We follow two strategies to address this concern. First, we present
models with the sample restricted to women living in subsidized sale flats.
Due to limited space and the high costs of housing, almost half of the
population in Hong Kong resides in some form of government housing,
while the remainder lives in private housing. Using census data, we esti-
mate that, in 2006, 30% of all households in Hong Kong were tenants in
government-provided housing, while another 16% owned subsidized flats
through the Home Ownership Scheme (HOS).25 For individuals residing
in government-subsidized housing, mobility and choice are rather limited
due to various restrictions imposed on the resale and allocation of flats ðLui
and Suen 2011Þ.
The HOS allows citizens in just the right income bands to buy their
flats at the cost of construction and get the land element for free.26 This
normally means discounts of between 30% and 50% on private flat prices.
Each year the government offers a given number of flats for sale. The flats
are in very large projects constructed by the government for this purpose.
Each household can apply for a flat in only one project and does not have
to state its preferred number of rooms or size of the flat. Applications
usually outnumber supply by huge numbers; for example, in 1994, 112,345
families applied to buy the 8,168 flats offered. Allocation is based on a
computer ballot that determines the flat selection sequence. After the third
year of occupancy, HOS flat owners may sell their flats in the open mar-
ket, but only after paying a premium to the Housing Authority, which
is equal to the value of the subsidy at prevailing market prices ðLui and
Suen 2011Þ. Additionally, if they sell they become ineligible to apply for
subsidized housing in the future. Referring to the allocation and resale
rules of the HOS, van Der Kamp (2008) states, “Thus, most of the buyers
are forced to stay where they are, irrespective of where they would like
to be, which they never had much choice of anyway when they bought
their homes.”
Second, using the entire sample, we can explicitly test whether house-
holds that have moved in the last 5 years are more likely to hire domestic
helpers. In results presented in table A6, available in the online version of
Journal of Labor Economics, we find that having moved in the past 5 years
is uncorrelated with a higher probability of having a domestic worker. We
also perform this test on a subset of households whose only child is 5 or
25
In our sample, the share living in subsidized sale flats is higher at 24%.
26
The upper limit has always been above the minimum income required to hire
a FDW.

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younger. Given that the probability of maid hire increases substantially

when a household has young children, this group of households is likely to
be first-time employers of foreign maids. Hence, looking at their moving
behavior in the previous 5 years provides a test of whether households
move in anticipation of hiring a foreign maid. The results for this sub-
sample of households with small children are also not statistically signif-
icant and very small. We interpret these results as suggesting that families
are not moving in large numbers to accommodate a FDW. To comple-
ment the evidence in table A6, we will also present estimates of our labor
supply models using a subsample of households that did not move in the
last 5 years. We will compare the estimates obtained from the full sample
to the sample of nonmovers to see whether this is indeed a large concern.
3. Fertility
Before turning to the structural estimates, we will briefly address the
implications of assuming that fertility is exogenous in our model. In a
standard model of fertility and labor supply behavior, both decisions are
jointly determined and depend on the mother’s earnings and the costs of
raising children. Given the joint nature of the labor supply and fertility
decision, ideally, we would like to implement a dynamic model that es-
timates the effects of the FDW program on married women’s decisions to
participate in the labor force and have children.27 Due to the lack of panel
data for Hong Kong, we are unable to endogenize fertility in a dynamic
model. Even if we settled for a static model that explains completed fer-
tility and LFP, we would face two major empirical challenges. The first is
that we would have to limit our sample to women old enough to have
completed their fertility but young enough such that all their children are
still living at home, for example, women between age 40 and 44. Second,
we would need to find another reasonable instrument to identify the fer-
tility equation. For these reasons, we conclude that endogenizing fertility
in our structural model is not viable.
Nevertheless, we will discuss the ramifications of endogenous fertility
on our structural estimates. This discussion is based on a sketch of a simple
static model by Blau and Robins ð1988Þ. The reduction in the cost of child
care induced by the availability of FDWs increases the relative wages of
mothers and at the same time reduces the cost of having children. There-
fore, assuming that substitution effects dominate, the direct effect of the
FDW policy would be to increase female labor supply and fertility. How-
ever, the increase in labor supply would indirectly affect fertility since
the increase in labor supply itself tends to increase the cost of child care,
as part of this cost increases the number of hours the mother works.
27
Moffitt ð1984Þ provides a discussion of static and dynamic models of fertility
and labor supply.

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360 Cortés/Pan
Similarly, if lower child care costs raise fertility, this would indirectly
reduce the labor supply of mothers as they incur the costs of bearing and
raising additional children. Without further assumptions, the net effects of
child care costs on fertility and labor supply cannot be signed.
What this discussion implies is that the indirect effects of a reduction of
child care costs on either labor supply ðthrough increased fertilityÞ or
fertility ðthrough reduced labor supplyÞ would tend to offset the direct
effects. Therefore, our structural model would tend to lead to an under-
estimate of the effect of child care costs on labor supply, as fertility is not
explicitly taken into account. In other words, our estimates are capturing
the potential reduction in labor supply due to the offsetting effects of
fertility choices in response to the change in child care costs.
D. Structural Estimates
In this section we discuss how we estimate the model ðeq. ½4Þ and
present the results. We first focus on the estimation of the effect of changes
in wages on LFP ðparameter b3 of our modelÞ and then turn to the esti-
mation of the whole model.
1. Identification of Wage Effects

Given the lack of wage data for nonparticipants, in order to identify
wage effects, we follow a two-step procedure based on Wooldridge ð2002Þ.
In the first step, we estimate a Heckman selection model that allows us to
construct the predicted wage for both participants and nonparticipants. In
the second step, we include the predicted wage in the multivariate probit
model. To identify the selection equation, we use three instruments com-
monly used in previous literature to estimate models of female labor sup-
ply ðsee Mroz ½1987 for a summaryÞ. These instruments include a dummy
for having a child aged 0–5, a dummy for a person aged 65 or older in the
household, and the husband’s wage. Conceptually, these variables are re-
lated to the productivity of the woman in household production, to the
amount of household work required, and to the woman’s unearned in-
come, which are important determinants of LFP in a simple time-use
model but a priori should not relate directly to the woman’s potential wage
in the labor market, at least conditional on the individual and household
characteristics included in the model.
As the predicted wage variable is included in a model that estimates the
LFP decision in the second step, in order to separately identify wage effects
from the participation decision, we will need an instrument that belongs to
the wage equation but is excluded from the participation equation. The
instrument we use is a dummy variable that indicates whether the woman
speaks English—the rationale is that speaking English is likely to affect
wages, as it is considered a valuable skill in the Hong Kong labor market,

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but is unlikely to have a direct effect on an individual’s productivity in

household production, conditional on other individual and household
characteristics.
Results from the Heckman selection model are presented in table A7,
available in the online version of Journal of Labor Economics. The coef-
ficients on our instruments all have the expected signs and are highly
statistically significant. It is worth mentioning that the main results of the
article do not depend on using the Heckman selection model to identify
wage effects. The estimated effects of the FDW program on the LFP of
Hong Kong women are very similar if we use a reduced-form approach
and include demographic determinants of market wage, instead of pre-
dicted wages, in the utility equations.28
2. Multivariable Probit Model

We estimate the multivariate probit model ð4Þ using the simulated
maximum likelihood implemented by the Geweke-Hajivassiliou-Keane
algorithm. Table 5 presents results for three samples: ðAÞ mothers aged
25–54 who live in homes with three or four rooms, ðBÞ a subset of A who
live in subsidized sale flats, and ðCÞ a subset of women who reported not
having moved in the past 5 years. We include the following economic and
demographic variables in all equations: a dummy for youngest child aged
0–5; number of children; a dummy for a person aged 65 or older living in
the household; household size; dummies for the education level of the
woman, the woman’s age, and age2; and the log of the husband’s income.29
The last column of each panel shows the estimate of the complementarity
in the LFP and FDW decisions and its statistical significance. Our in-
strument is omitted from the equation of participating in the labor market
and not hiring a FDW. Predicted wage is excluded from the equation of
hiring a FDW and not participating in the labor market.
Given that the utility equations are relative to the option of not par-
ticipating in the labor market and not hiring a FDW, all but the predicted
wage coefficient in the LFP equation ðtable 5, cols. 1Þ can be interpreted as
differential effects of demographic and economic variables on the dis-
utility of working. Therefore, our estimates suggest that women with
more children and younger children, with either high or low education
levels, from smaller households, and with richer husbands tend to have a
higher disutility of working in the market. As expected, the utility of
28
Results available upon request.
29
One concern with the 25–54 age range is that the number of children in a
household could be an underestimate if children have moved out ðthis is likely to
affect older women in the sampleÞ. Results from the multivariate probit model are
similar if we consider mothers in the 25–44 age range.

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Table 5
Structural Model of Labor Supply and the Decision to Hire a Foreign Domestic Worker
A. All Married Women Aged 25–54 B. Subsidized Sale Flats C. Nonmovers
Only Only Interaction Only Only Interaction Only Only Interaction
LFP DW Both Coefficient LFP DW Both Coefficient LFP DW Both Coefficient
ð1Þ ð2Þ ð3Þ ð4Þ ð1Þ ð2Þ ð3Þ ð4Þ ð1Þ ð2Þ ð3Þ ð4Þ
logðpredicted
wageÞ .144*** 1.465*** .340*** 1.812*** .141** 1.591***
362
ð.035Þ ð.052Þ ð.086Þ ð.127Þ ð.048Þ ð.073Þ
Youngest
child 0–5 2.415*** .374*** .494*** .535*** 2.431*** .549*** .586*** .468*** 2.437*** .436*** .511*** .512***
ð.018Þ ð.046Þ ð.023Þ ð.036Þ ð.111Þ ð.048Þ ð.024Þ ð.062Þ ð.032Þ

High
education .0582 .361*** 2.902*** 21.321*** 2.171 .21 2.890*** 2.929*** .121 .399*** 21.040*** 21.560***
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Medium
education .119*** .192*** 2.231*** 2.542*** .00327 .146 2.208* 2.357** .0975** .192** 2.312*** 2.602***
lnðhusband’s
wageÞ 2.373*** .440*** .182*** .115*** 2.445*** .482*** .193*** .156 2.390*** .462*** .176*** .104*
Age 2.0118 .0326 .0775*** .057 2.0351 .142 .0836 2.023 2.000369 .0546 .0725* .018
Age2 .000187 2.000418 2.00116*** 2.001 .000455 2.00178 2.00116* .000 .0000146 2.000683 2.00107** .000
Number of
children 2.237*** .248*** .325*** .314*** 2.269*** .287 .367*** .349 2.239*** .333*** .367*** .273***
Household
size .0916*** 2.155** 2.219*** 2.156*** .138*** 2.265 2.270*** 2.143 .105*** 2.275*** 2.264*** 2.094
Dummy for
person 651 .048 .166* .301*** .087 .0316 .394 .306** 2.120 .0551 .266* .306*** 2.015
Dummy for
four rooms .329*** .329*** .272*** .272*** .333*** .333***
ð.015Þ ð.015Þ ð.033Þ ð.033Þ ð.021Þ ð.021Þ
Constant 2.407*** 27.398*** 217.22*** 212.229*** 1.809* 29.819*** 22.76*** 212.750*** 2.375*** 27.801*** 218.09*** 212.664***
ð.345Þ ð.696Þ ð.540Þ ð.852Þ ð2.075Þ ð1.303Þ ð.508Þ ð1.083Þ ð.807Þ
Correlation
coefficient 2.278*** 2.302*** 2.310***
ð.012Þ ð.031Þ ð.016Þ
Number of
363
observations 39,367 9,606 23,951
NOTE.—Each panel reports the estimates from a separate multivariate probit model ðsee text for descriptionÞ. In panel A, the sample is restricted to married women aged 25–54
with at least one child aged 0–17 who live in places with three or four rooms. The sample for panel B is a subset of A who live in government-subsidized sale flats. Panel C uses a
subset of women in A who reported not having moved in the past 5 years. Reported standard errors in parentheses are robust to heteroskedasticity. LFP 5 labor force participation;

DW 5 domestic worker.
* Significant at 10%.
51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00

** Significant at 5%.

364 Cortés/Pan
working outside of the household is increasing in the market wage. The

magnitude of the coefficient suggests that a 10% increase in the wage in-
creases the marginal probability of participating in the labor force ðand not
hiring a FDWÞ by 0.5%.30
The constant in the utility equation for hiring a FDW and not partic-
ipating in the labor market ðtable 5, cols. 2Þ suggests that this alternative is
only attractive for women with very wealthy husbands, high education,
and many children. For these women, the availability of FDWs has not
changed their LFP decisions but has allowed them to enjoy more leisure
time or spend more quality time with their children. Our instrument is
positive and statistically significant in the FDW equation.
Columns 3, in the panels of table 5, present the coefficients in the
equation of the utility of both hiring a FDW and participating in the la-
bor market relative to staying at home and not hiring a FDW, and in
columns 4 we compute the implied complementarity effect and its sig-
nificance. The coefficient on predicted wage is positive and statistically
significant as expected in columns 3, but its magnitude is much larger than
that for the option of working in the market and not hiring a FDW in
columns 1. We can think of two potential explanations. First, having a very
high wage actually allows one to hire a FDW, given the restriction on the
income level of the household. Second, women with a higher predicted
wage are likely to work in occupations that value flexibility ðe.g., lawyers
and doctorsÞ, and, therefore, hiring a FDW increases the returns to work-
ing. The magnitude of the predicted wage coefficient suggests that a 10%
increase in the predicted wage increases the marginal probability of choos-
ing this option by 2.1%.
Estimates from table 5, columns 4, also suggest that complementarity is
especially large for women with very young kids and with several chil-
dren. The strong interaction effect for those with a young child suggests
that women view FDWs as a very good substitute for their time spent in
child care. Note that in Hong Kong most people work full time; hence, the
child will spend many hours of her day with the FDW. One possibility as
to why we observe a smaller complementarity effect for women with high
education ðcontrolling for market wageÞ is that their time devoted to rais-
ing children may be less substitutable with that of the FDW’s.
While the focus thus far has been on the effect of FDWs on female labor
supply decisions due to reductions in child care costs, it is possible that
FDWs are also hired to take care of elderly parents. The positive and ðmar-
30
To estimate this elasticity, we computed, for each observation, the predicted
marginal probabilities of each of the options before and after an increase in the
predicted wage of 10%. We report the sample average increase in the marginal
probability of working in the labor force and not hiring a FDW.

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ginallyÞ significant coefficient on the dummy for a person in the house-

hold older than 65 in the FDW utility equation suggests that FDWs are
indeed hired to help care for the elderly. However, the coefficient is positive
and nonsignificant in the LFP equation, indicating that the presence of
elderly parents, unlike young children, does not prevent women from en-
tering the labor market. Moreover, the implied complementarity effects for
households with an older person aged 651 is small and nonsignificant,
suggesting that while FDWs are hired to care for the elderly, they do not
appear to significantly affect women’s labor supply decisions.
Panels B and C of table 5 reproduce the exercise reported in panel A but
restrict the sample to women for whom the number of rooms is less likely
to have been endogenously chosen. Results are very similar for the sample
of nonmovers, both in direction and magnitude of the coefficients. For the
sample of women living in subsidized sale flats, all the coefficients are in
the same direction as for the whole sample and are relatively similar in
magnitude, only less precisely estimated, given the significantly smaller
number of observations.
We estimate a negative correlation coefficient between the unobserved
determinants of LFP and the decision to hire a FDW, suggesting that a
naive estimation will underestimate the extent to which the availability of
FDWs has changed the labor supply decisions of women. In specifications
not shown here, we ran linear models of LFP on having hired a FDW. The
ordinary least squares coefficient is positive but significantly smaller than
the two-stage least-squares specification that uses the number of rooms as
an instrument.
Thus far, we have only discussed the direction of the effects of the ob-
servables on the utility of the different alternatives. To translate the mag-
nitudes of the coefficients to willingness to pay in Hong Kong dollars, we
need a way of converting utils to dollars. To do so, we use the coefficient of
the variable of having an extra room combined with an estimate of the cost
of getting the extra space to transform the interpretation of the coefficients
from utils to dollars.31 Although this is clearly an imprecise approach, it
allows us to check whether our estimates are sensible. On the basis of
census data on monthly mortgage payments, the monthly cost of having
an extra room is between HK$2,000 and HK$2,500 ðUS$260–US$325Þ.
From the structural estimates in table 5, having an extra room increases
the utility from hiring a FDW by 0.25 to 0.3 utils; therefore, a util cor-
responds roughly to HK$6,500–HK$10,000. Applying these numbers to
the difference between the utility levels of two women identical in all
31
We have constrained the dummy for having four rooms to be equal in the two
equations that it enters. Estimations of the model without imposing this restriction
strongly suggest it is reasonable to do so.

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366 Cortés/Pan
observable and unobservable characteristics except in the age of their

youngest child, we find that women with a child aged 0–5 are willing to
pay between HK$2,700 and HK$6,000 ðUS$351–US$780Þ more than
women with an older child to have the option of hiring a FDW at the
current prices.32 Is this a reasonable number? Suppose that the alternative
is to hire a female low-skilled native; the average full time wage for a low-
education native is about HK$3,800 higher than the minimum wage for
the FDW. This number is in the range of our estimate of the willingness
to pay.
Using the util-to-dollar conversion, we can also compute the consumer
surplus derived from the availability of FDWs, which we define as
CS 5 max ½0; max ðUd ; Upd Þ 2 maxðUp; 0Þ:
Table 6 presents our estimates. Our model implies that because of the
program, mothers of children aged 0–17 in Hong Kong enjoy an average
monthly consumer surplus of between HK$473 and HK$728 ðUS$62–
US$94Þ. As observed, mothers of younger children have an average con-
sumer surplus twice as large as the consumer surplus for mothers of school-
age children. The results also suggest that the program has dispropor-
tionately benefited highly educated women.
E. Comparing Macro and Micro Estimates

To compare the macro and micro estimates, we use the structural model
to simulate the program effect on the LFP of mothers. We simulate the
optimal labor supply choices when the relative price of hiring a FDW is
set at the early 1980s level.33 We do this separately for mothers of younger
and older children to construct a difference-in-difference estimator com-
parable to the macro estimates. Table 7 presents the results. Our micro
difference-in-difference estimates suggest that the decline in the relative
price of hiring a FDW from its level in the 1980s to its level today resulted
in an increase in the relative LFP of younger versus older children of
12.4–13.1 percentage points. As with the macro approach, the labor supply
change comes mostly from mothers with medium to high levels of edu-
cation.
32
Chosen to guarantee a positive willingness to pay.
33
More specifically, what we do is this: we predict the individual-level utilities
for each alternative at the 2001 minimum wage using our estimates from table 5
and random draws from a multivariate standardized normal distribution with
correlation coefficient ĵ. We take these predicted utilities and subtract the dif-
ference in utils between the 1981 and the 2001 cost of hiring a FDW. We calculate
how many women will have chosen to work at the 2001 minimum wage level and
how many at the much higher 1981 level.

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Table 6
Consumer Surplus Estimates from the Foreign Domestic Worker Program
ðin HK$Þ
Mean SD Max
All women, age 25–54, with three to four rooms:
Lower bound 473.03 1,747.04 22,180.42
Higher bound 727.74 2,687.76 34,123.71
Youngest child, age 0–5:
Lower bound 984.04 2,512.85 22,180.42
Higher bound 1,513.90 3,865.92 34,123.71
Youngest child, age 6–17:
Lower bound 237.26 1,170.93 18,505.95
Higher bound 365.01 1,801.43 28,470.70
Low education:
Lower bound 78.72 616.77 19,279.93
Higher bound 121.11 948.88 29,661.43
Medium education:
Lower bound 731.75 2,118.85 22,180.42
Higher bound 1,125.77 3,259.77 34,123.71
High education:
Lower bound 1,829.06 3,283.72 21,024.67
Higher bound 2,813.94 5,051.88 32,345.65
NOTE.—Consumer surplus estimates are based on simulations using the model estimated in table 5,
panel A. The lower bound estimate of the consumer surplus uses the conversion 1 util 5 HK$6,500. The
upper bound estimate of the consumer surplus uses the conversion 1 util 5 HK$10,000. Low education is
defined as having at most a primary education, medium education as having more than a primary edu-
cation but less than a college degree, and high education as having a college degree or a graduate degree.
While we acknowledge that both the macro and the micro approaches
have important limitations and are based on relatively strong identifica-
tion assumptions, the similarity of the estimates suggests that our esti-
mates of the effect of the FDW program on female labor supply are fairly
robust and reliable. This similarity is especially noteworthy given that
the macro and the micro approaches use very different sources of varia-
tion for identification.
The numbers in table 7 are also useful to calculate the elasticity of LFP
with respect to the price of FDWs implied by our structural model. As
observed in the table, a 75% decrease in the relative price of hiring a FDW
ðfrom its 1981 level to its 2001 levelÞ increased the probability of mothers
of young children participating in the labor force by 56%, an implied
elasticity of 20.74. Our estimates imply an elasticity larger in absolute
value but not too far from well-identified elasticities for the United States
and Canada, which gravitate around 20.35 ðBaker et al. 2008Þ. Note that
the elasticities are not perfectly comparable, as the services offered by
FDWs differ from regular child care centers in the United States and Can-
ada. Day care centers do not perform other domestic tasks ðe.g., cooking

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368 Cortés/Pan
Table 7
Micro Approach Difference-in-Difference Estimate of the Labor Force
Participation Effect of the Foreign Domestic Worker Program
Predicted ðwn at Predicted ðwn at 1981 LevelÞ
Observed 2001 LevelÞ Upper Bound Lower Bound
All:
Child 0–5 .547 .530 .340 .348
Child 6–17 .541 .533 .473 .475
Difference in difference .131 .124
Low education:
Child 0–5 .315 .358 .307 .308
Child 6–17 .473 .462 .446 .446
Medium education:
Child 0–5 .650 .604 .367 .376
Child 6–17 .627 .627 .514 .516
High education:
Child 0–5 .752 .692 .318 .343
Child 6–17 .732 .685 .488 .501
NOTE.—Simulations are based on the model estimated in table 5, panel A; wn is the monetary cost of
hiring a foreign domestic worker. The lower bound estimate of the consumer surplus uses the conversion
1 util 5 HK$6,500. The upper bound estimate of the consumer surplus uses the conversion 1 util 5 HK
$10,000. Low education is defined as having at most a primary education, medium education as having
more than a primary education but less than a college degree, and high education as having a college degree
or a graduate degree.
and cleaningÞ and are only open for limited hours. This could be a pos-
sible reason for the higher elasticity that we obtain.
V. Conclusion
The outsourcing of household production to temporary foreign do-
mestic helpers is a distinctive feature of many newly industrialized na-
tions. Moreover, this form of migration is also becoming increasingly
prevalent in some developed countries as a result of demographic changes
and increasing demand for household services as women seek to enter the
labor market.
In this article, we find that temporary foreign domestic helper poli-
cies significantly increased female LFP rates in Hong Kong, especially for
mothers of young children. Reduced-form estimates from comparing LFP
rates over time in Hong Kong versus Taiwan and simulations from a struc-
tural model of female labor supply imply that the program raised the LFP
of mothers of young children in Hong Kong by between 8 and 13 per-
centage points relative to mothers of older children. These labor supply
effects are concentrated among medium and highly skilled women, con-

51.158.165.233 on Mon, 20 Nov 2023 07:22:01 +00:00
sistent with the fact that these women face higher opportunity costs of
household production. Moreover, the program has increased the welfare
of women in Hong Kong significantly, especially for mothers of younger
children and mothers with high levels of education. The results from the
structural model suggest that mothers regard FDWs as a good substitute
for their time spent in household production.
The influx of domestic migrant workers is likely to have different eco-
nomic implications on the host country labor market as compared to con-
ventional low-skilled migrants. Since these workers substitute for house-
hold production, they free up native women to take up employment in the
labor market and potentially allow them to enter more demanding occu-
pations. That we observe such large effects on labor supply decisions in
response to the decrease in child care costs as a result of the FDW pro-
gram also suggests that at least part of the differences in labor market
outcomes of men and women can be attributed to constraints that women
face in juggling their dual roles in the household and the labor market.
These results suggest that FDW programs can have important policy ram-
ifications for encouraging women to enter the labor market and to bridge
the gender gap. Nevertheless, such a policy is likely to raise important
ethical and political economy considerations that may outweigh the po-
tential benefits. A full discussion of the viability of such temporary FDW
programs outside the Hong Kong context is likely to be country specific
and is beyond the scope of this article.
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Corts OutsourcingHouseholdProduction 2013

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NORC at the University of Chicago

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Jessica Pan, National University of Singapore

We explore how the availability of affordable live-in help provided

We are grateful to David Autor, Marianne Bertrand, David Card, Matthew

[ Journal of Labor Economics, 2013, vol. 31, no. 2, pt. 1]

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donesia, Thailand, and Sri Lanka migrating to newly industrialized

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II. Data and Background

B. Foreign Domestic Helper Policy in Hong Kong

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FIG. 2.—Relative wage of native married women to minimum wage of foreign

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A couple of statistics show the amount of substitution of household

III. Macro Approach: Hong Kong versus Taiwan

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The identification strategy that underlies the macro approach exploits

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B. Taiwan as a Control Group

2. Shifts in the Demand for Child Care

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FIG. 4.—Evolution of the labor force participation ðLFPÞ of mothers due to

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FIG. 6.—Labor force participation ðLFPÞ of native mothers by age of youngest

and middle-educated women. Highly educated mothers, whose youngest

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FIG. 7.—Labor force participation of native mothers by age of youngest child

children. Highly educated mothers of young children in Taiwan, however,

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2. Formal Econometric Evidence

where i is the individual, j is the country, g is the group ðwhether female

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4. Are the Estimates Driven by the Comparison with Taiwan?

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As a robustness check, we also explore female LFP trends in the United

IV. Micro Approach: A Structural Model

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maxUðM; CÞ such that

where I is unearned income, w is the woman’s salary, wn is the monetary

5 ðb1 1 d1 1 p1 Þ 1 ðd2 1 b2 1 p2 Þxi 1 b3 lnw 1 ε2 1 ε3 :

We interpret ε2 and ε3 as unobserved components of the utility from hiring

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ing an additional restriction beyond what is needed to set the scale of

B. Identification of the Complementarity between LFP

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1. Endogeneity of the Number of Rooms