Linkages between Innovation, Financial Development and Female Labor Force Participation: Evidence from India

Abstract

When the effect of innovation is studied, labor is treated as a homogenous entity devoid of gender segregation which has led to a lack of insights as to how innovation impacts male and female labor differently. This paper examines the relationship between innovation, financial development, and female labor force participation rate in India between 1995 and 2019. Vector Autoregression model and Granger Causality tests have been employed to assess the linkage and direction of causality among female labor force participation, innovation, and financial development controlling for female unemployment and per capita income. A bidirectional causality is found between female labor force participation and innovation and they significantly and positively influence each other. Evidence for finance-innovation nexus was found where the results showed financial development granger causes innovation while the vice versa is not true. Financial development acts as a channel through which innovation positively influences female labor force participation and therefore positively impacts it indirectly. However, the direct relationship between financial development and female labor force participation is negative. This paper is a first of its kind which examines the relationship between innovation, female labor force participation, and financial development in India through the VAR framework. It also adds to the literature on innovation externalities in the labor market. It provides significant empirical evidence to integrate the importance of innovation with gender demographics in employment, in not only economic but policy terms.