Childcare Subsidies and Household Labor Supply

By Nezih Guner, Remzi Kaygusuz and Gustavo Ventura

What would be the aggregate effects of adopting a more generous and universal childcare subsidy program in the U.S.? We answer this question in a life-cycle equilibrium model with joint labor-supply decisions of married households along extensive and intensive margins, heterogeneity in terms of the presence of children across households and skill losses of females associated to non-participation. We find that subsidies have substantial effects on female labor supply, which are largest at the bottom of the skill distribution. Fully subsidized childcare available to all households leads to long-run increases in the participation of married females and total hours worked by about 10.1% and 1.0%, respectively. There are large differences across households in welfare gains, as a small number of households – poorer households with children – gain significantly while others lose. Welfare gains of newborn households amount to 1.9%. Our findings are robust to differences among households in fertility and childcare expenditures.

There are plenty of empirical studies addressing the same question, but the big problem is that so many measures are endogenous (general equilibrium!), including factor prices that are important for labor supply decisions. This is why studies like this one are very important, as they highlight the channels through which public policies have an impact. What this paper shows is that matters are almost impossible for the empiricist: either there is a natural experiment with a small segment of the population, where the wages are not affected and the results thus miss something very important, or it is a nationwide experiment where wages are affected but they can also be affected by many other things.

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