Child care subsidies with endogenous education and fertility

What are the effects of child care subsidies on education, fertility and the sectoral allocation of the labour force? In a general equilibrium setting the availability of affordable professional child care will have an impact on the relative supplies of educated and uneducated workers and the cross-sectional fertility pattern. In absence of taxes and subsidies the optimal choice of financial assets early in life (taking marriage market conditions into account) is such that individuals who decide to attend college save relatively little. As a consequence, a couple with an uneducated wife and an educated husband has the most children, while parents who are both educated have the least. Introducing an ad valorem subsidy on child care financed by a proportional tax on income leads to an increase in fertility for all households. As more uneducated workers are employed in the service sector the college wage premium goes down and college graduation rates drop. This latter consequence is even more pronounced if the tax system is progressive. If the aim of the subsidy is to stimulate fertility, then this can be more effectively done by providing a specific subsidy per child. However, this reduces the supply of labour, especially by uneducated married women.