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Should day care be subsidized?

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Author Info

  • Domeij, David

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Klein, Paul

    ()
    (Institute for International Economics)

Abstract

In an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing consumption/leisure wedges over the life cycle and across agents. A simple way to implement this is to make day care expenses tax deductible. Calibrating our model to Germany, we find that tax deductibility for day care expenses leads to an approximate doubling of labor supply for both married and single mothers with small children. The overall welfare gain from optimal reform corresponds to a 1.0 percent increase in consumption.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0729.

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Length: 43 pages
Date of creation: 11 Jun 2010
Date of revision:
Handle: RePEc:hhs:hastef:0729

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Keywords: Female labor force participation; Germany; day care subsidies;

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References

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  1. Besley, Timothy & Coate, Stephen, 1991. "Public Provision of Private Goods and the Redistribution of Income," American Economic Review, American Economic Association, vol. 81(4), pages 979-84, September.
  2. Merz, Monika, 2004. "Women's Hours of Market Work in Germany: The Role of Parental Leave," IZA Discussion Papers 1288, Institute for the Study of Labor (IZA).
  3. Bergstrom, T. & Blomqust, S., 1993. "The Political Econmomy of Subsidized Day Care," Papers 1993-15, Uppsala - Working Paper Series.
  4. Katharina Wrohlich, 2005. "The Excess Demand for Subsidized Child Care in Germany," Discussion Papers of DIW Berlin 470, DIW Berlin, German Institute for Economic Research.
  5. Conny Olovsson, 2004. "Why do Europeans Work so Little?," 2004 Meeting Papers 760, Society for Economic Dynamics.
  6. Gouveia, Miguel, 1997. " Majority Rule and the Public Provision of a Private Good," Public Choice, Springer, vol. 93(3-4), pages 221-44, December.
  7. Larry E. Jones & Rodolfo E. Manuelli & Ellen R. McGrattan, 2003. "Why are married women working so much?," Staff Report 317, Federal Reserve Bank of Minneapolis.
  8. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
  9. Katharina Wrohlich, 2011. "Labor Supply and Child Care Choices in a Rationed Child Care Market," Discussion Papers of DIW Berlin 1169, DIW Berlin, German Institute for Economic Research.
  10. David C. Ribar, 1992. "Child Care and the Labor Supply of Married Women: Reduced Form Evidence," Journal of Human Resources, University of Wisconsin Press, vol. 27(1), pages 134-165.
  11. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, vol. 105(2), pages 338-369, August.
  12. Michael Baker & Jonathan Gruber & Kevin Milligan, 2005. "Universal Childcare, Maternal Labor Supply, and Family Well-Being," NBER Working Papers 11832, National Bureau of Economic Research, Inc.
  13. Neil Bruce & Michael Waldman, 1988. "Transfers in Kind: Why They Can Be Efficient and Non-Paternalistic," UCLA Economics Working Papers 532, UCLA Department of Economics.
  14. Blomquist, S. & Christiansen, V., 1998. "The Political Economy of Publicly Provided Private Goods," Papers 1998-14, Uppsala - Working Paper Series.
  15. Lundholm, M. & Ohlsson, H., 1995. "Wages for Women and Publicly Financed Day Care," Papers 1995-23, Uppsala - Working Paper Series.
  16. Willem Adema & Donald Gray & Sigrun Kahl, 2003. "Social Assistance in Germany," OECD Labour Market and Social Policy Occasional Papers 58, OECD Publishing.
  17. John Knowles, 2005. "Why are Married Men Working So Much?," PIER Working Paper Archive 05-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  18. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 57-84, February.
  19. Siv Gustafsson & Frank Stafford, 1992. "Child Care Subsidies and Labor Supply in Sweden," Journal of Human Resources, University of Wisconsin Press, vol. 27(1), pages 204-230.
  20. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  21. Alexander Bick, 2010. "The Quantitative Role of Child Care for Fertility and Female Labor Force Participation," 2010 Meeting Papers 892, Society for Economic Dynamics.
  22. David Carey & Harry Tchilinguirian, 2000. "Average Effective Tax Rates on Capital, Labour and Consumption," OECD Economics Department Working Papers 258, OECD Publishing.
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Citations

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Cited by:
  1. C. Katharina Spieß, 2011. "Vereinbarkeit von Familie und Beruf – wie wirksam sind deutsche „Care Policies“?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(s1), pages 4-27, 05.
  2. Alessandra Casarico & Alessandro Sommacal, 2014. "Taxation and Parental Time Allocation under Different Assumptions on Altruism," CESifo Working Paper Series 4690, CESifo Group Munich.
  3. Reijnders, Laurie S.M., 2014. "Child care subsidies with endogenous education and fertility," Research Report 14007-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  4. Bick, Alexander, 2011. "The quantitative role of child care for female labor force participation and fertility," MPRA Paper 31713, University Library of Munich, Germany.
  5. Guner, Nezih & Kaygusuz, Remzi & Ventura, Gustavo, 2013. "Childcare Subsidies and Household Labor Supply," CEPR Discussion Papers 9775, C.E.P.R. Discussion Papers.
  6. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.

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