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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. 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.
  2. Theodore C. Bergstrom & S�ren Blomquist, . "The Political Economy of Subsidized Day Care," ELSE working papers 015, ESRC Centre on Economics Learning and Social Evolution.
  3. 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.
  4. Katharina Wrohlich, 2006. "Labor Supply and Child Care Choices in a Rationed Child Care Market," Discussion Papers of DIW Berlin 570, DIW Berlin, German Institute for Economic Research.
  5. Olovsson, Conny, 2004. "Why do Europeans Work so Little?," Seminar Papers 727, Stockholm University, Institute for International Economic Studies.
  6. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
  7. Blomquist, Sören & Christiansen, Vidar, 1998. "The Political Economy of Publicly Provided Private Goods," Working Paper Series 1998:14, Uppsala University, Department of Economics.
  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, 2008. "The excess demand for subsidized child care in Germany," Applied Economics, Taylor & Francis Journals, vol. 40(10), pages 1217-1228.
  10. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
  11. 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.
  12. 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.
  13. 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.
  14. Henry Ohlsson & Michael Lundholm, 1998. "Wages, taxes and publicly provided day care," Journal of Population Economics, Springer, vol. 11(2), pages 185-204.
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Citations

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Cited by:
  1. 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).
  2. Nezih Guner & Remzi Kaygusuz & Gustavo Ventura, 2013. "Childcare Subsidies and Household Labor Supply," Working Papers 738, Barcelona Graduate School of Economics.
  3. Bick, Alexander & Choi, Sekyu, 2012. "Revisiting the Effect of Household Size on Consumption Over the Life-Cycle," MPRA Paper 41756, University Library of Munich, Germany.
  4. Alessandra Casarico & Alessandro Sommacal, 2014. "Taxation and Parental Time Allocation under Different Assumptions on Altruism," CESifo Working Paper Series 4690, CESifo Group Munich.
  5. Bick, Alexander, 2010. "The quantitative role of child care for female labor force participation and fertility," MPRA Paper 25474, University Library of Munich, Germany.
  6. 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.

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