The effects of childcare subsidies on fertility and welfare

This paper develops a two-period OLG model that incorporates an endogenous fertility rate, the childcare service market, and the pension system. It examines the effects of government childcare subsidy expenditures on fertility rates, family welfare, and capital accumulation under two distinct financing modes. The results show that, under the non-tax financing mode, childcare subsidies can significantly increase the fertility rate, reduce the capital stock, and produce an asymmetrical U-shaped impact on family welfare. However, under the tax financing mode, the positive effect of childcare subsidies on fertility is weakened, the negative effect on capital accumulation becomes more pronounced, and adverse effects on household welfare emerge. Log-linearization analysis around the steady state, along with the examination of transitional dynamics, supports these steady-state results. Further analysis reveals that the optimal tax rate and subsidy rate under the tax financing mode are 3.14 % and 69.77 %, respectively. When parameters vary, the reasonable ranges for the tax rate and subsidy rate are 2–4 % and 50–84 %, respectively. Overall, childcare subsidies under the non-tax financing mode represent a relatively effective policy choice; however, considering policy sustainability, providing subsidies through tax financing is more feasible.