A Forgotten Issue: Distributional Effects of Day Care Subsidies in Germany

In general, day care subsidies are accepted as a means of creating equal chances for both children and mothers in the labour market. Although there is a broad consensus that the use of children's day care should be publicly supported, there is no consensus on how this should be done. Moreover, there is little knowledge on the distributional effects of day care subsidies. In order to assess whether public expenditures are targeted efficiently, however, it is vital to know which social groups profit most from public expenditures on children's day care and whether taxpayers' money is spent effectively. In Germany, as in other European countries, day care subsidies are mainly provided ‘in-kind’. Municipalities and NPOs provide day care for children, which is - apart from a small fee - free of charge. In this study we estimate the distributional effects of state-funded day care in Germany using microdata on households and data on the expenditure of public-funded day care. Major results are that day care subsidies have only modest redistributional effects. Primarily it is the middle-income range that profits from the public provision of children's day care. This contradicts common public-policy recommendations, which state that low-income families should be the first target of day care subsidies.