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The distortionary effect of size and factor dependent policies: The role of factor substitutability in measuring the impact of a child-care subsidy policy in Chile

Author

Listed:
  • Escobar, Diego
  • Lafortune, Jeanne
  • Rubini, Loris
  • Tessada, José

Abstract

In an effort to increase female labor participation in Chile, firms with more than 19 women must pay for childcare for the children of their female employees. We evaluate the effects of such policy using a model that features firm heterogeneity and three factors of production: women, men and capital. In our model the policy misallocates resources, driving firms to stop hiring once they are close to the threshold, depressing female participation and wages. We calibrate the model to the Chilean economy, and analyze via counterfactuals the effects of removing this distortion. First, we find that the policy reduces female labor participation by 1%, and wages by 2%. Second, the policy redistributes welfare from men to women, increasing female welfare by 0.05%. Third, we suggest alternatives policies that would be more successful at increasing female labor participation. For example, financing childcare with a tax on profits would increase female labor participation by 4%, with similar welfare consequences as the policy in place.

Suggested Citation

  • Escobar, Diego & Lafortune, Jeanne & Rubini, Loris & Tessada, José, 2017. "The distortionary effect of size and factor dependent policies: The role of factor substitutability in measuring the impact of a child-care subsidy policy in Chile," Research Department working papers 1104, CAF Development Bank Of Latinamerica.
  • Handle: RePEc:dbl:dblwop:1104
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    Cited by:

    1. Rosangela Bando & Samuel Berlinski & José Martinez Carrasco, 2019. "Progress and Challenges for an Evidence-Based Gender Equality Policy: a Focus in Latin America and the Caribbean," Journal of Economics, Race, and Policy, Springer, vol. 2(4), pages 187-201, December.

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