Child Poverty, Labour Markets and Public Policy in Rich Countries

We examine levels and changes across time in the children’s economicwell-being aswell as the drivers of their living standards, in rich countries. Using data from the Luxembourg Income Study Database (LIS), we focus on the worst-off fifth of children, measuring their economic well-being in the latest LIS data as well as over time by the equivalent disposable income of their households, in both relative and absolute terms. Much attention has in recent years has been directed to parental labour force participation – what economists call the extensive margin labour supply – and the role of taxes and transfer in driving that. We therefore examine the combined roles of labour markets and the public sector through net transfers. Our key policy variables are participation tax rates – the change in household disposable income for a given increase in labour earnings driven by benefit withdrawal and tax increase – and minimum income support in public transfers. Our results show substantial variation across countries in levels of child poverty and the extent to which that level stems from labour markets or public transfers. Our regression results suggest that neither participation tax rates nor levels of minimum income support appear to matter much for parental labour supply, as market incomes are little affected by either. For overall children’s living standards, i.e., their disposable income, levels of minimum income support do matter but participation tax rates do not appear to be important, with the effect of the former operating mainly through net transfers.