Reducing child poverty through cash or care

Reducing poverty is a central policy priority in many countries, also in wealthy countries with comprehensive universal support systems, such as the Nordic welfare states. This study examines policy options designed to support families with preschool-aged children and their implications for poverty reduction: increasing cash transfers, such as child benefits, and eliminating parental fees for early childhood education and care (ECEC). We assess the effectiveness of these measures in a Norwegian context, both in the short and long term. The key parameter for resolving the cash-versus-care question is parents’ responsiveness to changes in childcare fees. By estimating and applying a structural model, we show that lower fees increase ECEC participation and reduce child poverty in the short run through higher parental labor supply. Moreover, higher enrollment in non-parental care yields lasting benefits for children and likely helps reduce poverty in the long run. Although cash and care may be seen as affecting child development at different points in the causal chain from family income to child outcomes, and be considered complementary rather than competing, free ECEC has the added advantage of increasing the participation rate for children for whom the benefits are the greatest. Our analyses show that in countries with extensive existing support, fine-tuning of existing policy schemes can still have meaningful effects for children in families at the margin.