To Work or Not to Work? The Effect of Child-Care Subsidies on the Labour Supply of Parents

Government Institute for Economic Research Working Paper No. 23

50 Pages Posted: 13 Sep 2011

See all articles by Tuomas Kosonen

Tuomas Kosonen

University of Helsinki - Department of Political and Economic Studies

Multiple version iconThere are 2 versions of this paper

Date Written: April 29, 2011

Abstract

This paper studies the effect of child-care subsidies on maternal labour supply. In the Finnish child-care system, parents taking care of their children at home receive a relatively generous home-care allowance. I use variation arising from changes in the municipality-specific supplement to this allowance to identify the causal effect of subsidies on the labour force participation of parents. A municipal supplement creates plausibly exogenous variation in subsidies, since the opportunity to take them up depends on municipal-level rules, but not on changes in individual labour supply decisions. Moreover, a supplement policy affects labour supply in a transparent way since the amount of supplement one is eligible for does not depend on income. Robustness checks indicate that the results are not driven by policy endogeneity or residential sorting. I find a large negative effect on the labour force participation and income of mothers. 100 euros higher supplement per month reduces the maternal labour supply by 3 per cent. The estimated effect is larger for higher-educated than for medium-educated mothers.

Keywords: Labour supply of parents, child care subsidies, participation tax rate

JEL Classification: H2, J13, J22

Suggested Citation

Kosonen, Tuomas, To Work or Not to Work? The Effect of Child-Care Subsidies on the Labour Supply of Parents (April 29, 2011). Government Institute for Economic Research Working Paper No. 23, Available at SSRN: https://ssrn.com/abstract=1926620 or http://dx.doi.org/10.2139/ssrn.1926620

Tuomas Kosonen (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland

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