Resource Misallocation from Childcare Policies

39 Pages Posted: 22 Jun 2020

See all articles by Diego Escobar Salcedo

Diego Escobar Salcedo

University of Chicago, Harris School of Public Policy, Students

Jeanne Lafortune

Pontifical Catholic University of Chile - Institute of Economics; IZA

Loris Rubini

University of New Hampshire

José Tessada

Business School, Pontificia Universidad Católica

Date Written: May 27, 2020

Abstract

Childcare subsidies often attempt to allow low income families to work, but a problem arises when they generate unforeseen negative general equilibrium consequences. This paper focuses on a law in Chile that forces firms with more than 19 female workers to pay for childcare. We evaluate its effects through a model that features firm and household heterogeneity. Firms differ in productivity, and households in age, marital status, gender, skills, and number of children. In the model, the policy mis-allocates resources, driving firms to stop hiring females once they are close to the threshold. It also selects females with more skills into jobs that pay for childcare, leaving unskilled mothers un-subsidized. We calibrate the model and analyze the effects of this policy via counterfactual. The policy reduces both male and female wages by between 1.5% and 2.1%, and GDP per capita by 1.8%. Most of the change comes from mis-allocation, but some also from capital accumulation, that drops by 1.7%. The policy makes every household worse off, but the largest losers are low income mothers, precisely the group targeted by the policy, who lose up to 2% of consumption equivalent units each period. We evaluate two alternative policies: one currently being considered by the Chilean government that finances childcare through a labor tax and one where all firms must pay for childcare irrespective of size. Only the latter has sizable positive effects, suggesting that a better way to help cover childcare costs would be to extend the mandate to all firms.

Keywords: Misallocation of Resources, Childcare Subsidies, Female Labor Supply, Family Economics, Labor Force Participation

JEL Classification: E65, E24, E25, D15

Suggested Citation

Escobar Salcedo, Diego and Lafortune, Jeanne and Rubini, Loris and Tessada, Jose, Resource Misallocation from Childcare Policies (May 27, 2020). Available at SSRN: https://ssrn.com/abstract=3611778 or http://dx.doi.org/10.2139/ssrn.3611778

Diego Escobar Salcedo

University of Chicago, Harris School of Public Policy, Students ( email )

Chicago, IL
United States

Jeanne Lafortune

Pontifical Catholic University of Chile - Institute of Economics ( email )

Casilla 76
Correo 17
Santiago
Chile

IZA ( email )

Loris Rubini (Contact Author)

University of New Hampshire ( email )

NH
United States

Jose Tessada

Business School, Pontificia Universidad Católica ( email )

Vicuna Mackenna 4860
Santiago
Chile

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