The Fiscal Return to Childcare Policies

Abstract

We study the long-term fiscal implications of childcare subsidies through their impact on maternal labour supply. Taking human capital accumulation into account, we explicitly capture life-cycle career aspects in a dynamic structural household model of female labour supply and childcare decisions: higher labour supply of mothers today results in higher expected future earnings. In our dynamic structural model, we allow households to be heterogeneous in their taste for home produced childcare, their taste for leisure, and in their access to informal childcare (e.g. by grandparents). Using German survey data, we provide a structural estimate of the degree to which childcare subsidies are dynamically self-financing through higher labour income tax revenue. Further, we explore how the marginal fiscal returns of childcare subsidies depend on the group of families targeted. Our estimates show that targeting childcare subsidies is a useful tool to increase the ability of these policies to be self-financing: an untargeted increase in childcare subsidies refinances itself by 2.6% over the remaining life cycle of the sampled households. The result increases to 17.4% (75.7%) if the subsidy is targeted towards (full-time) working mothers. Finally, targeting working mothers with children below the age of three raises the marginal return to 23.3%.

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David Koll
Postdoctoral Scholar, University of Mannheim