Principal investigator: Eduarda Miller Figueiredo
Original title: Efficient Child Care Subsidies
Authors: Christine Ho and Nicola Pavoni
Location of the Intervention: United States
Sample Size:
Sector: Education, Job Market
Primary Variable of Interest: Child welfare, labor market
Type of Intervention: Childcare subsidies
Methodology: Another – Economic model plus simulation exercise
Summary
Literature has been discussing the impact of childcare subsidies on mothers' employment and the affordability of childcare costs. The promotion of maternal labor supply is a key argument in favor of childcare subsidies. Consequently, policymakers are increasing their focus on childcare subsidy programs. This article proposes an economic model to study income tax patterns and childcare subsidies. The results suggest that properly designed childcare subsidies can encourage labor supply.
- Policy Problem
Women have transitioned from the traditional role of mothers and homemakers to the role of potential heads of household over the past few decades, indicating the growing involvement of mothers as active members of the workforce. As a result, policymakers are increasing their focus on childcare subsidy programs.
The literature has already discussed the impact of childcare subsidies on mothers' employment and the affordability of childcare. However, studies focusing on the ideal design of childcare subsidies are still lacking.
The article analyzed here presents a study on the design of such subsidies within an ideal welfare framework. Women and mothers in the workforce have childcare needs and allocate their efforts between the primary labor market and domestic childcare activities.
According to the literature, childcare subsidies can encourage German mothers to offer their services, just as in the US it can increase the labor supply (Bick, 2016; Guner, Kaygusuz and Ventura, 2016).
According to the authors of the study analyzed here (Ho and Pavoni, 2020), this study analyzes a richer and more flexible political tool than the studies already cited. In this approach, flexibility supported by rigorous economic principles can provide some valuable advantages. insights Regarding the evaluation of complex schemes, such as the one in place in the United States.
- Implementation and Evaluation Context
In the United States, there are two major cost-related childcare subsidy programs: the Dependent Care Tax Credit (DCTC).[1] and the Child Care and Development Fund (CCDF)[2]There are also tax exemptions and subsidies for dependent children available to families with children under the federal income tax scheme, the Employment Income Tax Credit (EITC).[3] and Temporary Assistance to Families in Need (TANF)[4].
From the wealth of the American program of transfers and subsidies related to children, some normative questions emerge. Is it economically sensible to pay a childcare allowance to working mothers? Should the childcare allowance rate depend on income? Should marginal taxes for working mothers be adjusted relative to taxes on families without children? Among other questions.
- Policy/Program Details
The DCTC is a non-refundable federal income tax credit program available to families with children under 13 and covers a portion of childcare expenses. The CCDF, on the other hand, is a grant fund administered by states within certain federal guidelines. CCDF grants are available as... vouchers or as part of direct purchase programs for families with children under 13 years of age and with income below 85% of the state's average income.
Both subsidies are contingent on parental employment and are "sliding scale," meaning the childcare subsidy rate decreases as income increases. The DCTC has a 35% tax credit rate for childcare expenses for families with gross annual income below $15.000. The tax credit rate decreases by 1% for every additional $2.000 of income until it reaches a constant tax credit rate of 20%.
- Assessment Method
To answer the various questions explored above, the authors of this article proposed an economic model to study income tax patterns and childcare subsidies. They present a model framework that allows for the inclusion of domestic childcare within an optimal welfare problem, thus capturing some of the key compromises faced by working mothers.
The authors also conducted an illustrative simulation exercise. They focused on single mothers with at least one child under the age of 6 and calibrated the model to match the characteristics of the US labor market. They then simulated optimal policy outcomes and calculated optimal childcare allowances and subsidies in the context studied in the article.
- Main results
The first result the authors bring to the discussion concerns optimal allocations. The results suggest that optimal incomes and consumption increase with market productivity. Unemployed mothers were grouped with the same consumption and domestic childcare within a given specification. Working mothers tend not to engage in domestic childcare, while a higher proportion of mothers tend to engage in domestic childcare in the specification with high childcare costs.
They also found that properly designed childcare subsidies can encourage labor supply, especially among low-productivity types close to the wide participation margin. The optimal scheme generates greater welfare gains for low-productivity mothers. According to the authors, this happens because these mothers tend to have relatively low consumption in the US system, while the criterion used in the social welfare study assigned them a greater weight.
The authors also considered the quality of childcare and the externalities of human capital. The literature shows that policymakers also argue that the quality of formal childcare can serve the purpose of improving children's outcomes, particularly for children from low socioeconomic backgrounds (Blau and Currie, 2006; Cascio and Schanzenbach, 2013; Comelissen et al., 2018). Based on the model used by the authors of this article, they conclude that the main assumption is that the production function of child human capital does not depend on unobservable market productivity.
As discussed in previous sections, promoting mothers' employment is a strong argument in favor of childcare subsidies. The effects on income may modify quantitative outcomes, but have no qualitative implications.
- Lessons in Public Policy
The authors, by providing an efficiency case for childcare subsidies through an optimal heterogeneous agent welfare problem, show that ideal childcare subsidy rates follow a sliding scale and that coverage rates should account for a distortion. Such characteristics are present in the existing US system. Although subsidies encourage greater labor participation, the sliding scale pattern can have discouraging effects on labor supply. To counteract these disincentives, marginal taxes on labor income are set at rates lower than labor margins.
References
Bick, Alexander. 2016. “The Quantitative Role of Child Care for Female Labor Force Participation and Fertility.” Journal of the European Economic Association 14 (3): 639-68.
Blay, David, and Janet Currie. 2006. “Pre-School, Day Care, and After-School Care: Who’s Minding the Kids?” In Handbook of the Economics of Education, Vol. 2, edited by Eric Hanushek and Finis Welch, 1163-1278. Amsterdam: Elsevier.
Cascio, Elizabeth U., and Diane Whitmore Schanzenbach 2013. “The Impacts of Expanding Access to High-Quality Preschool Education.” Brookings Papers on Economic Activity (Fall): 127-92.
Cornelissen, Thomas, Christian Dustmann, Anna Raute, and Uta Schönberg. 2018. “Who Benefits from Universal Child Care? Estimating Marginal Returns to Early Child Care Attendance.” Journal of Political Economy 126 (6): 2356-409.
Guner, Nezih, Remzi Kaygusuz, and Gustavo Ventura. 2016. “Child-Related Transfers, Household Labor Supply and Welfare.” Human Capital and Economic Opportunity Working Paper 2017-001.
[1] Dependent Care Tax Credit (DCTC).
[2] Child Care and Development Fund (CCDF).
[3] Earned Income Tax Credit (EITC).
[4] Temporary Assistance to Needy Families (TANF).
