Responsible researcher: Eduarda Miller Figueiredo
Original title: Efficient Child Care Subsidies
Authors: Christine Ho and Nicola Pavoni
Intervention Location: United States
Sample Size: -
Sector: Education, Job Market
Variable of Main Interest: Child well-being, labor market
Intervention Type: Childcare Subsidies
Methodology: Other - Economic model plus simulation exercise
Summary
The literature has already discussed the impact of child care subsidies on mothers' employment and the affordability of child care costs. In which promoting mothers' labor supply is an important argument in favor of childcare subsidies. As a result, policymakers are increasing their focus on child care subsidy programs. In this article, an economic model was proposed to study the patterns of income taxes and child care subsidies. The results suggest that properly designed child care subsidies can encourage labor supply.
Women have transitioned from the role of traditional mothers and housewives to the role of potential heads of households over the past few decades, indicating the increasing involvement of mothers as active members of the workforce. As a result, policymakers are increasing their focus on child care subsidy programs.
The literature has already discussed the impact of child care subsidies on mothers' employment and the affordability of child care costs. However, there is still a lack of studies that focus on the ideal design of child care subsidies.
The article analyzed here presents a study on the design of such subsidies, within an ideal welfare structure. Women and mothers in the labor force have childcare needs and allocate efforts between the primary labor market and domestic childcare activities.
According to the literature, child care subsidies can encourage the labor supply of German mothers, just as in the USA it can increase 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 mentioned. Where flexibility supported by rigorous economic principles can provide some valuable insights into the evaluation of complex schemes such as the one in the United States.
In the United States there are two major price-related child care 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 that are available to families with children under the federal income tax regime, the Earned Income Tax Credit (EITC) [3] and Temporary Assistance for Needy Families (TANF ) [4] .
From the richness of the American program of child-related transfers and subsidies, some normative questions emerge. Is it economically sensible to pay a childcare subsidy to working mothers? Should the child care subsidy rate depend on income? Should marginal taxes on working mothers be adjusted relative to taxes on childless families? Among other questions.
The DCTC is a non-refundable federal income tax credit program available to families with children under age 13 and covers part of their child care expenses. The CCDF 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 age 13 and incomes below 85% of the state median income.
Both subsidies are conditional on parents' employment and are “sliding scale,” meaning the child care subsidy rate decreases as income increases. DCTC has a tax credit rate of 35% of child care expenses for families with gross annual income of less than $15,000. The tax credit rate decreases by 1% for every $2,000 of additional income until you reach a constant tax credit rate of 20%.
To answer various questions such as those explored previously, the authors of this article proposed an economic model to study the patterns of income taxes and child care subsidies. They present a model framework that allows us to introduce the possibility of involving home child care in an optimal welfare problem. Thus, capturing some of the main commitments faced by working mothers.
The authors also performed an illustrative simulation exercise. They focused on single mothers with at least one child under age 6 and calibrated the model to match the characteristics of the U.S. labor market. They then simulated the optimal policy outcomes and calculated the optimal child care subsidies and allowances in the context studied in the article.
The first result that the authors bring to discussion is about optimal allocations. The results suggest that optimal income and consumption increase with market productivity. Unemployed mothers were grouped with the same household consumption and childcare within a given specification. Working mothers tend not to engage in home child care, while a greater proportion of mothers tend to engage in home child care in the high-cost specification of child care.
They also find that properly designed child care subsidies can encourage labor supply, especially among low-productivity types near 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 a relatively low consumption in the US system, while the criteria used in the social well-being study gave them a greater weight.
The authors also considered the quality of child care and human capital externalities. The literature demonstrates that policymakers also argue that the quality of formal child care 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 of the authors of this article studied here, they conclude that the main assumption is that the production function of children's human capital does not depend on unobservable market productivity.
As already discussed in previous topics, promoting mothers' labor supply is an important argument in favor of child care subsidies. Effects on income may modify quantitative results, but have no qualitative implications.
The authors, in providing an efficiency case for child care subsidies through an optimal heterogeneous agent welfare problem, show that optimal child care subsidy rates follow a sliding scale and that coverage rates must account for a distortion . Such characteristics are present in the existing regime in the USA. Although subsidies encourage greater work participation, the sliding scale pattern can have disincentive effects on labor supply. To counterbalance 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).
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