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Family policy and couples’ labour supply: an empirical assessment

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Abstract

This paper empirically examines the effect on couples’ labour supply of a universal at-birth cash benefit and a government subsidy equal to 50% of child care expenditure for working parents. The method is first to simulate the effects on labour supply over the adult lifecycle using a calibrated dynamic utility maximisation model of a representative couple, using data drawn from waves of a longitudinal survey for Australia. Then using the same data, the effect of family benefits and the child care subsidy on couples’ hours worked is econometrically estimated. The 50% child care subsidy was found to increase the average couple’s labour supply by the equivalent of 0.75 to 1 h per week whilst children are of pre-school age, and less on average over the couple’s working lifetime. The cash benefit changes were found to have a negligible effect on labour supply.

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Notes

  1. Spain’s equivalent to the Baby Bonus, which was introduced in 2007, was discontinued at the end of 2010.

  2. In several countries, for example Singapore and the Russian Federation, the term ‘Baby Bonus’ has been used to describe family benefits which structured differently from Australia’s universal, flat-rate, at birth ‘Baby Bonus’.

  3. Henceforth, we refer to it as the Baby Bonus.

  4. Wave 1 was not included because comparable data on hours worked were not available from this wave.

  5. In Australia, for example, mothers still spend considerably less time in paid work and considerably more time on domestic work and looking after children than fathers, especially when the children are young (Craig and Sawrikar 2009). However, there is a trend toward fathers spending more time caring for children than in the past and some evidence fathers would like more opportunity to do so (Craig and Sawrikar 2009; Craig et al. 2010).

  6. The Wave 9 HILDA data (for 2009) show the median ages at entry to union for couples with a female partner aged 45 to 54 and two children were 25.2 for females and 27.5 for males.

  7. The bimodal distribution is given as the weighted sum of two normal distributions: \(\gamma_i =\frac{1}{\sigma \sqrt {2\pi } }\exp \left( {\frac{-\left( {i-\mu_1 } \right)^2}{2\sigma^2}} \right)+w\frac{1}{\sigma \sqrt {2\pi } }\exp \left( {\frac{-\left( {i-\mu_2 } \right)^2}{2\sigma^2}} \right)\) where w is a weight.

  8. This reflects evidence from the time use literature which shows that younger children receive more of parents’ child care time than older children (Craig 2006, 2007; Craig and Sawrikar 2009) implying more parental time out of the labour force. It is assumed here that this reflects a parental preference to spend more time with younger children.

  9. The cost of a child of a given age is assumed to decline with the number of children born (see Section 2).

  10. The estimates are derived from the fertility histories of women aged 40–49 with 2 children who are currently either married or in an opposite sex cohabiting/de facto union, had not had a child before their current union and who (if married) had not been married prior to the start of their current union.

  11. The percentage changes reported in Table 1 refer to percentage point change in LFP (not the proportional change).

  12. The HILDA survey provides the age of the youngest child by individual years of age. Information on numbers of children by age is provided only by the broad age ranges (0 to 4, 5 to 14 and 15 to 24) here.

  13. Non linearity in this effect was tested for by including the square of the union duration. However, the squared term was later removed after it was found to be insignificant.

  14. Non linearity in this effect was tested for by including separate effects for a 30% rebate and a 50% rebate. However, since the estimated effect of the 50% rebate on hours worked by couples with a child under 5 was roughly 1.6 times that of a 30% rebate the more parsimonious linear variable was preferred.

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Acknowledgements

This research was supported by an Australian Research Council (ARC) Discovery Grant funding scheme (project number DP0984378). We gratefully acknowledge the research assistance provided by Amy Lo and Simon Massey. This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. The HILDA Project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute). The findings and views reported in this paper, however, are those of the authors and should not be attributed to either FaHCSIA or the Melbourne Institute.

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Appendix: Calibration and data

Appendix: Calibration and data

The base case values chosen for the parameters in Eqs. 1 to 5, are given in Table 5 and are chosen as follows. The preference for consumption relative to leisure, μ, is calibrated such that the optimal labour force participation (LFP) at the time of the union, in the case of no children, is equal to 0.6; hence L 1 = 0.8 and S 1 = 0.2 in that simulation. The value of μ is recalibrated for each birth sequence such that this initial LFP condition is met. The term θ a,i represents an additional degree of preference for leisure depending on the age of the youngest child of the couple at age i. The values of θ a,i are set in order that the joint labour time of the couple falls by approximately 30% in the first year following a birth, 15% in the second year, and 10% in the third year and so on. This broadly reflects HILDA data on couples’ median hours worked per week according to the age of the youngest child. The age-specific preference for children, γ i follows a bimodal distribution in order to generate the baseline birth sequence.

Table 5 Base case parameter values

The child care expenditure parameter, η, is set equal to 0.1 in the baseline case, representing expenditure per child of 10% of the couple’s wage at the time of the union. The child care rebate is set at 0.5 (50%) in the baseline case. The parameter ε measures the rate at which the couple’s human capital increases with workforce experience. The value of ε was determined from Gray and Chapman (2001) who find that woman increase their annual after-tax earnings by between 1% and 4% per year from the age of 30 to 45, depending on the number of children they have. We have chosen a value of ε (0.01) reflecting the lower end of this range.

The cost of a child of age ij and birth order n, Q i − j,n , is based on Percival and Harding (2007). They report figures for a child of a given age that vary depending on the work status of the parents, the level of child care and the number of children in the household. An average of their figures at each age is adopted here, resulting in the cost of the first born child being roughly 20% of household income when the child is aged 3 and increasing by 0.4% of income for each additional year of age of the child, reaching approximately 25% of income by age 14. The age-specific costs of second and subsequent children are assumed here to be 50% of the cost of the most recently born child. This is an approximation consistent with the figures reported in Percival and Harding (2007). It implies for example, that given the cost of the first born child at age 3 of 20% of household income, when the second child is age 3 the cost of that child is 0.5 of 20% (=10%) of household income, giving a total cost of the two children (aged 3 and 6) of 30%. Once the child reaches the age of 18, the cost of that child is reduced by 50% for each year thereafter. Hence, the cost of a 19-year-old child is 50% the cost of an 18-year-old, and the cost of a 20-year-old is 25% of the cost of an 18-year-old, and so on.

Family benefits per child of age ij B i − j , are expressed as a proportion, δ, of the monetary costs of a child at age ij. Lattimore and Pobke (2008) calculate the value of Australian Government family benefits to be about one quarter of the full private monetary costs of children. Hence δ = 0.25 in the base case.

Target wealth at the end of the planning period, A T , is set equal to five times the household income at the time of the union. This is based on HILDA Wave 9 data for median household financial assets for couples aged 60–69 who have children. Initial wealth, A 0, is zero.

The real interest rate, r, is both a borrowing and lending rate for simplicity. It is set at 3% which is a typical rate used in household life cycle models (Li and Yao 2007, for example). The rate of time preference, ρ, is also set at 3% which is also well within the range of values used in similar models and those estimated from data (for example Li and Yao 2007, use 4.5% while Jorgenson and Yun 2001, estimate a value of 2%).

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Guest, R., Parr, N. Family policy and couples’ labour supply: an empirical assessment. J Popul Econ 26, 1631–1660 (2013). https://doi.org/10.1007/s00148-012-0421-0

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