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The B.E. Journal of Economic Analysis & Policy

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Volume 14, Issue 3


Volume 18 (2018)

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

To Work or Not to Work? The Effect of Childcare Subsidies on the Labour Supply of Parents

Tuomas Kosonen
Published Online: 2014-05-29 | DOI: https://doi.org/10.1515/bejeap-2013-0073


This paper studies the effect of childcare subsidies on parental labour supply. I use variation arising from changes in the municipality-specific supplement to Finnish child homecare allowance to identify the causal effect of subsidies on the labour force participation of parents. The variation in labour supply incentives is plausibly exogenous, since eligibility depends on municipal-level rules, but not on family income. Robustness checks indicate that the results are not driven by policy endogeneity or residential sorting. I find a robust result that 100 euros higher supplement per month reduces the maternal labour supply by 3 percentage points.

Keywords: parental labour supply; childcare subsidies; participation elasticity

JEL Classification: J22; J13; H22


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About the article

Published Online: 2014-05-29

Published in Print: 2014-07-01

This is subsidized from a different allowance, the private daycare allowance, and is more attractive for the third party (the carer).

This is stated in legislation. Before 1995 the law stated that every child under the age of 4 is entitled to a place in public daycare.

This system has been in place nationwide since 1997. Between 1995 and 1997 there was an experiment in 33 municipalities that provided a similar allowance. Viitanen (2007) found a positive effect on the use of private daycare, but little effect on labour force participation.

In some rare cases the supplement does depend on family income. Excluding such municipalities does not change the results, and these cases are not part of the main analysis.

There are cities in both supplement and no-supplement municipalities. However, supplement municipalities are on average more populous.

In the rotating panel each household is surveyed in two consecutive years and each year half of the sample consists of new households. Thus there are two consecutive observations for each individual.

More specifically I measured income for women between 20 and 59 years old and not on sick leave, retired or otherwise outside of the labour force.

The average net-of-tax income per month for a woman working full time is around 1,500 (own calculations).

Some of the municipal supplement rules were simplified in order to be able to calculate the leads and lags, like removing the age restrictions of the sibling extras to the supplement. These simplifications do not affect the euro amounts of the supplement much and, more importantly, do not delete or create any reforms to supplement policies. The regression included municipal and year dummies, as well as dummies for every 2 years of age of the youngest child and controls for characteristics of the mother.

Finnish municipalities are typically large in surface area. Thus moving to another municipality usually means moving to a completely different city or town.

The other definition is the number of months worked as based on a survey question. The results for this are shown in Table 11. There is a measurement error in this variable, thus I did not use it in the main estimates.

For participation essentially the same set of results emerged when the participation threshold was defined as 30% of the mean income of the education group.

Citation Information: The B.E. Journal of Economic Analysis & Policy, Volume 14, Issue 3, Pages 817–848, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2013-0073.

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