Job Market Paper

More Babies for the Buck? Universal versus Work-Contingent Child Care Subsidies

Abstract:

This paper studies whether universal or work-contingent child care subsidies are more cost-effective in raising fertility. Their relative cost-effectiveness is theoretically ambiguous. When preferences for children are heterogeneous, women with stronger preferences may select out of the labor force, allowing universal subsidies to reach women with potentially larger fertility responses. However, these women also have more inframarginal children. Work-contingent subsidies cover fewer inframarginal children but may induce employment responses that crowd out childrearing. To quantify these tradeoffs, I develop a model of fertility, female labor supply, and market child care use with heterogeneity in preferences for children and wage opportunities, calibrated to the United States circa 2010. Policy counterfactuals show that universal subsidies are more cost-effective in raising fertility than subsidies conditional on working at least 15 hours per week or working full time.  Raising average fertility by 0.1 children requires average government expenditure per household of approximately $19,000 under a universal subsidy, compared with $43,000 under a work-contingent subsidy with a 15-hour requirement and $95,000 under a full-time-only subsidy, assuming that subsidies are provided for five years.