Childcare subsidies, labour supply and public finance: an AGE approach

Abstract

This paper uses an applied general equilibrium approach to analyse the impact of childcare subsidies on the labour market and government budget. Simulation results show that an increase in childcare subsidies has a relatively large impact on labour supply, because childcare subsidies accrue to people who feature a relatively high labour supply elasticity. General equilibrium wage effects cause an increase in employment. Moreover, since only workers benefit from childcare subsidies, this policy lowers the replacement ratio, reducing unemployment. The resulting additional tax receipts do not fully compensate for the rise in subsidies. However, public expenditure also partly decreases because of the wage reduction. As a result, childcare subsidies largely pay for themselves.