Analyzing the macro economic impact of child care subsidies: an AGE approach

Advocates of this policy claim that it is an important instrument to stimulate labour market participation of women with children. Opponents, on the other hand, believe that raising subsidies for child care only stimulates substitution from informal to formal child care without generating much additional labour supply. In order to investigate the labour market effects of child care subsidies, this paper presents a model of the child care market in the Netherlands.

The model is included in MIMIC, the applied general equilibrium model of CPB. Simulation results show that, notwithstanding deadweight losses from substitution from informal to official child care, an increase in child care subsidies is more efficient in stimulating labour supply than a general reduction in the income tax rate. The explanation is that child care subsidies accrue to people who exhibit a relatively high labour supply elasticity. Moreover, since only workers benefit from child care subsidies, this policy lowers the replacement ratio. Do more high skilled workers occupy simple jobs during bad times?