The effect of tax-benefit policies on fertility and female labor force participation in the United States

This paper presents an investigation of the effects of the tax exemption for dependents and the child care tax credit on age-specific fertility rates and female labor supply for the U.S. 1948-1997. These policies are incorporated in a model that is tested within a cointegration framework for women of two age groups: 20-24 and 25-34 year olds. Tests indicate the existence of two cointegrating relations for each of the two age groups, and these are identified as a fertility equation and a female labor force participation equation, with signs and statistical significance supportive of the economic model. The tax exemption elasticity in the fertility equation for younger women is moderately large, but this policy variable is dominated by effects from changes in women's wages. The 25-34 year olds are less responsive to all economic changes, including the tax exemption, reflecting reduced flexibility in their timing of fertility.