Can child care policy encourage employment and fertility?: Evidence from a structural model

We develop a structural model of female employment and fertility which accounts for intertemporal feedback effects between these two outcomes. To identify the effect of financial incentives on employment and fertility we exploit variation in the tax and transfer system, which differs by employment state and number of children. Specifically, we simulate in detail the effects of the tax and transfer system, including child care costs. The model provides estimates of the structural preferences of women that can be used to study the effect of various policy reforms. Results show that increasing child care subsidies, conditional on employment, increases the labor supply of all women as well as the fertility rates of the childless and highly educated women.

Research Highlights► We develop an empirical model of female employment and fertility. ► This model can explain how financial incentives affect the decision to work and to have a(n other) child. ► Identification is based on variation in the tax and transfer system, including child care costs. ► Policy simulations based on the model show that increasing child care subsidies increases labor supply of all women as well as fertility rates of the childless and highly educated women.