The Impacts of Family Policies on Labor Supply, Fertility, and Social Welfare

Abstract

We quantitatively examine the impacts of family policies on labor supply, fertility, and social welfare in a heterogeneous agent overlapping-generations (OLG) economy. We extend a standard incomplete-market OLG model with married and single households by incorporating parental decisions on the number of children, child care, education spending, and time allocation between market work, parental care, and leisure. We use this extended model to examine the possible impacts of four major family policies: child subsidies, child care subsidies, education subsidies, and income tax deductions for dependent children. The results of all four policies suggest a tradeoff between fertility rates and female labor supply, although the individual effects of each policy on households and the macroeconomy differ significantly. Child care subsidies raise female labor supply but lower fertility rates. By contrast, child subsidies, education subsidies, and income tax deductions reduce female labor supply but raise fertility rates. Child care subsidies improve overall welfare the most among the four policies. This is because increased labor supply and a decrease in the number of children raise the consumption level in the long run, while lowering policy costs.