Child-Related Transfers, Household Labor Supply and Welfare

Transcription

1 Child-Related Transfers, Household Labor Supply and Welfare Nezih Guner, Remzi Kaygusuz and Gustavo Ventura CEMFI Tilburg University Arizona State University January 2017

2 Motivation Availability and cost of childcare is a key determinant of female labor supply. The macroeconomic and welfare implications of Child-Related Transfers to households. Childcare subsidies Child-related tax credits What are the labor supply, gender gap, output, and welfare e ects for the US economy?

3 What we do Develop a life-cycle economy with heterogenous married and single agents, household labor supply decisions and costly childbearing Guner, Kaygusuz and Ventura (2012). Parameterize this model to be consistent with a host of cross-sectional observations. gender and skill premia, labor force participation of married females, structure of marital sorting, and the cost of children. Use framework for a quantitative evaluation of Child-Related Transfers.

4 Why We Care Female labor supply is quite elastic. Potentially large e ects. Big interest in policy circles: Child-related transfers are appealing form of government transfers without negative e ects on labor supply. Such transfers are substantial in some countries (e.g Sweden), but rather small in the U.S. President Obama s 2015 State of the Union Address: "In today s economy, when having both parents in the workforce is an economic necessity for many families, we need a ordable, high-quality childcare more than ever. It is not a nice-to-have it is a must have. So it is time we stop childcare as a side issue, or a women s issue, and treat it like a national economic priority that is for all of us. Both Clinton and Trump were proposing expansions of child-related transfers.

5 Child-Care Subsidies Child-Related Transfers in the US Means-tested, conditional on work. Serves mainly poor working households. Approximately 1.71 million children in 201, about 5.5% of children between ages 0 to 13. Subsidy rate is about 75%. Child-Tax Credits (CTC) Means-tested, partly-refundable tax credit. Independent of childcare expenditures or labor market status of parents. Starts at 1000$ per child and declines by income. Child and Dependent Care Tax Credit (CDCTC) Non-refundable tax credit for child care expenditures for all households with working parents. Maximum credit is 1050$ per child (with an overall maximum of 2010$), and declines by household income. Serves middle and high income working households.

6 Key Model Features Extensive margin in heterogenous couples. Permits quanti cation of major sources of labor-supply gains. Account for costly childbearing in married and single households. Permits clean analysis of expansion of current arrangements. Model skill depreciation of females due to childbearing disruptions. Allows us to capture increases in female skills due to expansion of subsidies. Detailed modelling of existing policies. Link to current policy debate.

7 Related Literature Heckman (1974), Hotz and Miller (1988), Blau and Hagy (1998): the e ect of childcare costs on female labor supply Attanasio, Low and Sanchez-Marcos (2008): reduction in child care costs and the rise of female labor supply. Bick (2016): childcare subsidies have quantitatively signi cant e ects on female labor supply. Domeij and Klein (2013): optimality of childcare subsidies in life-cycle economies. They compute the welfare-maximizing level of childcare subsidies for German economy. Rogerson (2007) use of tax revenue to nance government transfers of service sector goods that are tied to female work

8 Heterogeneity Life-cycle economy, j = 1,..., J R,...J. Males (m) and females (f ), heterogenous in their types (education). Male types, z 2 Z. These types map into productivity pro les, ϖ m (z, j). Female types, x 2 X. These types map into initial productivity levels, h 1 = ϖ f (x, 1), and after age 1, h evolves endogenously. h 0 = exp[ln h + α x j {z} growth χ(l) δ {z} x dep. (1 χ(l))], Additional permanent heterogeneity (within each type). Male labor endowments: ϖ m (z, j)ε z Female labor endowments: hε x.

9 Household Structure Agents can be single (S) or married (M). Married agents age, retire, and die together. Stationary demographics. Individuals value consumption and dislike work. Married households dislike joint work. Married agents maximize discounted sum of individual utilities.

10 Children and Child Care Costs Married households and single females di er in terms of the number of children attached to them k(x), k(x, z) They also di er whether they have access to informal care, g 2 f0, 1g. Three possibilities: without any children, early child bearers, late child bearers, denoted by b = f0, 1, 2g Early child bearers have children in ages j = 1, 2, 3 while late child bearers have children in ages j = 2, 3, 4.

11 Children and Child Care Costs If a female with children works, married or single, then the household has to pay for child care costs. Independent of hours worked. Child care costs depend on the age of the child, s = 1, 2, 3. whether the household has access to informal care, g 2 f0, 1g the type (education) of the mother. Amount of child care required, d(s, x, g)k(x) or d(s, x, z, g)k(x, z). Total cost wd(s, x, g)k(x) or wd(s, x, z, g)k(x, z).

12 Child Related Transfers Child care subsidies Cost of childcare is wd(s, x, z, g)k(x, z)(1 θ) if I Î, and wd(s, x, z, g)k(x, z) otherwise. Two parameters: subsidy rate (θ) and eligibility (Î ). Tax Credits CTC potential credit that start from a maximum, and then declines by income CDCTC potential credit = min {maximum credit, earnings, childcare expenditure}*rate rate declines by household income CDCTC is not refundable, and CTC is partially refundable. Actual credit depends on how much household own in taxes.

13 Other Taxes and Transfers Households pay taxes on their total income T M (I, k) and T S (I, k) captures federal income tax There is a ( at) payroll tax that taxes individual labor incomes, represented by τ p, to fund social-security transfers. Each household pays an additional at capital income tax for the returns from his/her asset holdings, denoted by τ k.

14 Other Taxes and Transfers The Earned Income Tax Credits (EITC), which works as a wage subsidy for households below a certain income level. Each household below a certain income level also receives a transfer from the government as a function of its marital status and income. Captures the other aspects of the welfare system in the US, such as the TANF and Food Stamps. For a household with income level I, number of children k and total child care expenditure D, the total tax credits and transfers are represented by TR S f (I, D, k), TRS m(i, D, k) and TR M (I, D, k).

15 Decisions Households decide how much to consume and how much to save Married households decide whether the female member of the household should work Costs of work: child care expenses Bene ts: higher household income, human capital accumulation. Child-related transfers a ect the cost and bene ts of work for married females.

16 Extensive Margin At the start of their lives married households draw a shock, q, which stands for the utility costs of joint market work for married couples. Residual heterogeneity in labor force participation.

17 Preferences Single male U S m (c, l) = log(c) ϕ(l) 1+ 1 γ. Single female Married male Married female U S f (c, l, k y ) = log(c) ϕ(l + k y η) 1+ 1 γ, U M m (c, l m, l f, q) = log(c) ϕl 1+ 1 γ m U M f (c, l f, q, k y ) = log(c) ϕ(l f + k y η) 1+ 1 γ Note: γ is same for males and females 1 2 χfl f gq, 1 2 χfl f gq,

18 where I = wϖ m (z, j)ε z l m + whε x l f + ra and D = wd(j + 1 b, x, z, g)k(x, z). Decision Problem Married with Children Let s M (x, z, ε x, ε z, q, b, g). For b = f1, 2g, j 2 fb, b + 1, b + 2g, V M (a, h, s M, j) = subject to max f[u a 0 f M (c, l f, q, k y ) + Um M (c, l m, l f, q)] + βv M ( 0 )g, l f, l m c + a 0 = 8 >< >: a(1 + r(1 τ k )) + w(ϖ m (z, j)ε z l m + hε x l f )(1 τ p ) T M (I, k(x, z)) + TR M (I, D(1 θ), k(x, z)) wd(j + 1 b, x, z, g)k(x, z)(1 θ)χ(l f ) if I bi a(1 + r(1 τ k )) + w(ϖ m (z, j)ε z l m + hε x l f )(1 τ p ) T M (I, k(x, z)) + TR M (I, D, k(x, z)) wd(j + 1 b, x, z, g)k(x, z)χ(l f ), otherwise

19 Decision Problem Married with Children V M (a, h, s M, j) = subject to max f[u a 0 f M (c, l f, q, k y ) + Um M (c, l m, l f, q)] + βv M ( 0 )g, l f, l m c + a 0 = 8 >< >: a(1 + r(1 τ k )) + w(ϖ m (z, j)ε z l m + hε x l f )(1 τ p ) T M (I, k(x, z)) + TR M (I, D(1 θ), k(x, z)) wd(j + 1 b, x, z, g)k(x, z)(1 θ)χ(l f ) if I bi a(1 + r(1 τ k )) + w(ϖ m (z, j)ε z l m + hε x l f )(1 τ p ) T M (I, k(x, z)) + TR M (I, D, k(x, z)) wd(j + 1 b, x, z, g)k(x, z)χ(l f ), otherwise and h 0 = exp[ln h + α x j χ(l) δ x (1 χ(l))],

20 Quantitative Analysis Model Period: 5 years. Types: less than high school (hs-), high school (hs), some college (sc), college (col) and post-college (col+). From data: Demographic structure (Census) Who is single and who is married in each education level Who is married with whom Wage pro les of males, initial wages for females (Census 2008)

21 Quantitative Analysis Children Child Bearing Status. From CPS June Supplement and Census High types (col or col+) are more likely to be childless or have their children late Singles are more likely to be childless than married Childbearing Status, Single Females Childless Early Late hs hs sc col col

22 Childbearing Status, Married Couples Childless Females Males hs- hs sc col col+ hs hs sc col col Early Females Males hs- hs sc col col+ hs hs sc col col Quantitative Analysis Children

23 Quantitative Analysis Children Child Bearing Status. From CPS June Supplement and Census Fertility Di erences Singles Married Females Male <HS HS SC COL COL+ < HS 2.72 < HS HS 2.19 HS SC 2.00 SC COL 1.84 COL COL COL

24 Quantitative Analysis Children The Survey of Income and Program Participation Fraction of Households Using Informal Care Young Children Single Married < HS HS SC COL COL Older Children Single Married < HS HS SC COL COL

25 Quantitative Analysis Children The Survey of Income and Program Participation (SIPP) Child Care Cost Di erences by Education Young Children Informal Formal Single Married Single Married < HS HS SC COL COL Older Children Single Married < HS HS SC COL COL

26 Quantitative Analysis Human Capital Accumulation To calibrate human capital process h 0 = exp ln h + α x j χ(l) δ(1 χ(l)). Based on the PSID, we set δ x = for the unskilled group and δ x = for the skilled group. Then, we select α x j so that if a female of a particular type x works in every period, her wage pro le has exactly the same shape as males. Select these parameters before we run the model

27 Quantitative Analysis Government Estimate e ective tax functions from micro tax data - Guner, Kaygusuz and Ventura (2014) Take τ p = from the data (the average value of the social security contributions as a fraction of aggregate labor income for ). Calibrate social security bene ts for the lowest type single male, p S m(z 1 ), to balance the budget. p S m(z 1 ) is a fraction of average household income. Set all other bene ts, p S m(x), p S f (z), and pm (x, z) to be consistent with data on social security bene ts for retired households.

28 0,3 Tax Functions, Marrried and Single Household with 2 Children 0,25 0,2 0,15 0,1 0,05 married, average married, marginal single, average single, marginal 0 0,20,40,60,8 1 1,21,41,61,8 2 2,22,42,62,8 3 3,23,43,63,8 4 4,24,44,64,8 5 5,25,45,65,8 6 6,26,46,66,8 7 7,27,47,67,8 8 8,28,48,68,8 9 9,29,49,69,8 10 Household Income (fraction of mean household income)

29 Quantitative Analysis Government Childcare Subsidies, as they work in the US θ = 0.75 (i.e. 75% subsidy) and set bi such that the poorest 5.5% of families with children receive a subsidy. The CTC and CDCTC are modelled as they actually work The EITC is modelled as it actually works Welfare transfers are estimated using the Survey of Income and Program Participation (SIPP)

30 CTC (fraction of mean household income) 0,035 Potential Child Tax Credit (a household with 2 children) 0,03 0,025 0,02 0,015 0,01 0, ,1 0,35 0,6 0,85 1,1 1,35 1,6 1,85 2,1 2,35 2,6 2,85 3,1 Household Income (fraction of mean household income)

31 Fraction of Child Care Expenses Credited Fraction of Child Care Expenses Credited with the CDCTC 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0,35 0,6 0,85 1,1 1,35 1,6 1,85 2,1 2,35 2,6 2,85 3,1 Household Income (fraction of mean household income)

32 The CDCTC ( fraction of mean household income) Potential CDCTC 0,035 0,03 0,025 0,02 0,015 0,01 0, ,1 0,35 0,6 0,85 1,1 1,35 1,6 1,85 2,1 2,35 2,6 2,85 3,1 Household Income (fraction of mean household income)

33 0,1 0,175 0,25 0,325 0,4 0,475 0,55 0,625 0,7 0,775 0,85 0, ,075 1,15 1,225 1,3 1,375 1,45 1,525 1,6 1,675 1,75 1,825 1,9 1,975 2,05 2,125 2,2 2,275 2,35 2,425 2,5 2,575 2,65 2,725 2,8 2,875 2,95 3,025 3,1 3,175 Tax Credits Received, as a fraction of mean household income 0,07 Effective CTC plus CDCTC 0,06 0,05 0,04 0,03 0,02 A household with two children Male earns 60% of household income Household Spend 10% household income on childcare 0,01 0 Household Income, as a fraction of mean household income

34 EITC (fraction of mean household income) 0,08 Earned Income Tax Credit (household with 2 children) 0,07 0,06 0,05 0,04 married single 0,03 0,02 0,01 0 0,1 0,178 0,232 0,298 0,373 0,448 0,523 0,598 0,673 0,748 0,823 0,898 0,973 Housheold Income (fraction of mean household income)

35 Transfers (fraction of mean household income) Welfare Payments, Married Household 0,1600 0,1400 0,1200 0,1000 0,0800 0,0600 married, 0 children married, 2 children 0,0400 0,0200 0, ,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 0,45 0,5 0,55 0,6 0,65 0,7 0,75 0,8 0,85 0,9 0,95 1 1,05 1,1 1,15 1,2 1,25 1,3 1,35 Housheohold Income (fraction of mean household income)

36 Transfers (fraction of mean household income) Welfare Payment, single females 0,2000 0,1800 0,1600 0,1400 0,1200 0,1000 single female, 2 children single female, 0 children 0,0800 0,0600 0,0400 0,0200 0, ,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 0,45 0,5 0,55 0,6 0,65 0,7 0,75 0,8 0,85 0,9 0,95 1 1,05 1,1 1,15 Household Income (fraction of mean household income)

37 Quantitative Analysis Preferences U M f (c, l f, q, k y ) = log(c) ϕ(l f + k y η) 1+ 1 γ 1 2 χfl f gq, γ = 0.4 (based on available estimates) ϕ is calibrated to match the labor hours per worker. η is calibrated to match the LFP of married females with young (0 to 5) children. β is chosen to match capital-to-output ratio. q is assumed to be distributed according to a Gamma distribution parameters are match LFP for married females, ages

38 Benchmark Economy Model and Data Statistic Data Model Capital Output Ratio Labor Hours Per-Worker LFP of Married Females with Young Children (%) Variance of Log Wages (ages 25-29) Participation rate of Married Females (%), Less than High School (<HS) High School (HS) Some College (SC) College (COL) More than College (COL+) With Children Without Children

39 Married Female Labor Force Participation by Skill 100,0 90,0 80,0 70,0 60,0 model-unskilled 50,0 40,0 data-unskilled model-skilled data-skilled 30,0 20,0 10,0 0, Age

40 Married Female Labor Force Participation by the Presence of Children 100,0 90,0 80,0 70,0 60,0 50,0 model - no child data - no child model - with child 40,0 data - with child 30,0 20,0 10,0 0, Age

41 Gender Gap (%) Gender Wage Gap model data Age

42 Expansion of Childcare Subsidies Benchmark Economy: θ = 75% and bi = 21% mean income. Make it universal Additional linear taxes on income for revenue neutrality. Assumption: Benchmark economy is a small open-economy.

43 Expansion of Childcare Subsidies Expansion of Childcare Subsidies (%) Universal Subsidies (75%) Participation Married Females 8.8 Total Hours 1.4 Total Hours (MF) 7.1 Hours per worker (f) -1.3 Hours per worker (m) -1.2 Output 0.4 Tax Rate 1.3 Signi cant increase in married female labor force participation and total hours

44 The e ect on labor supply is much stronger for those with lower education Expansion of Childcare Subsidies Expansion of Childcare Subsidies (%) Universal Subsidies (75%) E ects on Participation: By Education < HS 21.5 HS 12.1 SC 8.0 COL 7.4 COL+ 4.7 By Child Bearing Status Early 12.6 Late 7.2

45 Expansion of the CTC Take the universal expansion of child care subsidies with 75% subsidy rate. Use this amount to increase the maximum credits for CTC. Recall that the CTC does not require mothers to work When we expand a program, we also make it fully refundable. CTC expansion: maximum credit increases from 1000$ to 2900$ per child.

46 Expansion of the CTC Expansion of Tax Credits (%) Universal Subsidies (75%) CTC Expan. Participation Mar. Fem Total Hours Total Hours (MF) Hours per worker (f) Hours per worker (m) Output Tax Rate (%) The e ects on female labor supply is very di erent.

47 Expansion of the CTC Expansion of Tax Credits (%) Universal Subsidies (75%) CTC Expan. E ects on Participation: By Education < HS HS SC COL COL By Child Bearing Status Early Late

48 Sharp differences between the previous exercises Expansion of the CDCTC flat rate subsidies versus transfers to all households with children that decline with income We consider an expansion of the CDCTC that captures elements of both programs. We construct a fully refundable, expenditure-equivalent expansion of the CDCTC program that provides a mixture of childcare subsidies and transfers that decline with household income. Recall that potential credit = min {maximum credit, earnings, childcare expenditure}*rate We multiply rate by a constant (5.75), and if the credit is higher than the childcare expenditure, the household gets a transfer

49 CTC (fraction of mean household income) 0,18 Potential CTC and CDCTC (a household with 2 children) 0,16 0,14 0,12 0,1 0,08 0,06 CTC CDCTC CTC-new CDCTC-NEW 0,04 0,02 0 0,1 0,35 0,6 0,85 1,1 1,35 1,6 1,85 2,1 2,35 2,6 2,85 3,1 Household Income (fraction of mean household income)

50 Expansion of the CDCTC Expansion of Tax Credits (%) Universal CTC CDCTC Subsidies (75%) Expan. Expan. Participation Mar. Fem Total Hours Total Hours (MF) Hours per worker (f) Hours per worker (m) Output Tax Rate (%) The e ects of the CDCTC are similar to child care subsidies

51 Expansion of the CDCTC Expansion of Tax Credits (%) Universal CTC CDCTC Subsidies (75%) Expan. Expan. E ects on Participation: By Education < HS HS SC COL COL By Child Bearing Status Early Late

52 Comparing Di erent Programs Calculate the subsidy and transfer for each program Childcare Subsidies and Transfers in Policy Exercises Universal Subsidies CTC Expan. CDCTC Expan. Income deciles Subs.(%) Trans. Subs. (%) Trans. Subs. (%) Trans. 1st nd rd th th th th th th th

53 Role of Endogenous Skills Policy Experiments: Keeping Female Skills at the Benchmark Level (%) Universal CTC CDCTC Subsidies (75%) Expan. Expan. Participation Married Females Total Hours Total Hours (MF) Hours per worker (f) Output Tax Rate (%) The rise in female labor supply is much smaller.

54 Robustness Redo everything keeping male hours at the benchmark level Redo everything under a closed economy assumption Consider a production function where skills are not fully substitutable Consumption and investment goods are produced according to Y = F (K, S, U) = K α L 1 g α with L g (νs ρ + (1 ν)u ρ ) 1 ρ, ρ 2 (, 1) Recalibrate the benchmark economy and redo everything.

55 Welfare Taking transitions into account Signi cant gains for some Welfare E ects (Newborns) Universal CTC CDCTC Subsidies (75%) Expansion Expansion Single F No Children Early Late < HS HS SC COL COL

56 Welfare Signi cant gains for some Welfare E ects (Newborns) Universal CTC CDCTC Subsidies (75%) Expansion Expansion Married No Children Early Late All Newborns

57 Welfare Signi cant gains for some Welfare E ects (Newborn Married Households) Universal Subsidies (75%) Females Males <HS HS SC COL COL+ <HS HS SC COL COL CTC Expansion Females <HS HS SC COL COL

58 Welfare Signi cant gains for some, but also signi cant losses for others Welfare E ects Universal CTC CDCTC Subsidies (75%) Expansion Expansion Age All (%) Winners Steady States: Newborns (%) Winners

59 Conclusions We evaluate the macroeconomic implications of expanding child-related transfers. We nd that an expansion of current arrangements childcare subsidies, CTC and CDCTC can have substantial e ects on participation rates and hours worked. We nd that the aggregate e ects of these policies depend critically on whether they are tied to market work, or not. We nd large asymmetries in terms of welfare.

60 Quantitative Analysis - Marital Structure Ages About 74% married Fraction of Agents by Type, Gender and Marital Status Males Females All Married Singles All Married Singles hs hs sc col col

61 Quantitative Analysis - Marital Sorting Ages About 74% of people are married About 50% of people marry someone of their own type Who is Married with Whom Females Males hs- hs sc col col+ hs hs sc col col

62 Quantitative Analysis Heterogeneity Initial Productivity Levels, by Type and Gender males (z) females (x) x/z < HS HS SC COL COL

63 Quantitative Analysis Government average tax rate (income) = η 1 + η 2 log(income) + ε, Tax Functions Estimates Married Single (no child) (2 child.) (3 child.) (no child) (2 child.) (3 child.) η η

64 Quantitative Analysis Social Security Bene ts Single Males Single Females < HS HS SC COL COL Females Males <HS HS SC COL COL+ < HS HS SC COL COL

65 Quantitative Analysis Human Capital Accumulation Labor Market Productivity Process for Females (α x J ) Types Age <HS HS SC COL COL

66 Quantitative Analysis - Cost of Joint Work Utility cost parameter is distributed according to ζ(qjz). Parameters match LFP for married females, ages Females Males <HS HS SC COL COL+ < HS HS SC COL COL Total Exploit the information on the rise of LFP with wages (type).

67 Robustness - Male Hours Policy Experiments Under Fixed Labor Supply of Males ((%) Universal CTC CDCTC Subsidies Expansion Expansion (75%) Participation Married Females Total Hours Total Hours (MF) Hours per worker (f) Output Tax Rate (%)

68 Robustness - Closed Economy Policy Experiments in a Closed Economy (%) Universal CTC CDCTC Subsidies Expansion Expansion (75%) Participation Married Females Total Hours Total Hours (MF) Hours per worker (f) Output Tax Rate (%)

69 Robustness - Imperfect Skill Substitutability Policy Experiments Under Imperfect Skill Substitutability (%) Universal CTC CDCTC Subsidies Expansion Expansion (75%) Participation Married Females Total Hours Total Hours (MF) Hours per worker (f) Output Skill Premium Tax Rate (%)