Paying Moms to Stay Home: Short and Long Run Effects on Parents and Children

Abstract

We study the impacts of a policy designed to reward mothers who stay at home rather than join the labor force when their children are under age three. We use regional and over time variation in child home care allowance to show that home care allowance decreases maternal employment in both the short and long term, with almost three-quarters of the supplement amount offset by lost labor income. The effects are large enough for the existence of home care benefit system to explain the higher child penalty in Finland than comparable nations. Home care benefits also negatively affect the early childhood cognitive test results of children at the age of five, increase the likelihood of choosing vocational rather than academic secondary education track, and increase youth crimes. We confirm that the mechanism of action is changing work/home care arrangements by studying a a day care fee (DCF) reform had the opposite effect of raising incentives to work. We find that this policy increased the labor force participation of mothers and participation of children to day care, and improved child early test and schooling outcomes. This parallel set of findings suggests that on average in Finland, shifting child care from the home to the market increases labor force participation and improves child outcomes.