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Family policy as a tool to rise fertility and welfare

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Family policy important role in our society. More than 45 % of countries worldwide have implemented some form of family policy. Government spending on family policy is growing. Different countries implement a different solution. For example, in Poland, 2% of GDP is spent on flat child benefit 500+. In Germany, 1% of GDP is spent on tax exemption connected to fertility level. Different countries use different tools. The common problem is the lack of counterfactual scenario. It makes an evaluation of family policy difficult. We proposed the OLG model with endogenous fertility choice to analyze family policy effects in a kind of laboratory environment. She compares the effects of 3 policies: flat child benefit, child-related labor tax cut and progressive child benefits. Family policies affect fertility, taxes, labor market and the implications for the pension system. Comparing cost and benefits we can calculate the welfare effects of a given family policy. Results in a nutshell: labor income tax exemption is the most expensive but also the most effective solution.

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Family policy as a tool to rise fertility and welfare

  1. 1. Childallowanceastoolto raisefertility Oliwia Komada FAME|GRAPE, Warsaw School of Economics Motivation 1. Declining population hazards growth or pros- perity and incomes. Relevant from the policy perspective! 2. Many countries introduce costly natalist policies. Are they worth it? 3. Local context limits the universality of ob- servational data policy evaluations. Universal evaluation method allowing comparisons across contexts. Filling the literature gaps 1. Ambiguous conclusions from empirical liter- ature on the eects of pro-natalist policies. Need for universal evaluation tools. 2. Theoretical literature (mostly) in partial equilibrium. Reaction of the economy relevant. 3. Even if general equilibrium taken in to ac- count, only steady states. Transitory costs matter for macro/scal, hence are crucial for welfare evaluation. What do we do? How dierent child allowance policies aect fertility, macro and welfare? Construct a GE overlapping generations model with idiosyncratic income shocks and endogenous fertility choice. 1. Consider dierent child allowance within the same economy. 2. Provide an identication of macro eects. 3. Consider transitory private and public cost and gains to obtain welfare. Result 1: fertility on transition 1.5 1.6 1.7 1.8 1.9 2 Completedcohortfertility 1975 2005 2035 2065 2095 2125 cohort baseline flat rate child allowance labor tax exemption progressive child allowance Baseline scenario completed fertility remains almost unchanged at 1.5 level. Pro-natalist scenarios' (transitory) eects on fertility are the same. The size of the instruments is such that population is stationary in the in nal steady. Result 2: tax cost 14 16 18 20 22 Consumptiontax 2015 2045 2075 2105 2135 2165 Year baseline flat rate child allowance labor tax exemption progressive child allowance Baseline scenario consumption tax has to rise due to longevity. Pro-natalist scenarios yields to higher taxes. Labor tax exemption is the most expensive tool. Progressive child allowance is the cheapest tool. Policies: 2.0 target fertility Baseline scenario • initial steady state: population and house- holds structure replicated from the data • completed fertility endogenous, calibrated to 1.5 in initial steady state • mortality CSO projection until 2060, at henceforth Pro-natalist scenarios 1. at rate child allowance subsidize child cost 2. child related labor tax exemption boost labor supply 3. progressive child allowance concentrate on poor Result 3: pension benets 0 5 10 15 Pensionwealthincreasein% 2015 2045 2075 2105 2135 2165 Year flat rate child allowance labor tax exemption progressive child allowance Tot. pension wealth increases by 10% in the long term. Two opposite eects: more children ⇔ more workers (−) lower wages thus lower pension benets (+) higher payroll growth rate thus higher indexation. Labor tax exemption implies the highest benets. Pro- gressive child allowance implies the lowest benets. Result 4: welfare −5 0 5 10 %ofbaselineconsumption 1915 1945 1975 2005 2035 2065 cohort flat rate child allowance labor tax exemption progressive child allowance Do I prefer the world with higher fertility? It depends. Aggregate welfare eects are negative for at (-2%) and progressive (-1%) child allowance. Wel- fare eect are positive for labor tax exemption (1%). Current parents benets the most (children price ↓, current wage ↔, benets ↑). The model Households consist of two individuals and chil- dren (0, 1, 2, 3+), choose consumption and labor. Individuals decide on completed fertility at age 40 and cover child related cost for 20 years. Child ⇔ long term commitment Individuals are risk averse and face idiosyn- cratic productivity risk. Income risky and children indivisible ⇔ lower investment in children Individuals face a cohort-specic mortality rates. Longevity ⇔ scal pressure Government collects taxes, nances public goods (xed per capita) and pro-natalist policy, operates PAYG DB pension system. Child is a public good⇔ place for intervention Conclusions: 1. Fertility is higher. Transitory path almost indistinguishable for all three pro-natalist scenarios. 2. Macro: taxes increase to cover child related spending. Pension increase ← payroll growth rate ↑. 3. Welfare eect depends on pro-natalist tool. Positive for labor tax exemption, negative otherwise. Acknowledgements We would like to thank A.Ludwig, J.Tyrowicz, K.Makarski and M.Malec for extremely valuable comments. The sup- port of Ministry of Science and Higher Education (grant DI2015/016945) is greatly acknowledged. All opinions and the remaining errors are ours.

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