Unconditional Child Benefits, Mothers’ Labor Supply, and Family Well-Being: Evidence from a Policy Reform

Abstract

In many parts of the developed world, governments devote a significant share of public funds to unconditional family cash transfers in an attempt to promote the economic well-being of households. But how successful are such policies? Germany has one of the world’s most generous child benefit systems, which was subject to a major reform in the mid-1990s. This article exploits the reform using a difference-in-differences approach. The main result suggests that child benefits lead to a substantial reduction of mothers’ labor supply at the intensive margin. The result implies that the policy in question is less effective at improving family finances and, consequently, expensive for the taxpayer because increases in benefit receipt are accompanied by negative labor supply responses. However, suggestive evidence seems to support that parents improve their time investment in children.

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