The effects of a new child care subsidy on couples’ labour supply in Australia: an empirical assessment

Ross Guest, Griffith University
Nick Parr, Macquarie University

In the mid-2000s the Australian Government implemented a series of changes to family policies, most notably the introduction of a universal, flat-rate at birth payment and an increased subsidisation of child care. This paper examines the effect on couples’ labour supply of these policies using two complimentary empirical approaches: simulations of a dynamic utility maximisation model of a representative couple, and empirical estimation using longitudinal survey data. The results suggest that the payment of a Child Care Rebate of 50% of out-of-pocket costs has produced a modest increase in couples’ combined hours worked. The increase in couples’ hours worked which has resulted from the increased subsidisation of child care is due to increased hours worked by the wives. The effect of this regressive child care subsidy has been greater for couples in which the husband is highly educated. The introduction of the Baby Bonus and the concurrent changes to family benefits has had an insignificant effect on labour supply.