Low-Income Families, Maternal Labor Supply, and Welfare Reform

Abstract

In this paper, we examine reforms that alleviate large employment disincentives induced by child-related transfers for married mothers. We develop a life-cycle model where married couples face labor market risk and make labor supply and consumption-saving decisions. The evolution of female human capital is endogenous and the model accounts for cross-section dispersion in child care needs. We calibrate the model to the U.S. using data from the Current Population Survey. We show that participation tax rates exceed 25 percent for most mothers in our sample, and can be as high as 60 percent when including child care expenses. We then evaluate reforms to existing tax credits for working couples. We find that (i) expanding child care tax credits and (ii) introducing a secondary earner EITC deduction lead to substantially higher employment rates among married mothers. Both reforms are easily implementable, self-financing, and welfare-improving. A combination of both reforms goes a long way in closing the maternal employment gap.