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

Abstract

In this paper, we study reforms that reduce the 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 heterogeneity in child care needs. We calibrate the model to non-college-educated married couples in the United States, using Current Population Survey data. We show that participation tax rates exceed 25% for most mothers in our sample, and can be as high as 60% 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.