Resource Misallocation from Childcare Policies

Childcare subsidies often attempt to allow low income families to work, but a problem arises when they generate unforeseen negative general equilibrium consequences. This paper focuses on a law in Chile that forces firms with more than 19 female workers to pay for childcare. We evaluate its effects through a model that features firm and household heterogeneity. Firms differ in productivity, and households in age, marital status, gender, skills, and number of children. In the model, the policy mis-allocates resources, driving firms to stop hiring females once they are close to the threshold. It also selects females with more skills into jobs that pay for childcare, leaving unskilled mothers un-subsidized. We calibrate the model and analyze the effects of this policy via counterfactual. The policy reduces both male and female wages by between 1.5% and 2.1%, and GDP per capita by 1.8%. Most of the change comes from mis-allocation, but some also from capital accumulation, that drops by 1.7%. The policy makes every household worse off, but the largest losers are low income mothers, precisely the group targeted by the policy, who lose up to 2% of consumption equivalent units each period. We evaluate two alternative policies: one currently being considered by the Chilean government that finances childcare through a labor tax and one where all firms must pay for childcare irrespective of size. Only the latter has sizable positive effects, suggesting that a better way to help cover childcare costs would be to extend the mandate to all firms