The Spillover Effect of Long-Term Care Insurance on Spousal Labor Supply : Existence and Mechanisms

Using a nationally representative data in China, this study applies a difference-in-difference method to estimate the effect of long-term care insurance (LTCI) on spousal labor supply. First, we find LTCI increases the probability of spousal labor participation by 3.4 percentage points and increases the hourly income of paid employment by CNY 1.9. Second, the study finds two possible channels through which the spillover effect operates: LTCI increases spousal labor supply by reducing informal care hours (substitution effect) and suppresses spousal labor supply by providing a stream of nonwage income (income effect). Third, the spillover effect differs by LTCI design: the effect is larger if it covers only the severely disabled rather than additionally covering the moderately disabled, and if LTCI provides benefits-in-kind services rather than benefits-in-cash services. The findings provide evidences on how LTCI affects the labor supply, which is vital for maintaining economic growth in a rapidly aging economy