Universal, Targeted or Both: Effects of Different Child Support Policies on Labour Supply and Poverty: A Simulation Study

We study a set of hypothetical reforms of child benefits in Germany using a static tax-benefit microsimulation model augmented with endogenous labour supply and take-up choices. We distinguish between a reform of the universal non-means-tested child benefit, a reform of the means-tested child benefit under the minimum income scheme, and a combination of both. The model simulates the impacts of the reforms on household income, poverty and labour supply. We find that improvements in the means-tested child benefit are well-targeted: They provide a high level of poverty reduction with a low fiscal impact at the cost of reduced labour supply incentives for low-income families. When unconditional benefits are increased, the effect on overall income inequality is more pronounced at the cost of reduced labour supply incentives for middle- and high-income families. Finally, when combined, the two approaches show synergies, particularly in the form of improved poverty reduction.