THE IMPACT OF A CASH BENEFIT REFORM ON PARENTS LABOUR FORCE PARTICIPATION.

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1 WORKING PAPERS IN ECONOMICS No. 0 GHAZALA NAZ THE IMPACT OF A CASH BENEFIT REFORM ON PARENTS LABOUR FORCE PARTICIPATION. Department of Economics U N I V E R S I T Y OF B E R G E N

2 The Impact of a Cash Benefit Reform on Parents Labour Force Participation. By Ghazala Naz* (April 30, 00) Abstract: This paper evaluates the impact of a recent Norwegian family policy reform. The reform provies benefits of up to NOK 3000 per month to all families with -3 year ol chilren, who o not utilise state subsiise ay care centres. We investigate the reform s effect on parents labour force participation. Our finings suggest that, on average, women s labour force participation ecreases an specialisation of work between couples increases after the reform. When we evaluate the reform s impact in association with women s schooling we fin that the ecrease in the labour force participation of mothers who have university level schooling is larger as compare with mothers who have less than university schooling. Key Wors: Public policy, Cash benefits, Specialisation JEL Classifications: I38, J6, J I am grateful to Espen Bratberg, Alf Erling Risa, Kjell Vaage, Aril Aakvik an Afsane Bjorvatn for their helpful suggestions an comments. This paper was presente in a seminar at the Department of Economics, University of Bergen, Norway. I am thankful to the participants of the seminar for their positive feeback.

3 . Introuction Many empirical stuies support the notion that the presence of young chilren typically increases the value of women s time at home (see Gronau 973; Leibowitz an Klerman 995; Nakamura an Nakamura 994), leaing to a ecrease in her labour market activity. However, the labour force participation of mothers with pre school chilren is higher in Norway than in many of the other West European countries. In 997, the labour force participation rate among marrie an cohabiting mothers was 75 percent if the youngest chil was less than 3 years ol an was 83 percent if the chil was 3-6 years ol (Statistics Norway 98). Empirical stuies on Scaninavian ata suggest that high quality public chilcare encourage labour market activity of women wit h preschool chilren (see, for instance, Gustafsson an Staffor 99; Kraval 996). In the spring of 998 the Norwegian government ecie to introuce cash benefits up to NOK 3000 (approximately 375) per month to parents with chilren of -3 years ol, who o not utilise state subsiise ay care facilities. This amount is roughly equivalent to the state subsiy per chil to ay care centres. Parents that utilise some, but not all ay care are entitle to receive a proportionally lower cash benefit. Economic theory suggests that public provision of ay care increases efficiency in the economy. The argument is base on the income tax wege between home prouction an market work. Due to this wege too little market work is provie. Chilcare subsi ies increase efficiency by stimulating the labour force participation of mothers, thereby increasing the tax base an mitigating the effects of the income tax (see Blomquist an Christiansen 995; Bergstrom an Blomquist 996). Whether a shift from chilca re subsiies

4 to cash benefits prouces efficiency loss is an interesting question that we aress later in the paper. The cash benefits offere to parents with chilren of -3 years ol are not teste against the parents labour market participation. It is therefore fully possible for both parents to work while receiving benefits. Nonetheless, these benefits increase the costs of chilcare centres for parents. The empirical literature suggests that high chilcare costs have negative effect on marrie women s labour force participation (see Blau an Robins 988; Riber 99). Thus, the cash benefits reform may reuce parents, especially mothers, labour force participation in Norway. Evaluating the effect of the reform on parents working behaviour is the main objective of this paper. Parents working behaviour is evaluate along two imensions: specialisation an total market intensity. The literature on househol economics iscusses that a large part of a surplus in the marriage is generate from specialisation. If one of the spouses has a comparative avantage in the provision of home time to commoity prouction, while the other one has a comparative avantage in earning the income that purchases market inputs, then family utility will be maximise by specialisation in the time allocation of the couple (see Becker 973, 985; Weiss 997). There is ample evience for specialisation within the househol. Marrie men work longer hours in the market an have substantially higher wages than unmarrie men. Marrie women have lower wages an work more at home than unmarrie women (see Gronau 986; Daniel 99; Korenman an Neumark 99). Due to both social an biological factors women have a comparative avantage in the prouction an care of chilren. We therefore believe that the cash benefits reform particularly increases the value of mothers Lunberg an Rose (999) efine market intensity as sum of the working hours of a couple an specialisation as husban s working hours wife s working hours. We use same efinitions in this paper. 3

5 time at home. Whether consequently specialisation increases in househols is an empirical question that is aresse in this paper. Lunberg an Rose (999) emphasise that chilcare costs also affect parents total market intensity. They fin that in the Unite States specialisation increases an total market intensity of parents ecreases after a chilbirth. This gives us incentive to evaluate the effect of the cash bene fits reform also on Norwegian couples total market intensity. The impact of cash benefits on specialisation an market intensity may iffer for groups of iniviuals epening on their characteristics. Becker escribes human capital as an important eterminant of specialisation in househols. Human capital analysis assumes that schooling raises earnings an prouctivity in the market sector, which establishes a positive association between females eucation an their labour force participation. This in turn leas to a lower level of specialisation between couples where wives have higher schooling as compare with couples where wives have lower schooling. In aition women with high eucation, experience, an income have significantly lower probabilities of job exits in Norway (see for instance, Nilsen, A.E. Risa an A. Torstensen 000). All this suggests that ue to the cash benefits reform women with lower level of schooling will be more motivate to reuce market work as compare with high level. In orer to test this hypothesis we explore the effect of cash benefit reform in association with mothers schooling. A number of empirical stuies in Norway compare women s labour force participation before an after the cash benefit reform of 98. Hellevik (000) an Rønsen (00) report that mothers have shifte from full time work to part time work after the introuction of cash benefits. Langset, Lian an Thoresen (000) estimate that the labour supply of working women is reuce most in the health sector. A shortcoming of these stuies is that they only 4

6 iscuss the labour force participation of the women who receive the cash benefits without taking into consieration the problem arising by sample selection bias. In the econometric literature a wie range of non-experimental estimators have been propose to evaluate the unbiase effects of social programs (see Heckman an Robb 985; Moffitt 99; Heckman, Lalone an Smith 999). This paper aresses the selection bias problem an efines an estimator of the reform on the basis of econometric methos. The rest of the paper is organise as follows. Section reports the source of our ata an explains our sample. Section 3 specifies the econometric moel we use to evaluate the reform effect. Section 4 iscusses the effect of the cash benefit reform on specialisation an working hours of couples. Section 5 conclues our research.. Data an Sample The sources of our ata are living stanar surveys conucte in April/May 998 an 999. The 998 survey was carrie out six months before the introuction of cash benefit reforms an inclues 436 househols. The 999 survey was conucte six months after the reform an inclues all mothers in 998 who still ha a pre-school chil as well as new mothers who ha given birth to a chil between the surveys. The sample in 999 totalle 3334 househols. The sample use in this paper inclues both participants an non-participants of the cash benefit program. We efine all parents with a chil of age -3, whether they receive or o not receive the benefits as participants an all parents with a chil of age 3-6 as non-participants. By using the living stanar surveys of 98 an 99, we form a pseuo panel of these two Almost 70 % of parents with -3 year ol chil choose to receive cash benefits. 5

7 groups. A genuine panel tracks the same iniviuals over time, whereas a pseuo panel tracks cohorts/ groups over time. A cohort/group in a pseuo panel may very well comprise of ifferent set of iniviuals in each perio (see Deaton 985 for etails about pseuo panels). The total number of observations in our sample is of them are for couples with chilren of age -3 in 98 or 99. The rest are for couples with chilren of age 3-6. There are almost 8 % househols in the sample where wives working hours are higher than their husbans. We run regression by excluing those couples but get almost the same results (results not shown). The mean an stanar eviation of the important variables in the sample are illustrate in Table. [Table about here] 3. Econometric Specification We are intereste in evaluating the impact of the cash benefit reform of 98 on specialisation, total market intensity, an iniviual working hours of the Norwegian couples. This section specifies an estimator of the reform effect. Let Y be the outcome variable an make the following efinitions: Y it * = level of outcome variable for a couple i who has a -3 years ol chil at time t if the cash benefits reform was not introuce. 6

8 Yit ** = level of outcome variable for a couple i who has a -3 years ol chil at time t after the cash benefits reform was introuce. The ifference between these two quantities is the effect of the reform, enote as α: α = Y (3.) ** * it Y it Our aim is to obtain an estimator of α, the reform effect. The ifficulty arises as we can not * * observe the counterfactual Y it irectly, but only the values of Y it for couples who are not eligible to get the cash benefits. In our sample these couples have a chil of age 3-6. The estimate of α in this case woul be: ~ * it it ** α = ( Y = ) ( Y = 0) (3.) where = if couples have a chil of age -3 an = 0 if couples have a chil of age 3-6. ** * Y it = an Y it = 0 are the corresponing average values of Y it. However, the estimator efine in (3.) is biase because: * * Yit = Yit = 0 (3.3) Even if the cash benefits were not introuce the level of outcome variable for parents with a chil of age -3 woul be ifferent as compare with parents with a chil of age 3-6. The 7

9 main reason for this ifference is that the level of parents labour force participation varies with the age of chilren. Using the cohort ata before an after the reform we can alleviate the selection bias problem. Assume that ifference in past levels of outcome variable of parents with -3 years ol chil an parents with 3-6 years ol chil may aequately control for their ifference in Y it * : * * * * ( Yit Yit = ) = ( Yit Yit = 0) (3.4) where Y * it is the average value of outcome variable for parents with -3 years ol chil = * an 0 for parents with 3-6 years ol chil in a perio before the reform. Y it = Our estimator is then efine as follows: * ˆ = it it it it ** * * α ( Y Y = ) ( Y Y = 0) (3.5) To calculate αˆ, we run a regression on the following equation: Y µ (3.6) = 0 3 where = if parents have a chil of age -3; =0 if parents have a chil of age 3-6; = if the time perio is after the reform; =0 if the time perio is before the reform. By plugging (3.6) into (3.5) we get: 8

10 ) ( ) ( ˆ α = = (3.7) To estimate the effect of cash benefit reform in association with eucation level of women, we run a regression on the following equation: v x x x x Y i i i i = γ γ γ γ (3.8) where i x = if university level eucation; i x =0 if less than university level eucation; an the estimator of the effect of the reform if the university level eucation is equal to 3 3 γ. An alternative metho is to stratify the whole sample with respect to women s eucation levels an then run regressions on equation (3.6) for each stratifie sample. We woul essentially get the same coefficients by using any of the two methos but stanar errors may vary. To control for other variables, we interact each an every variable in the same way as we interact eucation level an run a regression on the following equation: η δ δ δ γ γ γ γ = i i i i i i i y y y x x x x Y (3.9) where yi is the vector of control variables.

11 4. Results The main objective of our research is to evaluate the impact of the reform of 98 on specialisation, market intensity, an iniviual working hours of the Norwegian couples. For this purpose we run four regressions on equation (3.6): one for each outcome. Table reports the after effects of the cash benefits reform. We iscusse in section that the reform of 98 may increase specialisation among the working parents. Our results illustrate that our preictions hols for our sample. We fin that ue to cash benefits couples with chilren of age -3 increase specialisation, by 3.8 hours, an ecrease market intensity by.4 hours per week. [Table about here] Table illustrates that wives market work ecreases an husbans market work increases after the reform. The increase in husbans market work is insignificant. We see that 87 percent of the increase specialisation is cause by a reuction in women s working hours. However, ue to some increase in the husban s market work, fall in a couples total market intensity remains lower than the ecrease in wife s working hours. An impact of any social program may iffer for groups of iniviuals epening on their characteristics. We iscusse in section that mothers schooling is one of the important eterminants of specialisation an parents total market intensity. We therefore explore the impact of the reform in association with mothers schooling. 0

12 The househol economic moels preict a positive association between females eucation an their market work leaing to a lower level of specialisation between couples. Figure illustrates the relationship between eucation an average working hours of women, who have -3 years ol chilren, in our sample. Figure illustrates the relationship between wives eucation an level of specialisation among couples with -3 years ol chilren. As expecte we observe the positive relationship between women s eucation an labour force participation an negative relationship between women s eucation an level of couples specialisation in a perio before an even after the reform. Nevertheless the average working hours for eucate women is lower an the level of specialisation is higher in a perio after the reform as compare with a perio before the reform. [Figure an about here] Our objective is to estimate the change in high an low eucate women s labour force participation an househols specialisation cause by the cash benefits reform. For this purpose we run four regressions by interacting our epenent variables with ummies for mothers eucation. The results are illustrate in Table 3. [Table 3 about here] We fin that the reform affects not only the househols where wives have less than university schooling but also the househols where wives have higher schooling. The ifferences between the reform s effects for the two categories of househol are statistically insignificant but we see the larger coefficients if wives have university level eucation.

13 We fin that househols where wives have less than university schooling increase specialisation, by.48 hours whereas this increase is 5.06 hours in househols where wives have university level eucation. Due to cash benefits women with less than university level schooling ecrease their market work by.7 hours. This ratio is 4.8 hours for women with higher schooling. In short our finings inicate a clear an profoun effect of the reform for househols where wives have university level eucation. This contraicts a hypothesis claiming that women with lower level schooling will be more motivate by the cash benefits reform as compare with high level. Controlling for age, working sector, number of chilren an husbans eucation, oes not change the basic pattern of the results but we get larger coefficients for all the outcome variables. We see that all control variables are statistically insignificant. F-tests show that the control variables are also jointly insignificant (results not shown). Therefore, we believe that results from running regr essions without control variables are vali for interpretation. 5. Conclusion The main aim of this research was to evaluate the effect of the recent cash benefits reform on specialisation an iniviual working hours of the Norwegian couples. We fin that, on average, women reuce their working hours after the reform, leaing to an increase in specialisation between a husban an a wife an ecrease in market intensity of the househols. The increase in husbans working hours is insignificant. Another objective of this paper was to explore the effect of cash benefits in association with mothers eucation. We fin that all women reuce their working hours after the reform,

14 leaing to an increase in specialisation between a husban an a wife but the effect is stronger for mothers who have higher eucation as compare with mothers who have less than university schooling. This result contraicts a hypothesis claiming that women with lower level schooling will be more motivate by the cash benefits as compa re with high level. In section, we mentione that tax wege between home prouction an market work may cause too little prouction in the labour market. Public provision of ay care may increase efficiency in the economy by stimulating labour force participation of women. We fin that the cash benefits reform reuces market work of all women an especially of highly eucate women. Due to ecrease in the supply of skille labour, the market prouction may ecrease substantially. Hence, the cash benef its reform may prouce efficiency losses if it causes too little prouction of market work by rawing eucate women out of the labour force. We fin that mainly wives reuce their labour force participation after the reform an not husbans. This suggests that the cash benefits reform leas to reversal in the evelopment towars equal status for men an women in the labour market. Asie from short-term loss of income, the time off from pai work may also influence wages an career in the long run, an finally the mothers pensions. 3

15 References Becker, G. S A Theory of Marriage, Journal of Political Economy 8 (4): Becker, G. S Human Capital, Effort, an the Sexual Division of Labor, Journal of Labor Economics 3(, pt. ): Bergstrom, T. an S. Blomquist 996. The Political Economy of Subsiise Day Care, European Journal of Political Economy, : Blau, D. an P. Robins 988. Chil-Care Costs an Family Labor Supply, Review of Economics an Sta tistics 70 (3): Blomquist, S. an V. Chrisitansen 995. Public Provision of Private Goos as a Reistributive Device in an Optimum Income Moel, Scaninavian Journal of Economics, 97: Daniel, K. 99. Does Marriage Make Men More Prouctive? Working Paper No. 9- (Economic Research Center, NORC) Deaton, A Panel Data from Time Series of Cross Sections, Journal of Econometrics 30:09-6. Gustafsson, S. an F. Staffor 99. Chil Care Subsiies an Labor Supply in Sween, Journal of Human Resources 7: Gronau, R.973. The Effect of Chilren on Housewife s Value of Time, Journal of Political Economy 8: Gronau, R Home-Prouction a Survey, in: O. Ashenfelter an R. Layars (Es.): Hanbook of Labor economics, North-Hollan. Heckman, J.J., R. J. Lalone an J. A. Smith 999. The Economics an Econometrics of Active Labor Market Programs, in Orley C. Ashenfelter an D. Car (es): Hanbook of Labor economics, North Hollan. Heckman, J. J. an R. Robb.985. Alternative Methos for Evaluating the Impact of Interventions: An Overview, Journal of Econometrics 30: Hellevik, T Småbarnsforelres yrkeseltakels og valg av barnetilsyn før og etter kontantstøttens innføring, (Families labour force participation an chilcare choice before an after the introuction of cash benefit reform) NOVA-Rapport /00. (In Norwegian) Korenman, S. an D. Neumark 99. Marriage, Motherhoo, an Wages, Journal of 4

16 Human Resources 7: Kraval, Ø How the Local Supply Day-Care Centres influences Fertility in Norway: A Parity Specific Approach, Population Research an Policy Review, 5: 0-8. Langset, B., B. Lian an T.O. Thoresen Kontantstøtten hva har skje me yrekeseltakelsen? (Cash benefits what happene to labour force participation) Økonomisk analyse 3. (In Norwegian) Leibowitz, A. an J. Klerman.995. Explaining Changes in Marrie Mothers Employment Over Time, Demography 3(3): Lunberg, S. a n E. Rose The Determinants of Specialization Within Marriage, Mimeo,University of Washington. Moffitt, R. 99. Program Evaluation with Nonexperimental Data, Evaluation Review 5(3): 9-34 Nakamura, A. an M.Nakamura.994. Preicting Female Labour Supply: Effects of Chilren an Recent Work Experience, Journal of Human Resources, 9 (): Nilsen, A; A.E. Risa an A.Torstensen Transitions From Employment Among Young Norwegian Workers, Journal of Population Economics,3: -4. Riber, D. C. 99. Chil Care an Labor Supply of Marrie Women, Journal of Human Resources 7, Rønsen, M. 00. Market Work, Chil Care an the Division of Househol Labour, Statistics Norway Report 00/3 Weiss, Y The formation an issolution of families: Why marry? Who marries whom? An what happens upon ivorce? in: M.R. Rosenzweig an O.Stark (Es.): Hanbook of population an family economics, North-Hollan. 5

17 Table : Mean an Stanar Deviations Variable Mean S.Dev Wife s eucation (more than years of schooling= university) If Wife s eucation university (38 % of total number) If Wife s eucation not university (6 % of total number) Husban s eucation(more than years of schooling= university) If Wife s eucation university If Wife s eucation not university Wife s Working hours (Per Week) If Wife s eucation university If Wife s eucation not university Husban s working hours (Per Week) If Wife s eucation university If Wife s eucation not university Specialisation (Husban s working hours-wife s working hours) If Wife s eucation university If Wife s eucation not university Market Intensity (Husban s working hourswife s working hours) If Wife s eucation university If Wife s eucation not university Wife s last year s income (in hunres) If Wife s eucation university If Wife s eucation not university Husban s last year s income (in hunres) If Wife s eucation university If Wife s eucation not university Number of chilren If Wife s eucation university If Wife s eucation not university Wife s age If Wife s eucation university If Wife s eucation not university Dummy if Wife works in the health Sector If Wife s eucation university If Wife s eucation not university Amount of Cash Benefits receive per couple If Wife s eucation university If Wife s eucation not university

18 Table: Effect of Cash Benefits on Specialisation an Market Intensity Variables t ratio 0 3 t ratio Specialisation Market Intensity Wife s working hours Husban s working hours Number of Observations constant; 3 reform s effect 7

19 Table3: Difference in the Effect of Cash Benefits With respect to Wife s Eucation Level Variables 0 γ γ 3 γ 3 δ 3 Specialisation No Control Variables (0.30) (-4.44) (.64) (.09) (.68) With Control Variables (3.34) (-4.09) (.65) (0.74) (.75) If Husban s Eucation University.9 (0.87) # of Chilren> -0.5 (-0.03) Works in the Health Sector -.9 (-0.4) Wife s Age> (-.04) Market Intensity No Control Variables (66.94) (5.4) (-.6) (-0.65) (-.8) With Control Variables (4.85) (4.08) (-.05) (-.04) (-.7) Husban s Eucation University.33 (0.87) # of Chilren> 5.6 (0.94) Works in the Health Sector.53 (0.86) Wife s Age>30.6 (0.63) Wife s working hours No Control Variables (9.87) (6.06) (-.83) (-.0) (-.84) With Control Variables (8.8) (5.7) (-.34) (-.3) (-.54) Husban s Eucation University 0.0 (0.0) # of Chilren>.89 (0.6) Works in the Health Sector.87 (0.8) Wife s Age>30.4 (.05) Husban s working hours No Control Variables (7.57) (0.63) (0.9) (.35) (0.68) With Control Variables (45.6) (0.04) (-0.35) (-0.5) (-0.45) Husban s Eucation University.3 (.4) Chilren>.73 (0.75) Works in the Health Sector 0.67 (0.38) Wife s Age> (-0.04) t ratio in parenthesis; 0 constant for low eucation level; 0 γ 0 constant for high eucation level; 3 reform s effect on low eucate; γ 3 ifference in the effect of the reform for low an high eucate; 3 γ 3 reform s effect on high eucate; δ 3 coefficients for control variables. 8

20 Figure Working Hours Womens' Eucation Level Before After 9

21 Figure 30 Level of Specialisation Before After Women's Eucation Level 0

22 Department of Economics University of Bergen Fosswinckels gate 6 N-5007 Bergen, Norway Phone: Telefax: