Child care subsidies revisted

Public spending on child care has taken a high flight in the Netherlands. One of the key policy goals of child care subsidies is to stimulate labour participation. We study the impact of child care subsidies on labour participation using a general equilibrium model.Next to the labour supply choice, we model the choice over formal and informal care. The choice between formal and informal care plays an important role in the overall impact of child care subsidies on labour participation. The model is calibrated to Dutch data. Our analysis shows that existing child care subsidies have promoted labour participation. However, at the current average subsidy rate of almost 80%, a further increase in the subsidy rate is a rather ineffective way to promote formal participation, the main effect being substitution of informal for formal care.