Publicly funded day care for children under the age of 3 is used less frequently in Germany compared to other (especially Nordic) countries. Supply of day care is still scarce for this age group. In order to improve possibilities to combine family duties with employment, additional public resources are currently provided for the expansion of publicly funded day care. The aim is to meet demand by 2013. For that year it is also planned to introduce a home care allowance, which is basically a monetary transfer for parents that do not use publicly funded day care. The idea is to subsidize child care within families and external care similarly, so that parents can decide for their preferred child care arrangement without any monetary considerations. Our paper analyzes the impact of the introduction of a home care allowance for children between 13 and 36 months of age and explicitly takes the expansion of publicly funded day care into account. We especially investigate the impact on i) labor supply, ii) public day care usage, iii) intensity of parental care, iv) household income and v) fiscal costs. We use the German Socio-Economic Panel (GSOEP) to estimate a structural model in which parents decide simultaneously about labor supply, usage of external day care and their time spent for child care within the family. The model also allows for possible rationing of parents with respect to publicly funded care arrangements. Simulations using the estimated model parameters show that labor supply and day care usage would increase moderately once publicly funded day care provision meets demand. The introduction of a home care allowance instead would lead to a moderate reduction in mother's labor supply as well as in day care usage. Considering both reforms at the same time, we overall find a decreasing labor supply, with 5.1% of the mothers increasing their labor market activities and 8.1% reducing it. The negative effects of the home care allowance also outweigh the impact of the expanding day care provision with respect to day care usage. Attendance rates decline by 4.1 percentage points. A home care allowance in fact increases the household income especially for poorly educated families, but at the same time discourages these parents to use external day care which can be important for early education.


Behavioral Microsimulation, Day Care, Family Policy, Germany