Targeting Fertility and Female Participation Through the Income Tax

Abstract

Low female labor force participation and low fertility rates in OECD countries, especially in Southern European countries, have raised a great deal of concern in recent years. As a means to reconcile work and family, Spain (one of the countries with the lowest female participation and lowest fertility) tried to target both issues through an income tax reform in 2003. One component of the tax reform consisted of a tax credit for working mothers of young children and the other consisted of sizeable increases in households' tax deductions per child. We find that the reforms increased both fertility and participation, and that these effects were very heterogeneous across different groups of women. Fertility is estimated to have increased by between 5 and 6 births per 1,000 women (where the average fertility is 37 per 1,000), while the participation rate of mothers with children under the age of 3 years increased by about 1.6 percentage points (where the average participation is 52 percent). Both effects were stronger among lower-educated women. Moreover, we find that the simultaneous nature of the policy reform dampened down the participation effect, such that some "trade-off" in the policy objectives existed.

Keywords: Female labor force participation, fertility, family policies

JEL Classification: J22, J13, H31