The Effect of Child Allowances on Labor Supply: Evidence from Israel

Abstract

This study estimates the effect of the sharp reduction in Israel’s child allowances in the early 2000s on labor supply. The study uses the difference-in-differences method to estimate changes in the labor supply of men and women with more children (four or five) compared to changes in the labor supply of men and women with fewer children (two or three). The results show an increase of approximately 4.3 percentage points in the labor supply of women with four or five children, and approximately 2.8 percentage points in the labor supply of men with four or five children, relative to that of women and men with two or three children. These numbers translate to an income elasticity of -0.77 for women and -0.5 for men.

Keywords: Labor supply, income elasticity, child allowance

JEL Classification: H53, J8, J21