Wages, Taxes and Publicly Provided Day Care

Abstract

Public employment growth has been paralleled by increased female labor force participation, while real wages for typical female public sector occupations have not increased. In a theoretical model we, first, show that there is a trade-off between day care provision and gross wages for occupations for which day care is a complement. It is possible to combine increased public labor demand with public day care provision leaving the wage unaffected. Second, non-parents will be in favor of increasing day care as long as day care productivity is higher than the inverse of the tax rate. This is because the effective labor supply and, therefore, the tax base increase. Third, parents want to push day care provision even further. They are prepared to accept a lower day care productivity than non-parents because day care provision relaxes the constraint on their desired labor supply. The Pareto efficient day care provision is between parents' and non-parents' preferred levels.

JEL Classification: D72, H31, H42, J13, J31