Income Effects and Labour Supply : Evidence from a Child Benefits Reform

In this paper, we exploit a unique and unexpected reform to the child benefit system in Denmark to assess the effects of child benefits on parental labour supply. A cap on child benefit payments in 2011 led to a non-negligible reduction in child benefits for larger families with young children. The differential impact of this policy represents an opportunity to assess the causal impact of child benefit programmes on the labour supply of mothers and fathers. We find that a reduction in child benefits leads to a large increase in the labour supply of mothers; the effect on fathers is much smaller. Both mothers and fathers respond to the policy at the intensive margin, but the strongest response is from mothers at the extensive margin. The majority of the effects can be ascribed to fertility responses, but even after controlling for fertility-related family characteristics, we find significant increases in labour supply after the introduction of the reform. We confirm this result by using data on parents' medical consultations regarding sterilisation, a common procedure in Denmark. Lastly, despite the fact that the policy was repealed in the year following its introduction, the reform appears to have had a long-lasting effect on labour supply