Income taxation, child-rearing policies, fertility and unemployment

We examine how subsidy policies to support child-rearing of households affect the fertility rate in a textbook OLG model extended to account for a labour market imperfection (e.g., a minimum wage or a monopolistic union’s wage) as well as endogenous fertility. It is shown that increasing the child subsidy actually reduces population growth. The policy implications for countries with imperfect labour markets and low fertility (e.g., the most part of European Union countries) are noteworthy: if the government’s objective is to increase the fertility rate, a child-subsidy support policy should not be introduced at all. Contrary to conventional wisdom, our findings in fact reveal that, for any given value of the minimum (or union’s) wage, the introduction of a child subsidy reduces capital accumulation and increases unemployment in the long-run, and ultimately it negatively affects the demand for children in spite of a reduced cost of child-rearing.