A comparison of family policy designs of Australia

Authors: Guyonne Kalb Thor O Thoresen

Publish Date: 2009/11/14

Volume: 8, Issue: 2, Pages: 255-287

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Abstract

Many of the Australian family support schemes are incometested transfers targeted towards the lower end of the income distribution whereas the Norwegian approach is to provide subsidized nonparental care services and universal family payments We contrast these two types of policies and discuss policy changes within these policy types by presenting results from simulations using microsimulation models developed for Australia and Norway Labor supply effects and distributional effects are discussed for the hypothetical policy changes of replacing the meanstested family payments of Australia by the Norwegian universal child benefit schedule and vice versa and of reducing the childcare fees in both countries The analysis highlights that the case for policy changes is restricted by the economic environment and the role of family policy in the two countries Whereas there is considerable potential for increased labor supply of Australian mothers it may have detrimental distributional effects and is likely to be costly In Norway mothers already have high labor supply and any adverse distributional effects of further labor supply incentives occur in an economy with low initial income dispersion However expenditure on family support is already high and the question is whether this should be further extendedThis paper was written when the second author visited the Department of Economics and the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne Both institutions are gratefully acknowledged for their hospitality A previous version of this paper was presented at the Australian Labour Market Research Workshop 89 February 2007 and at the International Microsimulation Conference 20–22 August 2007 We thank John Creedy John K Dagsvik Prem Thapa and two anonymous referees for their comments on earlier versions of this paper and Tom Kornstad for assisting with the simulations for Norway The first author also acknowledges the financial support of the Australian Research Council which funded this research through a Discovery Project Grant DP0770567Equation 4 shows that the choice model is analogous to a multinomial logit model where the representative utility terms are weighted with the number of opportunities theta H at that utility see also Dagsvik and Strøm 2006 However as these opportunity densities are not observed the empirical strategy implies estimating parameters reflecting differences in the number of opportunities across different choices along with parameters of the utility functionProbability distributions of labor supply for Australia are obtained using a userspecified number of random draws 100 in our case rather than use Eq 9 since this allows us to calibrate to observed hours The deterministic component of utility nu C h 1 h 2 h 1 h 2 is obtained using the parameter estimates of the quadratic preference function To generate the random component of utility a draw is taken from the distribution of the error term for each hours level an Extreme Value Type I distribution The utilitymaximizing hours level is found by adding the two components of utility for each hours level and choosing the hours with the highest utility Draws from the error terms are taken conditionally on the observed labor supply that is they are taken in such a way that the optimal prereform labor supply is equal to the actually observed labor supply As a result the postreform labor supply outcome is computed conditional on the observed prereform labor supply Using the repeated draws an empirical probability distribution for the hours of work can be constructed at the individual level and aggregated up to the population level The probability distribution can then be used to simulate expected labor supply responses or changes in expenditure at the individual level which can then again be aggregated up to the population level

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