Paying Moms to Stay Home: Short and Long Run Effects on Parents and Children

We study the impacts of a policy designed to reward mothers who stay at home rather than join the labor force when their children are under age three. We use regional and over time variation to show that the Finnish Home Care Allowance (HCA) decreases maternal employment in both the short and long term. The effects are large enough for the existence of home care benefit system to explain the higher short-term child penalty in Finland than comparable nations. Home care benefits also negatively affect the early childhood cognitive test results of children, decrease the likelihood of choosing academic high school, and increase youth crimes. We confirm that the mechanism of action is changing work/home care arrangements by studying a day care fee reform that had the opposite effect of raising incentives to work – with corresponding opposite effects on mothers and children compared to HCA. Our findings suggest that shifting child care from the home to the market increases labor force participation and improves child outcomes.