New evidence on the effect of
cash-for-care benefit on maternal labor supply
Sofia Bakhtawer Ashraf
Economic Theory and Econometrics Master’s thesis at Department of Economics
UNIVERSITY OF OSLO
May 2018
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New evidence on the effect of cash-for-care
benefit on maternal labor supply
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© Sofia Bakhtawer Ashraf 2018
New evidence on the effect of cash-for-care benefit on maternal labor supply Sofia Bakhtawer Ashraf
http://www.duo.uio.no/
Print: University Print Centre, University of Oslo
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Summary
The purpose of this thesis is to investigate the implications of cash-for-care eligibility on maternal labor supply and to find out if these effects are persistent over time. The cash-for- care benefit in Norway studied in this paper is a benefit paid monthly to parents of children between the age of one and two years who do not, or only partially, attend a government subsidized kindergarten. This benefit was partially introduced to compensate parents that did not manage to secure a slot in kindergarten. However, today there is almost full kindergarten coverage, which gives a real choice between enrolling a child in kindergarten or arranging alternative care and receiving the benefit. This thesis investigates who chooses to use this benefit and why. Previous research finds that it is mainly used by those with low education and income, where a high percentage of the recipients are immigrants.
The dissertation builds on the neoclassical model of labor-leisure choice to analyze the use of the benefit. The theory predicts that those with low wages will have a higher incentive compared to those with high wages to leave the labor force, because the economic
opportunities provided by the welfare system to those with low wages is better than those presented by the labor market.
Building on previous research findings and new analyses, the thesis investigates whether the benefit is economic preferable, and whether the theory can predict the findings. The empirical analysis looks at the effects of the cash-for-care benefit removal for two-year olds in 2012 and exploits the change in benefit entitlements before and after the removal. By examining how comparison in eligibility rates affects labor supply, one can estimate the policy response. This is done by using a fixed effects approach. To conduct this analysis, data from Statistics Norway’s registers have been used. Mothers’ labor supply is measured through mothers’
earnings and the independent variable is cash-for-care eligibility.
There is no possibility for reverse causality, as the decision to eliminate the benefit for two- year olds in 2012 was decided upon on processing of the 2012 government budget, such that the children were already born, and the parents could not affect the children’s birth. This provides exogenous variation in cash-for-care eligibility.
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The empirical analysis finds that a 1 NOK increase in cash-for-care eligibility causes around a 0.20 NOK decrease in mothers’ earnings the year the children turn two years. This is a larger estimate than several other previous estimates, especially compared to Langset et. Al in 2000, who predicted a reduction in labor supply between 5.83% and 7.50%, and also compared to Hardoy and Schøne in 2010, who found a reduction of around 8.00%. The results also indicate that these effects are larger for mothers with low education, compared to those with midrange education when their children are one year. In addition, mothers with partners reduce their labor supply more than non-partner mothers when the children are two years.
The analysis of persistency indicates that the negative results on maternal labor supply also remain when the children turn three and four years. A 1 NOK higher cash-for-care eligibility rate causes around a 0.23 and 0.25 NOK decrease in labor earnings when the children are three and four years respectively. These estimates are contradictory to previous findings, especially of what Schøne found in 2004, as no lasting effects of cash-for-care benefit were revealed.
In order to investigate which margins of income that are affected by the cash-for-care
eligibility, earnings above some base rate thresholds are used as the dependent variable. This shows that at almost all thresholds, earnings fall slightly with some percentage points when there is an increase in cash-for-care eligibility of 1,000 NOK. This also suggests that the effects are rather linear in earnings, which contradicts previous research, including the findings of Hardoy and Schøne from 2010. They found that those already outside the labor market were much more affected by the benefit than those that were active in the labor force.
There is a great amount of political debates in Norway on cash-for-care benefit. The results from this analysis are immensely relevant to whether the benefit should be phased out also for the one-year olds.
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Preface
This thesis is made as a completion of my five years master education in Economic Theory and Econometrics at University of Oslo. Through this period of years, I have gained
knowledge about social involvement, mathematical and analytical skills and value creation of scarce resources, which has given me the possibility to apply this in a final master’s thesis.
After five intensive months of writing the master’s thesis, I have learned a lot, both on an academical and personal level.
During the writing of my thesis, I have had the possibility to sit at Statistics Norway and use microdata to complete my empirical analysis. I would like to thank my supervisor Edwin Leuven and co-supervisor Martin Eckhoff Andresen for their time, valuable inputs and
support throughout the entire master period. Finally, I would like to thank my family for being helpful, encouraging and supportive during my time studying at University of Oslo and
through the time of writing the thesis. This accomplishment would not have been possible without them.
Cash-for-care benefit is a much-debated benefit. With this dissertation, I hope to bring forward knowledge to political debates in Norway on whether it should be retained or if it should be discontinued.
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Table of contents
1 Introduction 1
2 Literature 3
2.1 Implications on labor supply 3
2.2 Effects on child development 5
3 Institutional setting 7
3.1 Rates 8
3.2 Recipients 10
3.2.1 Traits 11
3.2.2 Evolution in numbers 12
3.3 Kindergarten coverage 14
4 Microeconomic theory 18
4.1 Effects of cash-for-care benefit in the model 18
5 Data and descriptive statistics 21
5.1 The sample of interest 22
6 Empirical strategy 25
7 Results 30
7.1 Labor market attachment 32
7.2 Persistency analysis 34
8 Conclusion 36
References 38
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List of figures
3.1 Share of cash-for-care benefit of the base rate 10
3.2 Usage of cash-for-care benefit and kindergarten 13
3.3 Cash-for-care government expenses, (1,000,000 NOK) 14
3.4 Kindergarten enrollment rates, by age 15
3.5 Cash-for-care benefit payments and kindergartens 17
4.1 Effect of cash-for-care benefit on work incentive 18
4.2 Effect of cash-for-care benefit on high-wage and low-wage mothers 19
6.1 Cash-for-care eligibility the year the children turn one year, by birth month 26 6.2 Cash-for-care eligibility the year the children turn two years, by birth month 26
List of tables
3.1 Rates for cash-for-care benefit as of January 1st, 2006 till July 31st, 2012 83.2 Rates for cash-for-care benefit as of August 1st, 2012 till July 31st, 2014 9
5.1 NUS2000 education level 22
5.2 Summary statistics 23
7.1 Main results of cash-for-care eligibility on mothers' labor supply 31
7.2 Threshold earnings 33
7.3 Persistency analysis 35
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1 Introduction
Cash-for-care benefit1 is a tax-free monthly benefit paid to parents with children from the age of 13 months to 23 months, who do not, or only partially, use kindergartens with government support. It was introduced August 1st, 1998 by Kjell Magne Bondevik's first government, such that families would have the possibility to choose the child care that they thought to be the best for their children.
The benefit is highly debated, as the critics’ claim it contributes to poor integration of
immigrants into the Norwegian society, who are a big share of the benefit users. Participation in the labor market is considered an important component of successful integration, and it is argued that the support keeps women away from the labor market beyond what should be the case. In addition, children who do not attend kindergarten have lower learning outcomes, including missing language skills and social abilities (NOU 2017:6). On the other hand, the proponents for cash support consider that it is an economic opportunity to spend more time with the children, as it ensures financial freedom. A Norwegian study from 2017 finds that toddlers that use kindergarten full-time have a higher level of the stress hormone cortisol, than toddlers who receive care at home (Drugli et al. 2017).
From an economic and policy perspective, it is of interest to investigate how cash-for-care benefit eligibility affects society by changes in parental behavior. As parents of children with cash-for-care benefit are fundamentally different from parents without the benefit, one cannot just compare their labor supply. The liquidation of the cash-for-care benefit for two-year olds in 2012 provides an opportunity to estimate the causal effect of the benefit. By considering the cash-for-care eligibility rates before and after the removal, I can investigate the
implications on the mothers’ labor supply by using a fixed effects approach2.
This thesis will contribute with implications of the benefit on labor supply, as well as persistency effects. The results indicate a 0.20 NOK decrease in earnings of mothers of two- year olds when cash-for-care eligibility rises with 1 NOK. When the children are one year old, the effects are larger for mothers with low education than mothers with midrange education. I also find a slightly larger reduction in labor supply for mothers with partners compared to the
1 Norwegian: Kontantstøtte
2 The software STATA 2015 is used for calculations
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mothers without partners of two-year olds. The findings also suggest that the effects are rather linear in earnings. The persistency effects two years later are somewhat higher than when the children are two years, a decrease of respectively 0.23 NOK and 0.25 NOK.
This dissertation starts by going through literature on this issue, as well as previous analyses conducted. Thereafter, it will present the institutional setting of the benefit, looking at the foundation, modifications and evolution, recipient traits and kindergarten coverage in section 3. This will be followed up by presenting a neoclassical model of labor-leisure choice and a discussion of what this implies. Accordingly, the focus is on the empirical analysis of the implications of the liquidation of cash-for-care benefit in 2012 and its persistence in the medium-term. This is carried out through a comparison of children’s cash-for-care eligibility before and after the 2012 change in the reform, which allows me to estimate the causal effect of cash-for-care eligibility on maternal labor supply. The economic policy effects of the cash- for-care benefit will be summed up in the conclusion.
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2 Literature
In the 20 years since cash-for-care benefit was introduced in Norway, it has been analyzed and evaluated several times. This section discusses some of the previous empirical research that has been done in this area.
2.1 Implications on labor supply
Cash-for-care benefit can have negative impacts on labor force participation, as it means that it will be more attractive to take care of your own children at home, as the costs of leaving the labor force is lower (NOU 2017:6). NOU 2009:10 states that The Allocation association 3 proposed to discontinue the support, because it would increase occupational participation among toddler mothers and prevent children from parents with low income and education from being kept away from kindergarten.
An article published in 2000, as a part of Statistics Norway journal Economic analyses:
3/2000, uses two surveys completed before and after the benefit was introduced, to assess how it has impacted occupational activity. About 19 percent of the mothers who received the support stated the benefit as the reason behind the reduced employment. The short-term effects on the labor supply reduction are estimated to be between 3,500 and 4,500 man-years, assuming that they yearly conducted 60,000 man-years before the reform (Langset et al.
2000). As the data were obtained too early after implementation of the reform, the long-term effects were not possible to capture.
In 2004, Schøne published a study of the long-term effect of the support to see if the negative impact on employment is lasting. The results revealed that the benefit did not have any lasting effects on the mother’s labor supply. Cash-for-care support reduces the mothers’ short-term labor supply, but evaluated in the last year of the support period, the negative effect is greatly attenuated. The negative effect is weakened over time, from 7.1 percent after one year to 1.3 percent after three years, the year in which the cash support period ends for the 1998 mothers.
Recent studies reveal that the introduction of cash-for-care support has had a negative effect on the employment of mothers, especially on immigrant women (Østbakken 2016). It has led
3 Norwegian: Fordelingsutvalget
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to a reduction in women's occupational participation, both by the fact that some mothers reduced their working hours, and some pulled out of the labor market (The Research Council of Norway 2015). The effect is strongest among the low educated. Nevertheless, mothers with a strong connection to working life discard the negative effect of cash support when the child is three years (Drange & Rege 2013). The support scheme caused a drop in employment of non-western immigrant women by approximately 15 percent (Hardoy & Schøne 2010). The reduction is mainly because already inactive women have reduced incentives to participate in the labor market. In addition to this, they also found that the cash-for-care benefit reform reduced the incentives of those that already were outside the labor market to join the labor force, while those who were active in the labor market did not have this incentive.
The cash-for-care benefit weakens the incentive to work for women from non-western countries. It is primarily mothers who are outside the labor market who are positively affected by the scheme, because they get more payments through the benefit. These mothers would probably be stay-at-home moms, even considering cash-for-care benefit did not exist.
However, traditional gender norms can act as a barrier to women's participation in work.
Immigrant groups' attitudes and practices with respect to combining family and work vary between first-generation immigrants and their children (The Research Council of Norway 2015).
Moreover, the Nordic countries have been politically concerned about the fact that the cash support scheme weakens the labor market participation of women with immigrant
background and comes at the cost of their children losing important knowledge of language and culture by staying home with a mother instead of going to kindergarten (The Research Council of Norway 2015). Several Norwegian Public Reports have dealt with the benefit (NOU, 2008:6, 2011:7, 2011:14). All investigations show how cash support has led to a reduction in occupational participation for mothers with one- and two-year olds, and several investigations propose phasing out the benefit.
The study of children of labor immigrants, which constitute the largest group of second- generation immigrants in Europe, reveals that there is little attention to the family as a potential resource and more focus on the family as managers of traditional gender norms (Nadim 2017). Dale et al. (2006) point to the fact that in British-Pakistani families there is a strong norm that the mother should be responsible for the daily care of the children, while kindergartens are not perceived as a relevant alternative. Thus, care for children are
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considered incompatible with participation in work for women, which make it difficult for mothers to work outside the home. Kavli and Nadim (2009) find that differences in attitudes towards women’s occupational activity between Pakistani immigrants and Norwegians are significant even after they have considered variations in age, education, number of children and mother’s occupational activity during the upbringing. Norwegian-born women with Pakistani parents are more occupationally active in the early childhood of their children, compared to women who have emigrated from Pakistan and have children of the same age. At the same time, they work part-time to a greater extent than ethnic Norwegian women in the same family phase.
2.2 Effects on child development
Research reveals that stimulation of children's cognitive and non-cognitive abilities from early age has a major effect on children's development (Havnes & Mogstad 2009). Kindergarten is today believed to be an important arena for learning. Nevertheless, there are parents who choose not to use kindergarten, in particular those with immigrant background or low education (NOU 2017:6). Mogstad and Rege (2009) argue that time in kindergarten helps to ensure a solid learning base, such that children not applied or admitted to kindergarten will have poorer opportunities to succeed in education and professional career.
The international PISA project reveals a strong correlation between the use of kindergarten and preschool and children's math and literacy skills in school age (OECD 2004). In addition to this, according to Schjølberg et al. (2008), Norwegian children in kindergartens have a better language development than children at home. However, Ruhm (2004) reports results indicating that mothers' occupation during the first three years after birth is at the expense of the child's development.
The Nobel prize winner in economics, James Heckman, argues that learning is a self- reinforcing process where early learning fosters more learning (Heckman 2006). What we learn in adolescence is amplified through what Heckman calls a "multiplier effect". Pre- school measures may therefore be particularly effective because they give the child a higher learning outcome in first grade, leading to further higher learning outcomes in second grade and so on. This is called dynamic complementarity. A child who has well-developed language understanding at school learns more because a good language makes learning easier. The same applies to non-cognitive properties. A child who can concentrate before starting school
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will learn more in school. An important consequence of the multiplier effect is that the differences that exist among children already in adolescence will increase in school age.
Havnes and Mogstad (2011) find that kindergartens benefit children's educational level and employment relationship in adulthood. The development of 17,500 new kindergartens slots led to 6,200 years of additional education in the 70’s. In addition, the probability of students completing high school and university education is respectively 6 and 7 percentage points higher per kindergarten place. The effect on education is greatest for children of mothers with low education. The chances of receiving benefits in adulthood are significantly reduced due to the kindergarten development (Havnes & Mogstad 2009).
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3 Institutional setting
Cash-for-care benefit is a cash support granted to parents of children between 13 and 23 months who do not, or only partially, use kindergarten with government operating grants as care service for their children (St.prp. nr. 53 (1997-98)). To be considered eligible to the benefit, parents must take responsibility for the care of their own children on a full-time basis or leave the care to a family member or a non-registered baby-minder4. Parents receive half the benefit if the children have a part-time place in kindergarten. In addition, to be entitled to the benefit, the child must be resident in Norway, which is considered as living in Norway for 12 months continuously. From July 1st, 2017, a criterion for the parents being a member of the national insurance scheme was added. If the child lives with both parents, then both are
required to have five years of national insurance coverage (NAV 2017).
The benefit is statutory in its own law, called Act of cash-for-care benefit for parents of toddlers5, also known as the Cash-for-care benefit Act. It came in enforcement on August 1st, 1998 and was introduced by Kjell Magne Bondevik's first government, consisting of the Christian Democratic Party, the Centre Party and the Liberal Party6. With the support of the Conservative Party7 and the Progress Party, the law was passed in the Norwegian Parliament, but against the Labour Party's and the Socialist Left Party's votes. The support applied only to parents of one-year olds, but was extended to parents of two-year olds as of January 1st, 1999.
A transitional arrangement ensured that parents of children who received cash support for their one-year olds and who were two years old in the autumn of 1998, did not lose the support in the period from the age of two until the scheme was generally applicable to two- year olds from January 1st, 1999.
According to Bondevik's first government, the introduction of the benefit was an important family policy reform to improve the opportunities for toddlers to get good child care. The three main purposes of this Act are to help families to have more time to take care of their own children, to give the family true freedom of choice in terms of child care and to make more equality to the transfers each family receives for child care from the state, regardless of how the audit is organized (Cash-for-care benefit Act 1998).
4 Norwegian: Dagmamma
5 Norwegian: «Lov om kontantstøtte til småbarnsforeldre»
6 Norwegian: Venstre
7 Norwegian: Høyre
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As of today, the benefit only applies to toddlers from 13 to 23 months, as Stoltenberg's second government, consisting of the Labour Party, the Centre Party and the Socialist Left Party, discontinued the cash support for two-year olds from August 1st, 2012. In the empirical section, this abolishment of cash-for-care benefit for two-year olds will be exploited to estimate the causal effects of benefit eligibility on mothers’ labor supply.
3.1 Rates
In 1998, full cash support was granted if children did not use kindergartens with government operating grants. Partial support was granted with 80%, 60% or 45% (Ot.prp. nr. 56 (1997- 98)). If the children stayed in kindergarten for more than 30 hours a week, no support was granted. From August 1st, 1999, a change in the rate of partial support was made, so that it was given either in 80%, 60%, 40% or 20%. The maximum stay time in kindergarten for non- cash benefit was increased by three hours, to 33 hours a week. The rates for cash-for-care benefit before the liquidation for two-year olds in 2012 are shown in table 3.1.
Table 3.1: Rates for cash-for-care benefit as of January 1st, 2006 till July 31st, 2012
Days per week
Hours of stay in kindergarten
Cash-for-care benefit in
percentage of full rate
Cash-for- care benefit rates per child 13 - 18 months
Cash-for- care benefit rates per child 19 - 23 months
Cash-for- care benefit rates per child 24 - 35 months
0 No use 100 per cent 3,303 NOK 3,303 NOK 3,303 NOK
1 One to eight hours 80 per cent 2,642 NOK 2,642 NOK 2,642 NOK 2 Nine to 16 hours 60 per cent 1,982 NOK 1,982 NOK 1,982 NOK 3 17 to 24 hours 40 per cent 1,321 NOK 1,321 NOK 1,321 NOK
4 25 to 32 hours 20 per cent 661 NOK 661 NOK 661 NOK
5 33 hours or more No cash-for-care benefit
0 NOK 0 NOK 0 NOK
From August 1st, 2012, the cash-for-care benefit Act changed (Prop. 8 L (2011-2012)). The benefit was eliminated for two-year olds, age-differentiated rates were introduced, and the classified levels changed by going from five to two rates, as shown in table 3.2. Age-
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differentiated rates imply that the youngest one-year olds, 13-18 months, receive the benefit at high rates, while the oldest one-year olds, 19-23 months, receive the benefit at low rates. The support can be granted for a maximum of 11 months, from 13 to 23 months. The two-rate grading means that the support was given at full rate if the child did not go to kindergarten, or at 50 per cent if the child used kindergarten for up to 19 hours a week. Parents were not entitled to cash support when using kindergarten for 19 hours or more during the week. The change applied to both current and new cases as of August 1st, 2012. From August 1st, 2014, the age-differentiated rates were removed, so that all recipients were paid the same amount.
The change applied to both current and new cases as of August 1st, 2014, which is why children born after 2011 are not included in the empirical sample in section 5.
Table 3.2: Rates for cash-for-care benefit as of August 1st, 2012 till July 31st, 2014
Hours of stay in kindergarten
Cash-for-care benefit in percentage of full rate
Cash-for-care benefit rates per child 13 - 18 months
Cash-for-care benefit rates per child 19 - 23 months
Cash-for-care benefit rates per child 24 - 35 months No use 100 per cent 5,000 NOK 3,303 NOK 0 NOK Up until 19 hours 50 per cent 3,750 NOK 1,652 NOK 0 NOK
20 hours or more No cash-for-care benefit
0 NOK 0 NOK 0 NOK
The Norwegian Parliament determines the amount of cash-for-care benefit annually. It is provided per child without any kind of income- or means testing and is also tax-free.
Compared to most other social security benefits that are linked to the base rate of the social security system and automatically adjusted against wage- and price increases, the politicians must increase the rate of cash-for-care support annually for the benefit to be inflation-
adjusted. The base rate8 is a fixed amount that is used as the base for calculating social security benefits and pensions.
The benefit amount has roughly been around 3,000 NOK from 1998 until 2011. In 2012, the amount was increased to 5,000 NOK simultaneously with the liquidation of the benefit for two-year olds. The support was raised with 1,000 NOK in 2014 to 6,000 NOK. In 2017 it was further increased to 7,500 NOK.
8 Norwegian: Grunnbeløp
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Figure 3.1 shows that the development in the real rates of the support is higher than never before. The real rates are calculated by taking the monthly cash-for-care benefit and dividing it by the monthly base rate in each year. There is a somewhat declining trend up to 2011, while an increase is seen from 2011 up until today. The downward trend arises from the fact that the rate has been around the same amount without being wage- and price adjusted. The actual support has decreased each year, aside from 2000, 2003, 2012, 2014 and 2017. This reduction causes fewer people to make use of the aid, as it will be shown in the next subsection. In recent years, however, the real support has increased significantly.
Figure 3.1: Share of cash-for-care benefit of the base rate
Note: The cash-for-care benefit rates used are the one that accounts for zero hours of kindergarten usage. The highest cash- for-care benefit rate, 5,000 NOK, is used in year 2012 and 2013.
3.2 Recipients
As mentioned in the previous subsection, the number of recipients of the benefit has
decreased since it was established. I shall here look at this trend and what characterizes those who receive the benefit.
0,0 % 20,0 % 40,0 % 60,0 % 80,0 % 100,0 %
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
CFC/BASE RATE
YEAR
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Bondevik's first government shaped the cash-for-care benefit as a gender-neutral scheme, so that it would apply to both fathers and mothers. The statistics, on the other hand, show that most people who used the scheme to reduce working hours were women who initially worked little. Fathers used it to a very small extent to work less and be more with the children
(Hellevik 2000).
There are more cash-for-care benefit recipients with immigrant background than with Norwegian-born parents (NOU 2010:1). In 2016, 43% of immigrant parents that are eligible to the benefit received the support, while only a share of 15% of non-immigrant parents received it. Due to a larger decrease in the use of cash support among Norwegian-born parents than immigrant parents, the difference has risen ever since the cash support was introduced, probably because of low child care coverage in the earlier states, causing unwilling cash-for- care users. In 2016, the largest share of cash beneficiaries was from Morocco and Pakistan (NAV 2017:6). The fact that the benefit is paid for a large proportion of children with backgrounds from these countries is probably because immigrant women have a low employment rate, below 40 percent, and that a large proportion has no education or low education level. Research indicates that lower socioeconomic backgrounds are linked to increased likelihood of using the support (Aassve and Lappegård 2008). The difference in the proportion of cash beneficiaries between immigrants with a rural background from Africa and Asia and between the EU has gradually decreased in recent years. In 2016, there were more cash beneficiaries from the EU and fewer recipients from Africa and Asia.
According to a report from NAV (2010), the inclination to use cash support for the maximum number of months is increasing with age, and the inclination to not use the support is highest among the youngest mothers. For single parents who have only one income, it may be harder to stay at home with toddlers. They have a weaker inclination than others to use cash support when everything else is equal, such as age, income, employment and immigrant background.
The real value of cash support has fallen just until recent years, while real childcare prices also have decreased, so it has become relatively expensive to be home with small children.
The benefit now amounts to only about one tenth of an average labor income and is thus no direct income compensation. However, the relative value of the support amount will be higher
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for parents with low income than for parents with high income. NAV (2010) show that parents with low income largely use the benefit. Holding everything else fixed, NAV finds that the higher income the mother has, the weaker the inclination to choose full cash support.
They also discover the same trend when they look at mother's occupation. Mothers in
professions that require higher education and who are well paid receive least of the aid. There is a higher proportion of mothers who have had few or no years of pensionable income before birth than mothers who have received a lump-sum grant at birth9, who have used cash support.
A lump-sum grant is given to mothers that are not entitled to parental benefit. This indicates that connection to the labor market may have an impact on the cash-for-care benefit use.
There is a correlation between the maternal education level and income on whether the family chooses the benefit or not. The sharp decline in the number of people receiving cash support has led to the scheme becoming a cash payment to the most marginalized families affected by child poverty. Cash-for-care benefit has developed into a scheme that is mainly used by those with the lowest income and a high percentage of the recipients are immigrants. The new 2017 requirement of five-years´ membership in the social security is assumed to reduce the number of immigrant recipients.
3.2.2 Evolution in numbers
There has been a decline in the number of recipients approximately every year since 1999 when 86,224 people received the support, as shown in figure 3.2. The introduction of the new regulations on August 1st, 2012 led to a huge decline the same year of 47.6 per cent per December 2012. In ten years, there have been about 37,700 fewer recipients of the support.
The number of beneficiaries has decreased steadily since its introduction in 1998. This is due to the development of kindergartens in the municipalities and limitations and requirements in the cash-for-care scheme, in addition to changes in preferences. The biggest decline since the change between 2011 and 2012 was in 2016, a decline of 1,352 recipients compared to the same time the previous year.
9 Norwegian: Engangsstønad
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Figure 3.2: Usage of cash-for-care benefit and kindergarten
In figure 3.2 above, we also see how the use of cash-for-care benefit is associated with the use of kindergarten for one- and two-year olds. It is clear from the figure that there is a reversal change in the use of cash-for-care support and kindergarten, where the use of kindergartens has increased considerably, and the use of the support has drastically decreased. There seems to be a mirrored change in the use of these until the change in the cash-for-care benefit Act in 2012, which no longer gave parents of two-year olds right to the support, resulting in further reduction in cash support use. Subsection 3.3 will further investigate how kindergarten affects cash-for-care benefit usage.
Figure 3.3 below shows the government's expenses for cash-for-care benefit. With the introduction of the support, the figure was down to 773 million NOK. Expenses were
approximately 3 billion NOK from 2000 to 2005. From 2010 to 2014, the spending has been below 1 billion NOK. The reduction in expenses is because more children have been granted kindergarten, so fewer use the scheme, which means that most people who did it initially used it as a substitute for kindergarten. As of 2017, the expenditure is just over one and a half billion, which it has been since 2015. The increase is due, among other things, to higher benefit rates and more users being attracted to the higher rates
0 20 000 40 000 60 000 80 000 100 000 120 000
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
CHILDREN
YEAR
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Figure 3.3: Cash-for-care government expenses, (1,000,000 NOK)
3.3 Kindergarten coverage
There is almost full kindergarten coverage today compared with the situation in the late 1990s when the cash-for-care support first was introduced (Stabell 2017). The 1990s had two
reforms other than cash-for-care that could have had an impact on the kindergarten sector.
Maternity leave extended up to the age of one year in 1993 and in 1997 the school starting age went from seven to six years. The reform in 1993 is considered to have had small effects on the child care market, as there were few children at that age attending formal child care. In contrast, the school reform had larger consequences, as six-year olds no longer needed kindergarten services, such that more kindergarten slots were available (Andersland and Nilsen 2016). This probably increased the mothers’ labor supply while having small children, causing a further development of public child care sector.
It is reasonable to think that the benefit is linked to kindergarten coverage. When kindergarten coverage is low, the child must wait a long time for kindergarten and therefore the number of cash support recipients will be high. On the other hand, when the coverage is high, parents have the option to choose between kindergarten or cash support. Complete coverage means
500 1000 1500 2000 2500 3000 3500
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
CASH-‐FOR-‐CARE GOVERNMENT EXPENSES
YEAR
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that the provision of kindergarten meets demand, so that all families who wish for
kindergarten is offered it. When full coverage has been achieved, there will be a real choice between the use of kindergarten and other care solutions, or the use of part-time kindergarten combined with cash support.
A survey from NAV (2010) on child supervision and the use of cash-for-care support was sent to a representative sample of parents for children born in 2008. The survey found that one out of four with the support wants kindergarten as care solution for their kid (NAV 2010:1).
Compared to a research done by Pettersen in 2002, 37% of the benefit users would have preferred kindergarten as the care solution for their child if they could choose freely. The existence of involuntary cash-for-care beneficiaries suggests that the supply of kindergartens is lower than demand.On the other hand, if the number of involuntary cash beneficiaries had been low, this would mean that the kindergarten demand was covered by the supply. There were 12 percentage points more involuntary cash-for-care beneficiaries in 2002 than in 2008, which means that more children got kindergarten admission towards 2008.
Figure 3.4: Kindergarten enrollment rates, by age
0,00 % 20,00 % 40,00 % 60,00 % 80,00 % 100,00 % 120,00 %
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
CHILDREN IN KINDERGARDENS/TOTAL CHILDREN
YEAR
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Figure 3.4 above shows the kindergarten enrollment rates by age, and here we see a
significant increase in those who used kindergarten as care solution. Kindergarten coverage for all children aged one to five years has increased towards full coverage. The figure shows that about every child in the age of two to five years is admitted into kindergarten and that the proportion of one-year olds in kindergarten also is very high. We see that kindergarten
coverage rate for toddlers were very low in the late 1990s and in the early 2000s. Of all one- year olds in 1999, only 26.8% used kindergartens as care solution, while in 2016 the number had increased to 71.6%. For the two-year olds, the number of child care coverage was slightly higher in 1999, at 45.4%. This has increased significantly over the years, and in 2016 it was about full coverage of 92.5%.
The cash support was introduced partly as a solution to this low degree of coverage in 1998.
The government had set a goal for full kindergarten coverage that entered Parliament of Norway in 2003, called the kindergarten concord. The kindergarten concord said that all families who wished for it would be offered kindergarten slots during 2005. Furthermore, there had to be financial equal treatment and coordinated admission to municipal and non- municipal kindergartens. Finally, a maximum price for kindergarten slots was introduced in May 2004, which in 2012 was 2,324 NOK per month. The government had also set the goal that kindergartens should be available to all children, regardless of parent's income. If the maximum price is higher than six percent of the total income for the household, a reduced price is offered. This corresponded to an income of 38,733 NOK per month in 2012.
Therefore, low-income families get to use kindergartens with income-differentiated prices.
Sibling moderation also leads to a reduction in parental payment if you have more than one child in kindergarten in the same municipality, so that the price for the second and the third child will be 70 percent and 50 percent of the price for the first child (Udir 2017). These reduced prices make kindergartens relatively cheaper compared to cash-for-care benefit, which reinforces the effect of a real reduction in the support. This may cause a substitution from the support to kindergarten, indicating that the parents are, to some extent, price- sensitive and react to changes in prices.
The number of cash-for-care benefit payments fell in the first ten years of the 2000s, as more kindergartens were built. In figure 3.5, however, we see that the trend in the support continued to decline, even though the development of kindergartens stopped and also started to decline from 2009. In recent years, childcare services have again reflected benefit payments, as the
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payments has increased while the number of kindergartens has fallen, as seen on the figure below. Thus, we see that there is a close connection between child care facilities and demand for cash-for-care support, which is quite realistic, as the child must be taken out completely or partially of the kindergarten for the parents to be entitled to cash support.
Figure 3.5: Cash-for-care benefit payments and kindergartens
The trends show that more children have started in kindergartens and fewer use cash-for-care benefit since it was introduced in 1998. The survey from NAV conducted on child supervision and the use of cash-for-care benefit in 2010, indicated that demand for kindergartens
exceeded supply. This led to many parents using the support even when they preferred kindergarten admission. In recent years, access to kindergartens has increased, such that the supply is closer to the demand. The waiting period for kindergartens has also reduced, which means that parents use the support for a shorter period until they get admission. In addition, the use of kindergartens has become cheaper, as the government has introduced several programs for achieving accessibility for all children, regardless of the family's financial background.
0 1000 2000 3000 4000 5000 6000 7000 8000
2002 2004 2006 2008 2010 2012 2014 2016
CFC PAYMENTS AND KINDERGARTENS
YEAR
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4 Microeconomic theory
A neoclassical model of labor-leisure choice is typically used as a framework to analyze labor supply behavior. This model will be used to explain the effects from the cash-for-care benefit. The theory will predict how changes in government policies, as cash-for-care benefit, will affect work incentives.
4.1 Effects of cash-for-care benefit in the model
Figure 4.1 below is an illustration of how cash-for-care benefit can alter work incentives on the extensive margin.
Figure 4.1: Effect of cash-for-care benefit on work incentive10
Note: The true cash-for-care system is less continuous than what this model describes, particularly before 2012, because of partial cash-for-care benefit rates.
Without cash-for-care benefit, the budget line is given by FE where point E is the
endowment point where a person chooses not to work at all and uses all his time on leisure, assuming no non-labor income. Trading off an hour of leisure for additional consumption will move the worker up on the budget line. The interior solution is given at point P, where a person enjoys 70 hours of leisure and 40 hours of work. A cash-for-care benefit of 5,000
10 Figure retrieved from Borjas, G. J., page 55
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NOK per month will result in this individual dropping out of the labor market11. This leads us to point G. If a mother chooses to get back to the labor market, the benefit is taken away and the opportunity set is switched back to the original budget line FE. As seen on the figure, the support can reduce work incentives because a woman gets higher level of utility at point G than point P due to being at a higher indifference curve.
Figure 4.2: Effect of cash-for-care benefit on high-wage and low-wage mothers
To investigate how cash-for-care benefit works on high-wage versus low-wage mothers in this model, two different budget lines in figure 4.2 are used, one for each wage group. The steeper budget line indicates the budget line for those with higher wages, and the flatter one is the budget line for those with lower wages. Before the introduction of the cash-for-care benefit, the low-wage mothers allocate at an interior solution at point P, while high-wage mothers have an interior solution at point R. When the benefit is introduced, the low-wage mothers move from point P to point G. The high-wage mothers however, stay at point R, which already is at a higher indifference curve than the point after the support is introduced, such that moving from point R to G will decrease utility. Therefore low-wage mothers will most likely choose point G, while high-wage mothers will not. The endowment point is now at G, which is higher than previous E, such that the reservation wage increases, thus fewer
11 Assuming no choice of using baby-‐minder or family member to take care of the child
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low-wage persons entering the labor market. The benefit results in encouragement of parents with low wages to leave the labor force because they find that the economic opportunities provided by the welfare system is better than those presented by the labor market.
Based on this theoretical model of effects of cash-for-care benefit on labor supply, the next sections will investigate if this model holds in the empirical part, as it anticipates a decrease in labor supply for mothers with low wages and no, or small, changes for mothers with high wages.
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5 Data and descriptive statistics
The data used for the empirical analysis is provided by Statistics Norway and includes microdata on children’s personal identification number, birth date, cash-for-care eligibility and several characteristics on the mothers. The dataset contains records for Norwegian residents born from 2007 till 2011, which is the main analytic sample. In addition, there is individual demographic information on the mothers, in particular marital status, immigrant background and age. There is also socioeconomic data on years of education and earnings.
The children are matched with their mothers using mothers’ unique identification number.
Cash-for-care eligibility is uniquely identified by birth month and year. I have made the dataset for cash-for-care eligibility myself, by matching variables for birth months with the years from 2008 till 2013. Then I made two more variables indicating how many months the children are eligible for high and low cash-for-care benefit, based on when they are born.
High cash-for-care rates indicates 5,000 NOK, while low cash-for-care rates indicates 3,303 NOK. Then I get the resulting variable of interest, the cash-for-care eligibility variable. This calculates how much cash-for-care a toddler annually is eligible for, by adding the amounts of low and high cash-for-care rates in the calendar year.
The data on birth numbers, immigrant category and marital status is extracted from an external source from the Central Office for Population Registration12. As an indicator on mothers’ labor supply in the analysis, mothers’ earnings in the year the children turn one and two years is used. For the persistency analysis, maternal earnings in the years the children turn three to five years is also added. This data comes from Ligningsregisteret, which Statistics Norway’s tax statistics for personal taxpayers are based on and is obtained annually from the Tax Directorate. The education data is obtained from the Norwegian Standard Classification for Education (NUS 2000). This is a 6-digit code system that classifies educational activities by level and subject. The code is used for people in education from the end of primary school.
In addition to mothers’ earnings as an indicator on maternal labor supply in the analysis, the labor market attachment of different mothers is also measured, based on their income compared to the base rate. Binary thresholds are used, which are multiplies of the base amount equal to one if the earnings exceed specific threshold. As we are looking at a main sample of children born from 2007 till 2011, when they are one and two years, the base rates
12 Norwegian: Sentralkontoret for folkeregistrering
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from 2008 till 2013 are used. The dummy values of the thresholds equal to one are given by earnings exceeding one, two, three or four times the base amount. One base amount can be considered as no employment, thus no labor participation, while a two times base amount accounts for a proper part-time job. A three times base amount will mean more than one part- time job and four times base rate can be interpreted as a full-time job.
5.1 The sample of interest
The main sample consists of Norwegian children born from 2007 till 2011. The purpose of choosing the children born in this period is that they turn two years before and after 2012, the year the benefit was abolished for two-year olds and increased for the youngest one-year olds.
Children born after 2011 are not included, because they are affected by other changes in the cash-for-care benefit reform than the one in 2012.
The empirical analysis uses the first digit of the coding system of the Norwegian Standard Classification for Education. This will tell us about the level of education the mothers have in the year the children turn one and two years. Table 5.1 below illustrates the different levels accompanied by years of schooling it requires.
Table 5.1: NUS2000 education level
Triple level Level Name of level Class division 0 No education or preschool Below compulsory
school Compulsory
education
1 Primary school education 1.-7. class 2 Secondary school education 8.-10. class Secondary
education 3 High school, basic education 11.-12. class 4 High school, final education 13. class 5 Supplementary education 14. class University and
college education 6 University and college education,
lower level 14.-17. class
7 University and college education, higher level
18.-19. class
8 Researcher 20. class +
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In public statistics, immigrants are defined as persons born abroad by two foreign-born parents (and four foreign-born grandparents) who have immigrated to Norway at some point.
This definition is used when creating a dummy of the immigrant category, which is indicated 1 if they are immigrants. The same applies to marital status, which is given the dummy value of 1 if the mother is married or has a registered partner.
The resulting baseline sample consists of 298,902 observations of children. Summary
statistics for the main variables of interest of the empirical analysis can be found in table 5.2.
The table shows that the average value of cash-for-care eligibility the year the children turn two is around 32,979 NOK, which is higher than the average value of cash-for-care eligibility the year the children turn one, stating around 18,958 NOK. The education level has an
average of around level five for both age groups, which indicates 14 years of education, meaning one more year than final high school. Earnings of the mothers in the year the children turn two are approximately 278,866 compared to 248,350 in the year they turn one year. Average age of mother at birth is around 30 years, 19 per cent of them are immigrants and 57 per cent have a partner. Given the definitions of base rates above, we see that 36 per cent of the mothers are not a part of the labor market. 56 and 58 per cent of the mothers of one and two-years olds respectively have one part-time job, while 45 and 58 per cent has more than one part-time job. 30 per cent of the mothers have full-time job when their children are one year and the same mothers accounts for 37 per cent full-time jobs when the children turn two.
Table 5.2: Summary statistics
Age of children Variable Observations Mean
1 Education level 289,305 4.78
2 Education level 293,608 4.81
1 Earnings 295,371 248,349.60
(187,695.00)
2 Earnings 298,902 278,865.60
(212,865.70) Age at birth 298,902 30.33
Immigrant 298,902 0.19
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Partner 298,902 0.57
1 CFC eligibility 295,371 18,957.97
2 CFC eligibility 298,902 32,979.17
1 Earnings > 1 BR 298,902 0.64
1 Earnings > 2 BR 298,902 0.56
1 Earnings > 3 BR 298,902 0.45
1 Earnings > 4 BR 298,902 0.30
2 Earnings > 1 BR 298,902 0.64
2 Earnings > 2 BR 298,902 0.58
2 Earnings > 3 BR 298,902 0.49
2 Earnings > 4 BR 298,902 0.37
Note: Summary statistics of mothers in the years the child turns one and two years respectively. Standard deviations of earnings in parentheses.
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6 Empirical strategy
The microeconomic model presented in section 4 predicts that the abolishment of cash-for- care benefit will increase the labor supply of the low-wage mothers. Almost all previous studies discussed in section 2.1 estimate a negative effect of cash-for-care benefit on labor supply. Most of these studies are however done at an early stage of the implementation of the benefit, in addition to looking at the actual benefit amounts each individual gets. In this section, estimation of the impact of cash-for-care eligibility in Norway on maternal labor supply is executed. As mothers with cash-for-care benefit are fundamentally different from mothers without cash-for-care benefit, as described in subsection 3.2.1, the empirical analysis cannot simply compare these mothers. The ideal method to investigate this is by conducting a randomized experiment, where one randomly allocates cash-for-care benefits.
To mimic this hypothetical experiment, I exploit variation across cash-for-care eligibility rates before and after the liquidation of the benefit for two-year olds in 2012 by using a fixed effects regression. The purpose of the empirical analysis is to find the effect of the cash-for- care eligibility on maternal labor supply. The children born from August 2009 are the children that are affected by the 2012 changes in the cash-for-care eligibility reform, while those who are born before August 2009 are not affected by the changes in 2012. There are no children that are fully treated by the reform in 2012, and by doing fixed effects regression, one is able to capture all the effects from the 2012 changes on maternal labor supply. This means that the mothers of children born in, for example September 2010 and 2008, would have had the same effect on maternal labor supply if the benefit was not abolished in 2012.
A regression analysis for the year when the children turn one and when they turn two is executed. The reason for including the year they turn one is because some children are born early in the year, such that they may have been exposed to the 2012 changes in eligibility rates already in the year they turn one. As seen on figure 6.1, there are some considerable differences in eligibility the year the children turn one year based on birth month. If these differences are solely by the 2012 reform, they need to be captured by doing a regression for the year the children are one, to see if it affects the labor supply. In addition, there are two different parameters, and both may be interesting.
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Figure 6.1: Cash-for-care eligibility the year the children turn one year, by birth month
Figure 6.2: Cash-for-care eligibility the year the children turn two years, by birth month
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Figure 6.2 shows the cash-for-care eligibility rates the year the children turn two by birth month. There are bigger differences in the cash-for-care eligibility rates when they turn two compared to when they are one, especially for the children that are two years in 2013. In addition, there is a large increase for the children that are two years in 2012 from August, as August is the month the changes in 2012 took place.
From figure 6.2, we see that the children born in December 2010 are two years in 2012. They are eligible to seven months of low benefit of 3,303 NOK from January to July, and four months of high benefit of 5,000 NOK from August to November. The children born in July 2010, are however only eligible to six months of low benefit from January to June, because the 2012 change does not make them eligible after turning two years. All children that are two years in 2012 receive less benefit than all those that are two years in 2011, because they are eligible to less months with benefits as the cash-for-care for the two-year olds is eliminated.
As all mothers are included in the earnings analyses, including those who have no income because they get cash-for-care benefit, log earnings are avoided. All mothers must be included because working is endogenous to the benefit. As the decision to liquidate the benefit for two- year olds in 2012 was decided upon on processing of the 2012 government budget, there is no possibility for reverse causality as the children were already born and the parents could not affect the children’s birth.
The regression is run with mother's labor supply as the dependent variable and an independent variable telling how much cash-for-care benefit a mother is eligible for. Several other
variables are added to correct for selection, age, business cycles and other effects.
The equation is given by:
𝑦! =𝛽+𝛼∗𝑐𝑓𝑐_𝑒𝑙𝑖𝑔!+𝛾!∗𝑖𝑚𝑚𝑖𝑔𝑟𝑎𝑛𝑡+ 𝛾!∗𝑝𝑎𝑟𝑡𝑛𝑒𝑟+𝛾!∗𝑎𝑔𝑒+𝛾!∗𝑎𝑔𝑒! + 𝛿!∗𝑒𝑑𝑢𝑐𝑙𝑒𝑣!+𝛿!∗𝑦𝑒𝑎𝑟!+ 𝛿!∗𝑏𝑖𝑟𝑡ℎ𝑚𝑜𝑛𝑡ℎ+𝜀! (1) 𝑡= 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑐ℎ𝑖𝑙𝑑𝑟𝑒𝑛 𝑡𝑢𝑟𝑛𝑠 𝑜𝑛𝑒,𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑐ℎ𝑖𝑙𝑑𝑟𝑒𝑛 𝑡𝑢𝑟𝑛𝑠 𝑡𝑤𝑜
yt is the earnings in year t and indicates mothers’ labor supply, β is a constant, cfc_eligt
indicates how much cash-for-care a child is eligible to get in year t based on when they are born and εt is the error term. The parameter of interest is α. In addition, some characteristics of the mothers is also controlled for. Immigrant is a binary variable equal to one if the mother
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is an immigrant, the binary variable partner indicates if the mother was married or had a partner and age is the mothers’ age the year they gave birth. Besides, there are three fixed effects dummy variables in the model to control for unobserved heterogeneity, as some mothers could have had higher or lower labor supply independently of cash-for-care
eligibility. Unobserved heterogeneity is cancelled out by using the fixed effects model. The variable educlevelt is the entity fixed effect and controls for education level that are constant over time but differ across entities. yeart and birthmonthare time fixed effects and control for year and calendar month, which are constant across entities but evolve over time. These are yearly and monthly shocks to the labor supply, affecting all mothers the same. Including all these variables that affect income in the regression, the coefficient 𝛼 for cash-for-care eligibility is obtained. The estimate for 𝛼 is therefore the implication of 1 NOK increase in cash-for-care eligibility on mothers’ labor supply measured in NOK.
By including the fixed effects, also called group dummies, one can control for the average differences across mothers and time in observable or unobservable predictors. educlevt
controls for differences across mothers through the level of education they have, being their mentality, personality, behavior or awareness of surroundings.
For the yeart variable, this would account for differences across time, as for example business cycles, which is the downward and upward movement of gross domestic product around its long-term growth trend. Periods of rapid economic growth, expansion, would result in more mothers joining the labor market as the labor demand would be high, thus easier to get jobs.
In periods of stagnation, recession, the labor demand is low, and people are being fired from jobs, resulting in more mothers choosing cash-for-care rather than working. This is the idea behind the year fixed effect. Adding this lets us control for the differences in year that could have had an impact on the earned income, such that omitted variable bias is controlled for.
The same applies to the birth month fixed effects. In the period the empirical analysis is focusing on, only children born before August 31st were entitled to kindergarten by law the same year as they turned one year. Those born after August did not have lawfully rights to kindergarten admission before almost turning two years. This means that mothers could have the possibility to plan their birth, such that giving birth in the months before September, entitled them with kindergarten. In effect, this specification exploits the changes in the labor
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supply of mothers with children born at the same time of the year, being subject to different changes in cash-for-care eligibility.
Besides the specifications of the equation above, the labor annual earnings, as previously mentioned in section 5, also observe market attachment of the mothers. The variables are defined the same way as above. I use outcome variable dummies for the thresholds of one, two, three and four times the base rate. Here, the independent variable cash-for-care eligibility is measured in 1000 NOK.
