Macroeconomic and welfare effects of family policy: cash transfers vs in-kind benefits

Abstract A pressing issue facing many advanced countries, including Japan, is finding ways to increase fertility rates. This paper compares and evaluates the effects of two types of childcare policies—cash benefits (CB) and in-kind benefits (IB)—on fertility, labor supply, and welfare. For parents, while CB, such as child allowances, reduces the monetary cost of childcare, IB, such as public daycare centers, alleviates the time cost of childcare. I develop a general equilibrium overlapping generations model with endogenous fertility for the Japanese economy. The model includes both single and married households and assumes that married couples face two key trade-offs: child quantity versus child quality and childcare time versus working time. Simulation results show that both childcare benefits lead to higher fertility rates. The demographic changes result in welfare gains for all future households due to a reduction in social security taxes. These positive effects are expected to be larger under IB, as these benefits also increase female labor supply. In terms of increasing fertility and welfare, IB is more effective for highly educated couples with high opportunity costs of having children, whereas CB is more effective for less educated couples.