ect of child care subsidies on the labour supply of parents ∗

This paper studies the e ect of child care subsidies on maternal labour supply. In the Finnish child care system, parents taking care of their children at home receive a relatively generous home care allowance. I use variation arising from changes in municipality speci c supplement to this allowance to identify the causal e ect of subsidies on the labour force participation of mothers. A municipal supplement creates plausibly exogenous variation since being eligible to it depends on municipal level rules but not on changes in individual labour supply decisions. Moreover, supplement policy a ects labour supply in a transparent way since the amount of a supplement one is eligible to do not depend on income. Robustness checks indicate that policy endogeneity or residential sorting is not driving the results. I nd a large negative e ect on the labour force participation and income of mothers. 100 euros more supplement per month reduces maternal labour supply by 4 per cent. The estimated e ect is larger for higher educated than for lower educated mothers.