Parental allowance increase and labor supply: Evidence from a Czech reform

Abstract

We study the effect of a substantial increase (36%) in parental allowance, a universal basic income-type benefit, on the labor supply of parents of young children in the Czech Republic. Parental allowance does not preclude labor market activity, which allows us to estimate the income effect. We find that the reform resulted in a 4.8 percentage point (11%) decrease in labor market participation of mothers of young children. Mothers with only one child (7.8 p.p., 20%) and university-educated mothers (17 p.p., 32%) reacted particularly strongly. The percentage reduction in hours worked was virtually identical to that in labor force participation. We argue that the sizeable labor supply reduction was driven by the option to extend the parental allowance period, which enabled mothers to postpone their return to work. We find no effect on the labor supply of fathers of young children.