Welfare and economic implications of universal child benefits

Abstract

Universal child benefits are an important component of the social protection systems in many developed economies, particularly in Europe. When evaluating their impact, most studies tend to focus primarily on the empirical evidence and short-term effects. However, given their large-scale implementation, such programs can have sizable general equilibrium effects. The aim of this paper is to study the long-run implications of universal child benefits within a theoretical framework that can capture the complexities of household decisions regarding consumption, labor participation, and the timing of children. To this end, I develop an overlapping generations model with idiosyncratic earnings risk, infertility shocks, and endogenous temporal fertility. According to the model simulations, universal child benefits lead to a reduction in the spacing between children and, on average, lower maternal age at childbirth for all births. This, in turn, alleviates some of the negative aggregate effects typically associated with redistributive policies, but has a detrimental impact on the average quality of children. Finally, universal child benefits increase ex-ante welfare by 0.42% of lifetime adult consumption, significantly outperforming broad-based transfer policies not tied to the number of children.