Paying moms to stay home: Short and long run effects on parents and children

We study the impacts of the Finnish Home Care Allowance (HCA) for mothers who stay at home with children that are under age of three. We use regional and over time variation to show that the HCA decreases maternal employment in both the short and long term. The effects are large enough to explain the relatively high short-term child penalty in Finland. HCA negatively affects the early childhood cognitive test results of children, decreases enrollment in high school, and increases youth crimes. We confirm our results by studying a daycare fee reform that had the opposite effects on mothers and children. • This paper studies the impacts of the Finnish Home Care Allowance (HCA) for mothers who stay at home with children are under age three. • We use regional and over time variation in the form of municipal supplements to HCA to show that the HCA decreases maternal employment in both the short and long term. • The effects are large enough to explain the relatively high short-term child penalty in Finland. • For children we estimate both short- and longer-term outcomes. HCA negatively affects the early childhood cognitive test results of children, decreases enrollment in high school, and increases youth crimes. • We confirm our results by studying a daycare fee reform that had the opposite effects on mothers and children.