Abstract:

This paper examines the policy option of providing government assistance to families with young children and financing it by increasing income taxes when the children leave home and the parents' wages rise due to their tenure in the labor market. We examine the expenditure composition and the characteristics of labor market participation of parents of young children in Israel, and find that these families have higher expenditures than other families, and that their income in the years in which children are present in the household is lower than in the following years. We do not find evidence that the relative position of young families deteriorated during the last decade, except for the housing market where we identify a consistently rising share of these families residing in rented rather than self-owned dwellings; such a trend did not develop among other family types. We also show that parents of young children are characterized by high employment rates and persistent employment. A comparison of government support for young families in other OECD countries with those in Israel for 14 representative family types—characterized by their structure and income composition—shows that it is higher in these countries for all of these family types. A simulation of raising the average benefits for young families in Israel to the level common in other OECD countries, while raising income tax rates at older ages in a way that keeps the policy fiscally balanced – and the individuals' lifetime income level unchanged – indicates that welfare can be increased substantially via consumption smoothing over the families' life cycle.