Question

Congress is considering providing a child-care subsidy of $50 per week to mothers that work at least 16 hours per week. What are the labor market implications of such a program? Illustrate your discussion with the appropriate graphical analysis.

Answer 1

A child care subsidy given to the working mothers is a subsidy on the supply side of the market. A subsidy on the supply side will increase the supply of labor and also increase their working hours because subsidy is provided to those who work for at least 16 hours per week. This will shift the labor supply curve in the labor market rightwards because supply of labor will increase at each wage rate. This can be depicted in the diagram as:

The initial equilibrium in the labor market occurs at point E1. Increase in labor supply will shift the labor supply curve rightwards to Ls' and thus new equilibrium shifts from point E1 to point E2 where equilibrium wage rate has decreased to w2 and level of employment in the economy has increased to L2.

Thus, such a program will increase labor supply and thus increase employment in the economy.