How German Family Policies Balanced Birth Rates and Economic Welfare

Economic Welfare Labor Economics Public Policy No Comments
A happy family sitting together on a grassy lawn in a sunny park. A mother and father are centered with their three young children and a small dog sitting to the right. The parents are smiling at each other while the children interact with the infant. The father wears a blue shirt and ripped jeans, and the mother wears an orange top and dark jeans. The scene conveys family connection and leisure time outdoors.

Many developed countries have child-related policies, such as childcare subsidies and paid parental leave, but little is known about the trade-offs and how these policies interact.

In Barcelona School of Economics Working Paper 1507, “Fertility and Family Leave Policies in Germany: Optimal Design in a Dynamic Framework,” Hanna Wang develops and estimates a dynamic life-cycle model of fertility and female labor supply using German household data to study two German child-related reforms and the optimal design of such policies. 

Her results show that the optimal policy has the potential to improve a family’s economic well-being (welfare) by 0.5% or boost the birth rate (fertility) by 5.7%, depending on the specific objective being targeted. 

While the policies are qualitatively similar, the policy instruments they prioritize are different.  

Read BSE Working Paper 1507 on bse.eu

A Tale of Two Policies

German parental leave and childcare reforms successfully raised fertility and welfare.

Using German household panel data, the author studies two major reforms: 

  1. The switch in 2007 to earnings-related parental leave (with caps and a minimum)
  2. The 2005-2013 expansion of low-cost public childcare for children under age 3 

Wang’s estimated model replicates observed shifts in fertility timing and mothers’ employment around these reforms and is then used to trace their long-run effects.

In the long run, both reforms increased the birth rate and welfare of German families. However, they achieve these results through different methods (channels) and with varying degrees of success (strengths):

  • The parental-leave reform primarily increases births, especially by lowering the short-run income loss around childbirth and making an additional child more affordable for families 
  • The childcare expansion delivers larger welfare gains, mainly by supporting mothers’ return to work, preserving on-the-job experience, and sustaining wage growth 

The short-run fertility effects of the parental leave reform are substantially larger than the long-run effects (see columns 4 and 6 in Table 1 below). This is true for mothers with all levels of education, but the effects increase with their education level (“Education Group” in the table: 3 is college education, 2 apprenticeship degrees, and 1 lower education).

Table 1 compares fertility metrics before and after a reform. The data is broken down by three Education Groups (1, 2, and 3). The metrics are No. of Births and Age at Birth. Standard errors are provided in parentheses below the mean values. For No. of Births, all groups show increases. Under the short-run policy (PL SR), the largest percentage increase is in Group 3 (+10.4%), and the smallest is in Group 1 (+4.9%). Under the long-run policy (PL LR), the largest increase is also in Group 3 (+8.8%). Age at Birth shows a small increase (+0.1) in the short run (PL SR) and a small decrease (-0.1) in the long run (PL LR).
Parental Leave Reform. Short-run and Long-run Effect on Births

Yearly births per 60 000 women. PL SR: short-run, second year after unanticipated reform; PL LR:
long-run, new policy anticipated fromage 22. Standard errors in parentheses calculated using 1000
simulations.

Notably, the short-run effects are 40.5% larger than those in the long run. This difference is driven by older women responding in the short run, evident from the increase in average age at birth in the last row. These women do not have many remaining fertile years to take advantage of the higher parental leave benefits.

Optimizing for Welfare vs. Fertility

The optimal policy can lead to either a 0.5% increase in welfare (in consumption terms) or a 5.7% increase in birth rates. The following optimal policy portfolios are designed to maximize either welfare or fertility while operating within the same government budget:

Welfare-Maximizing Solution

  • This policy favors subsidies that increase female labor supply, such as childcare subsidies and tax deductions and increases
  • The mothers with the highest education benefit the most, seeing a welfare gain of 0.9%, while the lowest education group sees only minimal improvements
  • Birth rates also show a modest increase of 0.7%

Fertility-Maximizing Solution

  • This approach places more weight on higher minimum parental leave payments and per-child subsidies to encourage families to have more children (higher-order births)
  • The effect is primarily driven by the lowest education group, whose birth rates increase by 9.6% due to the lower opportunity costs of childbearing
  • Welfare increases, though only by 0.1%

Both optimal solutions share key characteristics including the elimination of joint taxation for couples. Removing joint taxation improves the incentives for the second earner (usually the mother) to re-enter the labor market, limits the effective tax penalty on returning to work, and ensures resources are channeled based on having children, not just marital status.

So What is the Best Family Policy Mix?

Overall, the best policy mix depends on the specific goal:

  • To increase family welfare, the policy should prioritize affordable childcare and tax deductions
  • To increase birth rates, it should strengthen per-child subsidies and minimum parental leave payments

In all scenarios, however, the elimination of joint taxation provides a strong and universal improvement for both efficiency and policy targeting.

Read BSE Working Paper 1507 on bse.eu