Stefan Thewissen and Jim Been
Home production and market work are two distinct possibilities for individuals to generate and smooth consumption possibilities (Becker, 1965). This paper analyses how parents reallocate their time in market work and home production when facing a shock in the costs of formal childcare. We provide a more encompassing view of the effects on wellbeing by focusing on extended income, calculated as the sum of market income and monetised home production, where we apply three methods to monetise home production. For causal identification, we rely on a difference-in-difference estimation where we exploit a substantial cut in childcare subsidies in the Netherlands as a natural experiment that only affected parents with young children. We find that mothers are able to avoid a loss in their extended income when facing increased costs in formal childcare by increasing their home production rather than hours spent on market work. This suggests that mothers are able to keep their wellbeing constant by reallocating their time use when facing a shock in their money budget. Fathers do not respond to the policy change.