Work incentives adjusting for childcare subsidies and healthcare benefits

This paper examines the role of two non-cash transfers in the financial incentives to work in Ireland: subsidised childcare provided under the Affordable Childcare Scheme and Medical and GP-Visit Cards. Financial work incentives do not usuallytake account of childcare costs or non-cash benefits that may be withdrawn as a person earns more. In this paper we use SWITCH, the ESRI’s tax-benefit microsimulation model, to examine financial work incentives on both the extensive margin by means of replacement rates and participation tax rates, and the intensive margin through effective marginal tax rates. As the amount of time parents of young children spend at work results in the need to pay for childcare, the inclusion of childcare costs is shown to weaken financial work incentives. However, including childcare subsidies results in an improvement in the financial incentive to take up a job or work more. Medical and GP visit cards, on the other hand, diminish those incentives, which is due to their means-tested nature. These results illustrate the need to go beyond cash transfers in assessing financial work incentives and the importance of taking childcare costs into account.