household has, on average, more children, the second earner may work fewer hours
because of greater home childcare demands. However, family size cannot be the main
driver of the large gap in female hours because both household groups have close to
the same average number of dependents within each phase: 2.03, 2.35 and 1.78 in the
H1 household and 1.65, 2.16 and 1.67 in the H2 household, across phases 2, 3 and 4,
respectively. An explanation can, however, be found in the structure of tax rates on
the second income.
With the arrival of the first child in phase 2, the female partner, as the lower wage
parent, faces a choice between providing childcare at home and working in the market
and buying-in childcare. If she works full time at home she avoids income taxes and
the GST on her implicit income from, and expenditure on, home production and her
family gains large FTBs. However, she loses work experience and may therefore face
a lower wage later in the lifecycle, which has associated risks. On the other hand, if
she goes out to work she faces very high tax rates, as well as high costs for bought-in
childcare.25 Because, as shown in the preceding section, taxes as a ratio of her gross
earnings tend to fall with hours worked, she faces a non-convex budget set. This can
create a discontinuity in her labour supply function, with small differences in factors,
such as perceived domestic productivity or the price of bought-in childcare, inducing
large differences in labour supply choices in phase 2. Panel data studies find that the
time allocation decisions made at this time tend to persist over the lifecycle, even after
the children have left home, as depicted in Figure 4.26
We now examine household saving and health costs using the HES data sample.
Again we partition the sample into the six lifecycle phases defined above. Saving is
computed as total weekly household income less total expenditure excluding the
25 Time use data indicate she also faces a “time crunch”. On average, mothers of young children in full
time employment work longer total hours - market plus domestic - than those who specialise in home
production, and they work longer hours than their male partners. See Apps and Rees (2003).
26 See, for example, Shaw (1994). The studies typically specify unobserved fixed effects, following
Heckman (1981), to deal with unexplained heterogeneity. For a survey see Blundell and MaCurdy
(1999).
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