Incentives to work? The impact of a ‘Cash-for-Care’ benefit for immigrant and native mothers labour market participation Inés Hardoy 1 , Pål Schøne ⁎ Institute for Social Research, PB 3233 Elisenberg, N-0208 Oslo, Norway abstract article info Article history: Received 17 December 2008 Received in revised form 8 February 2010 Accepted 12 February 2010 Available online 26 February 2010 JEL classification: J13 J18 J22 Keywords: Labour market Childcare Non-western immigrants Difference-in-differences-in-differences To what extent is labour market participation of mothers sensitive to economic incentives? We answer this question by studying the effect on labour market participation of a Norwegian family policy programme that clearly has affected the incentives to participate in the labour market of mothers with small children. From January 1999, all parents with one- and two-year-old children who did not use publicly subsidised day-care became entitled to a benefit, ‘Cash-for-Care’ (‘CFC’). The CFC reform has increased the price of publicly subsidised day-care relative to the price of own care. Economic theory of labour market participation postulates that the CFC reform would have a negative effect on labour market participation for the person most involved in childcare. The results show that the CFC reform has affected mothers' labour market participation negatively. The effects are much stronger for non-western immigrant mothers' than for native mothers. The results support the hypothesis that non-western immigrant mothers do react to changes in the relative prices of childcare and suggests that non-western female immigrants are quite responsive to changes in economic incentives. © 2010 Elsevier B.V. All rights reserved. 1. Introduction In this paper we analyse the labour market participation effects of a Norwegian family policy programme that clearly affected the incentive to participate in the labour market. From January 1999, all parents with one- and two-year-old children who did not use publicly subsidised day-care became entitled to a benefit, ‘Cash-for-Care’ (from now on referred to as ‘CFC’). CFC is paid monthly from the time the child is one until it is three years old. The CFC reform has increased the price of publicly subsidised day-care relative to the price of own care. Economic theory of labour market participation postulates that the CFC reform will have a negative effect on labour market participation for the person most involved in childcare. In this paper we analyse the labour market participation effects of this reform for two groups of mothers—natives and non-western immigrants. The female labour force participation rate is very high in Norway. Almost eight of ten women aged 15 to 64 years participate in the labour market. Together with Denmark and Sweden this is the highest rate in the OECD area (OECD, 2008). However, in Norway, as in most other modern economies there is marked difference in labour force participation rates between native females and immigrant females, with female immigrants, and especially non-western female immi- grants having very low labour market participation. One important question is whether the reform has further increased the employment gap between native and non-western immigrant mothers. The low labour force participation rate of immigrant mothers can be explained by both supply and demand side explanations. Lack of transferable skills from the country of birth, and employer discrimination are examples of explanations from the demand side. In this paper we are especially concerned with factors affecting the supply-side of the labour market. Opponents of the CFC reform argued that the reform would lead to a setback in the endeavour for gender equality, and that it might have an especially negative effect for non-western immigrant mothers keeping them outside the labour market. The effect of the CFC reform on labour market participation is studied by utilising potentially exogenous variations in the eligibility of CFC. This is a natural experiment approach. The basic idea is to compare two groups, one which has experienced a specific policy change, and the other with similar characteristics which has been unaffected by the policy change. Our approach is to compare the change in labour market participation for mothers eligible for CFC with mothers of children not eligible for CFC. The CFC reform is equally and accessible nation-wide for all mothers with children in the age-range 1 to 3. Therefore, there is no natural comparison group. This problem is approached by using a framework in which the treatment group differs from the control group along three dimensions by employing a triple difference approach, i.e. a so-called difference-in-differences-in-differences (DDD) approach. For Labour Economics 17 (2010) 963–974 ⁎ Corresponding author. Tel.: + 47 23 08 61 82. E-mail addresses: iha@samfunnsforskning.no (I. Hardoy), psc@samfunnsforskning.no (P. Schøne). 1 Tel.: +47 23 08 61 35. 0927-5371/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.labeco.2010.02.008 Contents lists available at ScienceDirect Labour Economics journal homepage: www.elsevier.com/locate/labeco