The family has traditionally played an important role in providing care to the elderly everywhere. However, ageing societies and the increase in female labour-force participation are putting pressure on governments to take a more active role. When policymakers consider reform scenarios, it is of utmost importance that they take into account the magnitude of the response of informal caregiving. If, for example, a country with high expenditures on nursing homes (say, the U.S.) were to introduce free nursing-home care, one would expect a sizeable number of elderly, who were previously taken care of informally at home, to move to nursing homes. So, if one takes seriously the response of families to economic incentives, what are the implications for policy makers?
In a recent paper, Daniel Barczyk (McGill University, Montreal) and Matthias Kredler build a model in which parents and children interact strategically in the care decision and use it to study how LTC would fare in the U.S. context. They find that informal care responds strongly to even relatively small subsidies. This is in line with the large differences in how care is provided across rich countries that they document in a follow-up article: Southern European countries and the U.S., countries that provide low subsidies to formal care, rely on family caregivers to a much larger extent than central and northern European countries. The latter provide much more generous funding, some of them spending up to 4% of GDP on formal long-term care services. The model predicts that an informal-care subsidy substantially reduces reliance on Medicaid (the U.S. government programme that pays for formal care), while the reduction of tax revenues caused by the reduction in caregivers’ labour supply is modest. The informal-care subsidy turns out to be welfare-improving – it keeps the elderly at home with the family (which they like), and is relatively cheap as the increase in government spending on the subsidy is largely compensated by the savings from a reduced Medicaid programme.
Barczyk and Kredler’s work on long-term care has been covered in entries in the blogs VoxEU and Agora.