Events at CERGE-EI

Patrizia Massner, MSc.

Institute for International Economic Studies, Stockholm University, Sweden

Authors: Patrizia Massner, Jens Wikstrom

Abstract: This paper examines how subsidies for formal elder (long-term) care services impactthe economic and health outcomes of both seniors and their adult children, who oftenfunction as informal caregivers to their old-age parents. We exploit a reform in Swedenin 2002 lowering the fee for elder care services by 40% on average across two-thirds ofSweden’s municipalities. Using new data on these fees, combined with administrativedata in a difference-in-differences design, we find that increases in the take-up of formalelder care go along with both reductions in hospitalizations among affected seniors andincreases in the labor supply of their adult children. Seniors benefit from significantimprovements in morbidity, due to fewer hospitalizations for conditions preventableor treatable outside of the hospital. At the same time, adult children increase theirannual earnings, which suggests a trade-off between informal caregiving and workingdepending on the price of formal care. We show that these effects are persistent as adultchildren keep working in less flexible, but higher-paying jobs, also after the parentalcare responsibilities have ended. To assess the welfare implications, we build a stylizedmodel that incorporates formal and informal caregiving. We show that the implicitoptimal subsidy balances the value created from insuring parents against substantialpermanent health shocks and the costs on the children of raising taxes to finance thesubsidy. Combining the theory with the empirical results, we find that subsidizing eldercare becomes self-financing within a decade of implementation. This demonstratesthat the benefits of improved health management and spillovers on adult children canoutweigh the direct costs of subsidizing elder care.

Full Text: Should Elder Care Be Subsidized?Theory and Evidence from Sweden