Do Taxation and Transfer Policies Mitigate the Child Penalty? Evidence from Australia

Abstract

Parenthood is associated with significant income reductions and labour market disruptions, known as the child penalty. This paper uses data from the Household, Income, and Labour Dynamics in Australia Survey (2001–2021) to analyse how Australia’s tax, welfare, and family policies are associated with the child penalty. Our findings show that one-parent households experience more pronounced income declines and higher poverty risks than two-parent households, which reflect differences in government support and policy eligibility. We demonstrate that one-parent households are better supported by transfer policies, while two-parent households are better supported by progressive taxation. Paid Parental Leave is associated with a reduction in the child penalty for first births but has a limited impact for subsequent births. By linking the child penalty to poverty and inequality, our study highlights the need for integrated policies tailored to diverse household structures to mitigate these effects.