Non-Technical Summary:
In Australia, one in seven households is headed by a lone parent, one quarter of whom experience relative income poverty in a given year. One way in which lone parent households are supported financially is through the child support paid by a non-resident parent.
Child support schemes have been established in many countries in response to the increasing prevalence of lone parent families since the 1970s. These schemes aim to ensure both parents remain financially responsible for their children in the event of relationship breakdown, to reduce the incidence of child poverty and to limit the costs of government transfers to support lone parents.
Understanding the effects of child support receipt on government transfers and labour supply is important as child support policy is particularly contentious: an increase in the amount of child support deemed appropriate is a direct transfer from one parent to the other, and occurs in an emotionally charged environment. Without a strong evidence base for the effects of receiving child support, policymakers lack a basis on which to reconcile these competing interests.
In Australia, child support interacts with government transfer receipt, with the level of Family Tax Benefit decreasing as the amount of child support received increases. This means that there is an effective tax on child support for child support payees receiving more than the base level of Family Tax Benefit, which in turn creates an incentive to increase labour supply and earnings to avoid this tax.
Using recent, nationally representative data, I find that the receipt of any child support leads to a $8,503 reduction in government transfer receipt. Conditional on receiving any child support, a $1 increase in the amount received leads to a 45 cent fall in the receipt of government transfers. A $1000 increase in child support received leads to a 2.9 percentage point reduction in the probability of being out of the labour force, and a 2.3 percentage point increase in the probability of working full time.
These results have broad implications for the design of child support and government transfer systems. One way to increase the child support received by lone parents is to reduce the effective tax rate resulting from the interaction of child support with government transfers. However, doing this may reduce labour supply incentives and so have long-run implications for lone parents’ human capital accumulation and retirement savings.