Why is the Rate of Single Parenthood Lower in Canada than in the U.S. A Dynamic Equilibrium.pdf

Why is the Rate of Single Parenthood Lower in Canada than in the U.S.? A Dynamic Equilibrium Analysis of Welfare Policies Nezih Guner and John Knowles October 2006 Abstract A critical aspect of welfare policies is whether they should target certain groups, as Aid to Families with Dependent Children (AFDC) program did in the U.S., or be universal with Önancial need being the only criteria, as in Canada. We contrast the Canadian and the U.S. policies within an equilibrium model of household formation and human capital investment on children. Policy di§erences we consider are: eligibility, dependence of transfers on the number of children, and generosity of transfers. Our simulations indicate that the policy di§erences can account for the higher rate of single-parenthood in the U.S. They also show that Canadian welfare policy is more e§ective for fostering human capital accumulation among children from poor families. Interestingly, a majority of agents in our benchmark economy prefers a welfare system that targets single mothers (as the U.S. system does), yet does not (unlike the U.S. system) make transfers dependent on the number of children. JEL ClassiÖcation Numbers: E10, I38, J12, J13. Keywords: dynamic general equilibrium models, social policy, marriage and divorce, single motherhood, investment in children. A¢ liations: Nezih Guner (corresponding author): Universidad Carlos III de Madrid, Calle Madrid 126, Getafe (Madrid), 28903, Spain and CEPR; e-mail: nguner@eco.uc3m.es. John Knowles: University of Pennsylvania, e-mail: jknowles@econ.sas.upenn.edu. The authors thank Andrew Rice for helpful comments and acknowledge Önancial support from Statistics Canada. An earlier