# **I. Introduction and Main Findings**

Among beneficiaries, one of the most discussed aspects of transfers that aim to alleviate poverty in households is their potential disincentives to enter or participate in the formal labor force. In particular, the introduction of a new noncontributory transfer in highly formalized economies can move the household income schedule in a ‘poverty trap’, with high marginal tax rates on any additional earning from formal work (Blundell and Walker, 2003; Blundell et al. 1998; Kell and Wright 1990). While work disincentives from transfers are often an overstated concern, the specific design features (for example, withdrawal rate or income cutoffs) of the programs and the way in which different programs targeting the same families add up are central in the determination of the final set of incentives.

Such issues can be exacerbated in families with young children, where the adult caretaker (usually the mother) has to bear childcare costs if she wishes to work. This paper analyzes the Family 500+ program<sup>2</sup> in Poland, to explore the labor supply incentive on mothers, resulting from the interaction of a noncontributory transfer with childcare costs and the potential role of childcare subsidies as a tool to make work pay. Such types of transfers are common in Organisation for Economic Cooperation and Development (OECD) countries. The paper explores this question by revisiting and updating the established model developed by the ‘OECD Tax-Benefit Model’, which is meant to reproduce the incentives to formal labor supply faced by households at different levels of earnings, based on a _de jure_ analysis of program designs. The model allows decomposing the effects of income taxes, social insurance contributions, and various noncontributory benefits to the overall change in net earnings of households as their gross labor income increases.

Data to examine the effects of the most recent reforms, for instance, the Household Budget Survey (HBS) 2016, will likely only become available in late 2017, making it difficult to capture an immediate behavioral response of families. Coupled with the limited access to administrative data, this exercise in plotting the theoretical levels complements existing analysis with current data to predict the behavioral response of the Polish population (Goraus and Inchauste 2016; Myck 2016).

When the Family 500+ program was introduced by the Government of Poland in 2016, the Polish welfare state underwent a systemic change: with an estimated cost of PLN 22.2 billion per year, or 1.3 percent of gross domestic product (GDP), the 500+ came on top of all existing programs, whose total expenditure was estimated at 0.7 percent of GDP in 2013. Due to the size of the transfer and amount increasing with the number of children, the program is clearly progressive and is recognized for its expected impact on reducing extreme poverty from 8.9 percent to 5.9 percent and for nearly eliminating child poverty (Goraus and Inchauste 2016). At the same time, the incentive compatibility of the 500+ with formal work has been questioned widely, both in the popular press and in the literature (Myck 2016). This is rather new for Poland where social benefits used to be rather ungenerous and they posed limited disincentives to work (World Bank 2014). Moreover, the literature has explored the nexus between the cost of childcare and the withdrawal

> 2 The Family 500+ program targets families with 2 or more children who receive an unconditional and universal payment of PLN 500 monthly for each child (ages 0–17). In addition to the universal payment for the second and each subsequent child, the same benefit can also be received for the first, if the income criterion (<PLN 800 per person per month, PLN 1,200 for families with a disabled child in the household) is met. Distinguishing it from many other benefits, 500+ is not included in calculations for taxes, contributions, or benefits.

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