Gender Inequality, Household Bargaining, and Social Welfare: A Structural Analysis of China’s Two-Child Policy Using Machine Learning (Job Market Paper)

Abstract

China relaxed its strict One-Child Policy to universally allow couples to have two children in 2016. Although the new policy suggests an improvement in welfare for couples, as they now have more freedom to achieve their desired fertility levels, it has the drawback of possibly increasing gender inequality both in the labor market and within the household. This paper starts with a difference-in-difference method to show that the new policy increased the gender wage gap between women and men and negatively affected the intrahousehold bargaining power of women. Motivated by this empirical pattern, I then build and estimate a dynamic collective household model to quantify the welfare impact of the new policy on both genders using a novel machine learning method and indirect inference. The results suggest that the welfare cost of the Two-Child Policy for women is equivalent to 6.00% of lifetime consumption, while the welfare benefit of the policy for men is equivalent to 7.23% of lifetime consumption. Policy experiments suggest that implementing anti-discrimination laws for women in the labor market significantly improves women’s welfare while providing public childcare subsidies is most effective in stimulating fertility in the post-policy era.