Labor supply, informal care, and living arrangement decisions of adult children and the disabled elderly

Unprecedented growth of the elderly population is predicted to lead to an increase in the demand for long-term care. Estimates indicate 22% of the disabled elderly are institutionalized. Of the remaining 78%, 70% receive some form of informal care; informal care has traditionally been performed by the female adult children of the disabled elderly. Increasing labor force participation rates for women and decreasing fertility rates over the past 20 years have decreased the supply of adult children, especially daughters, who might provide eldercare. In response to these trends policy has been introduced; the Family and Medical Leave Act (1993) provides for an unpaid leave of absence, tax incentives, and caregiver allowances for parental care.

We aim to answer three questions in this paper: 1) Does providing informal care reduce the labor supply of the adult child? 2) Do living arrangement choices affect the combination of informal care provision and labor supply? 3) How do public policies affect the informal care-giving and living arrangement decisions?

This study will extend the existing literature in 4 ways: 1) expand the living arrangement choice set beyond household formation to incorporate institutional care 2) estimate the hours of care provision and hours of labor supply, rather than using binary choice variables 3) employ a semi-parametric discrete factor model in estimation to account for unmeasured heterogeneity and 4) examine the effects of public policy on the informal care-giving and living arrangement decisions.