Informal and formal care in Europe

Government expenditure on formal residential care and home-help services for the elderly significantly reduces 45-59 year old women´s informal care-giving affecting both the extensive and the intensive margin. Allowing for country fixed-effects and country-specific trends and correcting for attrition, the estimates - based on the European Community Household Panel - imply that a 1000 Euro increase in the government expenditure on formal residential care and home-help services for the elderly decreases the probability of informal care-giving outside of the caregiver´s household by 6 percentage points. Formal care substitutes for informal care that is undertaken outside of the carer´s own household, but does not substitute for intergenerational household formation. A simulation exercise shows that an increase in government formal care expenditure can be used to increase the labour force participation rates and a back-of-envelope cost-benefit calculation suggests the policy to be cost-effective.