Do parents tax their children? Teenage labour supply and financial support

Abstract

This paper models child employment and parental pocket money decisions as a non- cooperative game. Assuming that the child human capital is a household public good and that the relationship between child human capital and employment is concave, we compare the welfare obtained under different decision-making mechanisms and test the predictions of the model for a cohort of English teenagers in compulsory education. Our results support a situation in which parents ‘tax’ their children’s earnings, withdrawing financial support as the child increases his working hours. This strategy forces the child to internalise the social cost of his activities.