Subsidies for elderly care with a pay-as-you-go pension

This paper presents an examination of how a subsidy for elderly care services affects the labor supply in the market of elderly care and other services. We set the model economy with or without a pay-as-you-go pension and were able to derive the following results. First, in the model without a pension, the subsidy for elderly care services raises the full time workers because of substitution between formal and informal elderly care. Second, in the model with a pension, the subsidy for elderly care services can not always pull up the full time workers because of the effects on the pension. With certain conditions, the subsidy can raise full time workers and the pension benefit can be raised. This result demonstrates that a subsidy for elderly care services should be regarded as raising or maintaining the pension benefit.