Child allowances, educational subsidies and occupational choice

•We examine the effects child allowances and educational subsidies.•We show that multiple steady states may arise under these two policies.•Fertility will increase with an increase in the tax rate.•With child allowances, increases in the tax rate lower quality of adults.•With educational subsidies, increases in the tax rate raise quality of adults. This paper examines the effects on occupational choice and capital accumulation attributable to government policies of child allowances and educational subsidies. We show that multiple steady states may arise under these two policies, with club convergence occurring, and the initial condition being of relevance, if the tax rate of labor income for skilled labor is fairly high. Under a policy of child allowances, an increase in the tax rate is found to raise the quantity of children, but lower the quality of adults; however, under a policy of educational subsidies, with an increase in the tax rate, corresponding increases are found in both the quantity of children and the quality of adults. For developed countries, introducing child allowances may improve or hurt the welfare while introducing educational subsidies is welfare improving.