Abstract
This paper uses CPS and SIPP data between 1990 and 2004 to examine the effects of child care expenditures and wages on the employment of single mothers. It adds to the literature in this area by incorporating explicit controls for child care subsidies and the EITC into the estimation. Doing so provides an opportunity to examine mothers’ sensitivity to prices and wages net of policies that influence these amounts. Results suggest that lower child care expenditures, higher wages, and more generous subsidy and EITC benefits increase the likelihood of employment. Allowing the impact of child care subsidies and the EITC to vary with expenditures and wages reveals substantial heterogeneity. In particular, the largest labor supply effects of child care subsidies are generated for mothers with higher child care costs, while the largest labor supply effects of the EITC are found for mothers with lower wages.
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Notes
Concurrent with these policy changes has been the explosion in employment among single mothers and a rapid decline in the welfare rolls. Specifically, between 1990 and 2004, the employment rate for single women with children (ages 0–12) increased from 69 to 77%, peaking at 82% in 2000 (Author’s calculations from the March CPS, 1991–2005). Conversely, after reaching five million families in 1994, welfare caseloads declined to approximately 2.2 million, its lowest level in 30 years (U.S. DHHS 2006).
Congress repealed three Title IV-A programs, and along with money from the Child Care and Development Block Grant (CCDBG), consolidated these funding streams into the CCDF. The four programs were called Aid to Families with Dependent Children Child Care (AFDC-CC), Transitional Child Care (TCC), and At Risk Child Care (ARCC). The first two programs were created by the Family Support Act of 1988, and the third was created by the Omnibus Budget Reconciliation Act of 1990. Another policy that provides child care assistance is the Child and Dependent Care Tax Credit (CDCTC). Created in 1976, the CDCTC initially provided a non-refundable credit of $4,800 (2+ children) for child care expenses incurred. Tax legislation in 2001 expanded the CDCTC by allowing families to claim additional child care expenses and increasing the credit rate for families below $43,000. However, expenditures on the program remain modest (at $2.8 billion as of FY 2006), and it still operates as a non-refundable tax credit, making benefits largely inaccessible to low-income families (Burnam et al. 2005). See Blau (2000) for a detailed summary of previous and current child care subsidy policy.
Enacted in 1975 as part of the Tax Reduction Act (TRA), expenditures on the EITC increased dramatically throughout the 1990s. By 2004, foregone revenue due to the credit totaled $38 billion, up from $6 billion in 1990. Claimant families also grew steadily during this period, from 13 million to 22 million. Single-parent families comprise 48% of all claimants, and 76% of EITC dollars go to these families (Liebman 1999; U.S. House of Representatives 2004). See Hotz and Scholz (2001) for a detailed description of the EITC.
The first expansion came with the passage of the 1986 Tax Reform Act (TRA86). This legislation indexed the EITC for inflation, increased the phase-in rate, and decreased the phase-out rate.
I include not only independent female-headed families (primary families), but also female heads of related sub-families and (unrelated) secondary families. Defining families in this manner provides the closest match to a tax-filing unit, which is crucial for determining eligibility for the EITC and other means-tested programs.
Exclusions to the sample include women in the armed services; women with negative earnings, negative non-labor income, positive earnings but zero hours of work, or positive hours of work but zero earnings; and women with hourly wages over $150.
It is important to note that a recent paper by Kimmel and Connelly (2007), which imputes child care expenditures for the American Time Use Survey, utilizes a strategy similar to the one described in this paper.
The duration of each panel ranges from 2.5 to 4 years. Households included in a given panel are divided into four rotation groups, each of which is interviewed in successive months. The 4-month period required to interview each rotation group is called a wave.
There are well-known criticisms of the SIPP child care module, many of which I attempt to handle in this paper. For a review of these criticisms, see Besharov et al. (2006). Many of these issues focus on changes to the survey design throughout the 1990s. For example, it was fundamentally altered three times, leading to changes in the wording of the child care questions and the timing of the module itself. During the early-1990s, the child care module was conducted throughout the fall but was changed to the spring during the late-1990s. The coverage of child care questions was also dramatically expanded to include a larger number of child care arrangements per child, a larger number of children per family, and non-working (in addition to working) mothers. Finally, the list of available arrangements increased, and the SIPP tailored many of these arrangements to specific age ranges.
Obtaining a close temporal match between the datasets is justified because the structure of child care prices likely changed in important ways over the sampling period. First, employment growth among single mothers increased the demand for and supply of child care. A by-product of increased demand for child care services is the growing demand for child care labor, which accounts for 70% of child care prices (Helburn 1995). Finally, public policies aimed at lowering costs and increasing quality have contributed to a changing price structure.
The nine missing states are Maine, Vermont, Iowa, North Dakota, South Dakota, Alaska, Idaho, Montana, and Wyoming.
The relatively small sample sizes in the SIPP have caused specification problems in previous child care studies. In particular, key variables such as age and education are added to the OLS child care price and wage equations but do not appear in the employment model (See, for example, Connelly and Kimmel 2003a). Given that age and education are highly significant in both OLS equations, there is little remaining variation independent of prices and wages to predict employment. Therefore, the impact of prices and wages is very sensitive to the inclusion of these key demographic variables, so some analysts omit them from the employment model. The larger sample size in this study, which uses pooled CPS samples, mitigates much of the sensitivity of price and wage effects to the inclusion of age and education.
As explained in the Introduction, adjusting wages for taxes and the EITC is a straightforward process. However, doing the same for child care prices is made difficult by the lack of subsidy reimbursement data prior to welfare reform. Even after welfare reform, reimbursement figures are only available for select states and years. Another difficulty is that CCDF subsidies are highly rationed at the state-level, given that the program is not an entitlement. Therefore, only a small number of eligible families receive a subsidy, with take-up rates estimated between 12 and 15% (U.S. DHHS 1999). To assign all single mothers a subsidy would introduce measurement error to child care prices that far exceeds the error from leaving prices unadjusted.
Building on research by Grogger (2003) and Grogger and Michalopoulos (2003), I capture the effects of time limits through the dummy variable and its interaction with the age of the mother. Allowing the effect of time limits to vary by age accounts for the possibility that mothers save their welfare benefits until an employment shock occurs. Indeed, the theoretical model developed by Grogger and Karoly (2005) suggests that forward-looking mothers will not draw upon their benefits today, opting instead to save them for future use.
This definition deviates from most in the literature, which includes expenditures covering only the primary arrangement of the youngest child. Connelly’s (1992) definition—total child care expenditures per hour of work—is quite similar to the one used in this study. The approach taken here is preferable because it exploits all available information on mothers’ child care use, and it assumes that employment decisions depend on total expenditures and not just those from a single child. However, it should be noted that this definition necessarily includes older children, whose child care price structure differs from younger children. Such differences might be reflected in the estimated elasticities, and therefore should be noted when comparing estimates with other studies.
Variables in the employment equation include age, education, marital status, race, non-wage income, presence and number of children in various age groups, urban residence, region of residence, and the state unemployment rate. Variables in the wage equation include age, education, marital status, race, non-wage income, number of children ages 0–18, urban residence, region of residence, the state unemployment rate, and state per capita income.
Several studies find that more stringent regulations lead to higher prices for child care (Blau 2002; Heeb and Kilburn 2004; Hotz and Kilburn 1995), with either a small or statistically insignificant effect on employment (Blau 2003; Ribar 1992; Heeb and Kilburn 2004; Hotz and Kilburn 1995). To date, only a handful of studies use child care regulations as instruments in the expenditure equation, and in each case, regulations are strongly related to prices. These results suggest that child care regulations influence labor supply indirectly and only through their influence on child care prices.
Results are generally consistent with those found in the literature. Higher child-staff ratios and educational requirements are associated with lower child care expenditures. Both results accord with the findings in Hotz and Xiao (2005), whose estimates indicate that private child care firms gain when state regulations mandate lower child-staff ratios but lose from increased educational requirements. Results also suggest that raising salaries for and the supply of private child care workers are associated with greater expenditures among single mothers, confirming theoretical predictions.
Other studies estimate low subsidy participation rates as well. For example, a study by the U.S. Department of Health and Human Services finds that only 12 to 15% of eligible children receive subsidies (U.S. DHHS 1999). Findings from a U.S. General Accounting Office (1999) study confirm this, estimating that states are serving no more than 15% of the CCDF-eligible population.
Scholz (1994) estimates that between 80 and 86% of eligible taxpayers receive the EITC.
In the current sample, never married mothers are about 29 years old, on average, while widowed, divorced, and separated mothers are 37 years old. Seven percent of never married mothers have at least a B.A. degree, compared to 13% among widowed, divorced, and separated mothers.
Since algorithms to evaluate multivariate normal integrals are not readily available, I rely on simulated maximum likelihood methods to jointly estimate the trivariate probit. Specifically, I use the Geweke-Hajivassilioiu-Keane (GHK) smooth recursive simulator. The GHK simulator exploits the computational tractability and accuracy of the univariate normal by approximating the multivariate normal as the product of sequential univariate normal distribution functions (Cappellari and Jenkins 2003).
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Acknowledgments
This research was supported by a grant (No. 90YE0083) from the Child Care Bureau, Administration on Children, Youth, and Families, U.S. Department of Health and Human Services (DHHS). The contents are solely the responsibility of the author and do not represent the official views of the funding agency, nor does publication in any way constitute an endorsement by the funding agency. I would like to thank the following individuals for their advice and/or technical assistance: Bill Galston, Mark Lopez, Jonah Gelbach, Burt Barnow, Randi Hjalmarsson, Peter Reuter, Sandra Hofferth, Gil Crouse, Jean Kimmel, and Patricia Anderson. I also thank Joseph Hotz and Rebecca Kilburn for generously providing their child care regulation data. Seminar participants from the University of Maryland, Johns Hopkins University, Arizona State University, American University, and RAND provided useful comments.
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Herbst, C.M. The labor supply effects of child care costs and wages in the presence of subsidies and the earned income tax credit. Rev Econ Household 8, 199–230 (2010). https://doi.org/10.1007/s11150-009-9078-1
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DOI: https://doi.org/10.1007/s11150-009-9078-1