Childcare Subsidies, Wages, and Employment of Single Mothers

Abstract

This paper provides a comprehensive analysis of employment and child care paymentdecisions of single mothers in the early post-welfare reform environment, using data from theNational Survey of America’s Families (NSAF). I develop and estimate a model thatexamines the effects of the price of child care and the wage rate on employment decision aswell as the decision to use paid child care among single mothers. The model distinguishesbetween the full-time and part-time employment decisions as well as the prevailing wages inthese two employment markets. A semi-parametric random effects estimator and theGaussian Quadrature are used together to estimate the system of equations for the discreteoutcomes of full-time and part-time employment, and child care payment, and the linearequations of the price of child care, and part-time and full-time wages in a unified framework.The econometric model also controls for the endogeneity of child care subsidy receipt andadjusts the hourly price of child care for the amount of subsidy for mothers who receive one.The results show that full-time working mothers are more sensitive to the price of child carethan part-time working mothers. A lower price of child care leads to increases in overallemployment and the use of paid child care. However, much of the increase in employment isin the form of full-time employment. An increase in the full-time wage rate leads to increasesin overall employment and the use of paid child care. The effects of full-time wage rate areestimated to be much larger than those of the price of child care. Part-time wage effects arefound to be so small to have significant implications.

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