VoxEU Column Education Poverty and Income Inequality

Childcare subsidies and child wellbeing

Do subsidies for childcare succeed in getting parents to work and improving the wellbeing of the children? This column presents evidence from the US suggesting that childcare subsidies have an unintended consequence. In the short run, children from low-income families are worse off as their parents go off to work and they receive low-quality childcare.

Childcare subsidies are increasingly used by state and local governments to facilitate employment and reduce welfare use among economically disadvantaged families in the US. Most public expenditures on child care assistance in the US are funnelled through the federal Child Care and Development Fund (created as part of the 1996 welfare reform).

This fund is targeted primarily at low-income families participating in a state-defined work activity. As such, these employment-related subsidies are intended to defray only those childcare expenses accrued during work hours, and they maximise parental choice by placing few restrictions on the quality of care that can be purchased. Such design features highlight a longstanding tension between the twin objectives of childcare policy in the US:

  • facilitating parental employment, and;
  • ensuring that children have access to safe and stimulating early care environments.

As Heckman (2008) points out, it is the early years that are critical to enhancing job-relevant skills.

The existing empirical evidence confirms that childcare subsidies administered through this fund encourage low-skilled parents to move out of welfare and in to work (Blau and Tekin 2007, Herbst 2010, Tekin 2005, 2007). Yet researchers have paid little attention to the potential impact of these work-related subsidies on children’s wellbeing.

In recent research (Herbst and Tekin 2010), we provide new evidence on the impact of childcare subsidy receipt on children’s cognitive, behavioural, and psychomotor outcomes. An important novelty in this research is that we pay careful attention to providing causal estimates by leveraging plausibly exogenous variation in subsidy use through a novel instrumental variable.

Finding exogenous sources of variation in childcare costs and related policy reforms presents challenges for studying maternal and child outcomes. In fact, identification problems are commonly cited as being primarily responsible for the diversity of empirical estimates documented throughout the childcare literature (e.g. Anderson and Levine 2000 and Bernal and Keane 2010). We attempt to overcome this and identify the impact of subsidy receipt by exploiting geographic variation in the distance that low-income families must travel from home in order to reach the nearest social service agency that administers the subsidy application process.

To implement this empirical strategy, we collected information on the precise location of virtually every public social service agency in the US, used these addresses to generate geo-codes for each agency, and then calculated the distance between these administrative offices and the residential location of families in their data. Instrumenting for subsidies using this distance measure is conceptually equivalent to comparing the developmental outcomes of children who differ in their propensity to receive subsidised care because they reside various distances from social service agencies.

We then develop and test a simple theoretical model in which employment-related childcare subsidies influence child wellbeing indirectly through three channels.

  • First, childcare subsidies encourage maternal employment, which has been shown by previous work to have implications for child wellbeing.

In particular, the most recent studies suggest that early maternal work is associated with small, negative effects on early and later cognitive ability (Baum 2002, Bernal 2008, Brooks-Gunn et al. 2002, Liu et al. 2003, Ruhm 2004, 2008), increases in a number of adverse health outcomes (Morrill 2009), and increases in childhood obesity (Anderson et al. 2003).

  • Second, subsidies increase the use of non-parental childcare services, especially centre- and family-based care, which has been shown to have conflicting effects on child wellbeing (Bernal and Keane 2008, Blau 1999, NICHD 2003a and 2003b).

There is an emerging consensus, however, that high-quality care is beneficial for disadvantaged children (Hill et al. 2002, NICHD and Duncan 2003).

  • Third, subsidies can influence child wellbeing through increases in parental income, which could be spent on goods and services that would enhance child quality of life.

The existing evidence suggests that the effect of income on child wellbeing is small (Blau 1999, Korenman et al. 1995). In sum, the overall impact of childcare subsidy receipt on child wellbeing is theoretically ambiguous.

Using data from the Kindergarten cohort of the Early Childhood Longitudinal Study, results point to sizeable negative impacts on cognitive ability tests and teacher-reported behavioural measures in the Fall and Spring of kindergarten. For example, our estimates suggest that subsidised children score 0.4 and 0.3 standard deviations lower on tests of reading and math ability, respectively. However, these negative effects begin to fade by the end of first grade and are completely attenuated by the end of fifth grade.

Moreover, we find robust evidence that the adverse effects of subsidy receipt are concentrated among children of high-skilled mothers.

Policy implications

These results have potentially important policy implications. The US policy regime intensifies the tension between the twin goals of childcare – enabling parents to work and promoting child development. The Child Care and Development Fund focuses almost exclusively on parental employment, indeed there are an array of design features that may encourage parents to buy low-quality care.

This type of intervention in the childcare market is often justified on the grounds that subsidies increase long-term economic self-sufficiency by encouraging work. However, they are at best an indirect approach to inculcating a work ethic and increasing human capital among low-skilled families. If low-wages create work disincentives as well as discourage individuals from developing relevant skills, labour market policies such as the Earned Income Tax Credit and minimum wage are more direct interventions. At their worst, employment-related subsidies attempt to remedy a distortion in the labour market, but simultaneously create distortions in the childcare market, e.g. by encouraging a shift from unpaid to paid childcare.

Consistent with the concerns raised by Blau (2001), we believe that employment-related childcare subsidies have an important unintended consequence. In the short-run, subsidy receipt adversely affects the wellbeing of low-income children. By design, the fund appears to influence child wellbeing through their positive employment effects or by encouraging parents to purchase low-quality childcare. Therefore, it is not surprising that a government policy to promote work and increase parental flexibility in choosing childcare would have harmful effects on child development.

A better way

Reform of the subsidy system might consider decoupling childcare assistance from the current work-based welfare system, and by extension, from parental employment. Childcare policy should neither explicitly promote nor inhibit employment. Instead, childcare policy should be refocused to provide parents with strong incentives to choose high-quality care.

  • Recent quality-based policy proposals stress two ways of doing this.

The generosity of childcare subsidy reimbursements should be conditioned, in part, on the quality of care purchased by parents.

It may still be means-tested, so as to phase-out as family income increases, but the reimbursement rates should not be different for working and non-working parents.

  • Given that recent studies consistently show that parents are not able to discern low- from high-quality care and are not well-informed about the potential benefits of high-quality care, governments at all levels should engage in aggressive outreach campaigns to educate parents.

States currently spend some Child Care and Development Fund money to engage in fairly targeted information campaigns, but these should be broadened to reach all new parents, and not just those within the subsidy system. It is reasonable to assume that, once informed, parents will increase their demand for high-quality care, and childcare providers will be more likely to provide it.


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