Policy Application: Child Care and

Labor Supply
• The purpose of this section is to consider the
labor market implications of programs to
support the care of children.
• Outline this topic is :
1. Child – Care Subsidies
2. Child Support Assurance
 Child – Care Subsidies
• In the last decade or so, however, federal
spending on child-care subsidies has tripled,
and the purpose of this section is to analyze
the effects of these greater subsidies on the
labor supply of parents.
 # Reducing the Fixed Costs of Care
• Consider first the case of a mother
who is not now working If she
decides to work, she must choose
from points along the line cd, with
the distance bc representing the
fixed costs of child care. The slope of
cd, of course, represents her wage
rate. Given her preferences and the
constraint depicted in this woman
receives more utility from not
working (at point b) than she would
from working (point X). If the fixed
cost were reduced to zero by a child-
care subsidy, so her constraint were
now abe, her utility would be
maximized at point Y on curve U3,
and she would now find it beneficial
to work.
• Now, consider the case
represented of a woman
who is already working
when the subsidy is
adopted. Before the
subsidy, her utility was
maximized at point X’ on
indifference curve U’1, a
point at which H’1hours are
worked. When the subsidy
generates the constraint
abe, her utility will now be
maximized at point Y’ (on
U’2 ), and she will reduce
her hours of work to H’2.
 # Reducing the Hourly Costs of Care
• If a government subsidy were to reduce the child-
care costs to zero, the parent would experience
an increase in the take-home wage, and the labor
supply effects would be those of a wage increase.
For those already working, the subsidy would
create an income effect and a substitution effect
that work in opposite directions on the desired
hours of work. For those not in the labor force,
the increased take-home wage would make it
more likely they would join the labor force
 # Observed Responses to Child-Care
Subsidies
• The effect on labor force participation,
however, is theoretically clear: child-care
subsidies should increase the labor force
participation rates among parents, especially
mothers. Empirical studies of the relationship
between child-care costs and labor force
participation are consistent with this latter
prediction: when costs go down, labor force
participation goes up.
 Child Support Assurance
• To enhance the resources of single-parent families,
some have proposed the creation of child support
assurance programs. The essential feature of these
programs is a guaranteed child support benefit that
would be paid by the government to the custodial
parent in the event the absent parent does not make
payments. If the absent parent makes only a portion of
the required support payment, the government would
make up the remainder.
• A critical question to ask about such a program is how
it would affect thenlabor supply of custodial parents.