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- In this paper, we specify and estimate a model for partnered women's simultaneous decisions about how much to work and how much child care to use.
- The model is an improvement over previous research in that it allows for comparison of alternative policies which affect household budget constraints, such as policies which change child care costs, and also allows for analysis of the distributional effects of such policies.
- The model is realistic in that labour supply and child care decisions are treated jointly and both hours worked and hours of child care demanded are chosen from a small set of commonly observed values. Hours can not be adjusted in arbitrarily small amounts but must respect the real-life constraints of the labour market and slots typically offered by child care providers.
- The model includes constraints which require that children be cared for at all times by someone other than the mother while the mother is working. Such constraints are important to avoid bias in the estimated effects of child care prices.
- The paper improves the modelling of the relationship between hours of child care and mothers' working time in two important ways:
- The model allows for the use of child care for purposes other than freeing up mothers' time to work. For example, child care may be used to improve children's development.
- The model allows hours worked by the mother to exceed hours of formal child care, with the difference being made up by informal and/or paternal care. This relaxation of hours restrictions imposed in previous research is important in that we observe in the data that over thirty per cent of working mothers work more hours than the hours spent by their children in formal care.
- Both of these innovations are novel in the literature.
- We model and include effects of the personal tax system and major transfer payments including New Start Allowance, Parenting Payment Partnered, Family Tax Benefits, and Child Care Benefit.1
- The model is estimated using data from Waves 5 through 7 (2005-2007) of the 'in-confidence' version of the Household Income and Labour Dynamics in Australia (HILDA) Survey.
- The model is estimated for partnered women with pre-school children—that is children age five and under who are not attending school. This homogeneous sample reduces model bias from unobserved factors. This reduction in bias comes at a cost, however, as the results may not be applicable to other groups (partnered women with school-aged children or single parents of pre-school children, for example).
- We focus on the estimation of net price elasticities, which provide an estimate of how labour supply or child care demand changes for a change in the net price of child care. The gross price is the posted price at a child care centre. The net price is what families actually pay out of pocket after accounting for any subsidies or rebates. Economic theory tells us that net, not gross, prices should determine behaviour. Government policy in Australia is targeted at changing the actual out-of-pocket costs that families face (rather than, for example, fixing prices) and thus the net price elasticity is more appropriate for understanding the effect of policy. The gap between the net and gross price elasticities is not constant across the population because of the means testing of subsidies. Net price elasticities are thus more useful to study the distributional effects of policy.
- We confirm the findings of Gong et al. (2010) that the labour supply behaviour of partnered women with young children responds (negatively) to child care price;
- we find that a one per cent increase in the net price of child care for pre-school children leads to a decrease in hours worked by partnered women of 0.10 per cent. Such a price change leads to a decrease in the employment rate of 0.06 per cent. These estimates are statistically different from zero.
- the analogous gross child care price elasticities are similar. A one per cent increase in the gross pre-school child care price causes mothers' hours of work to decrease by 0.11 per cent and mothers' employment rate to decrease by 0.07 per cent.
- both labour supply and child care demand are more responsive in families with lower income, with less educated parents, and with lower female wages. Poorer families, for whom child care expenses may take up a larger fraction of the household budget, are thus more affected by child care price changes than wealthier families.
- Gong et al. (2010) found a gross child care price elasticity of employment of -0.29. The gross child care price elasticity from the approach of Gong et al. (2010) for the sub-group of pre-school children as considered in this paper is -0.15, which is not statistically different than the corresponding point estimate of -0.07 presented in this paper. The differences in the two papers can be explained by five factors:
- the two papers estimate different models;
- the two papers use different methods to calculate elasticities;
- the two papers use different samples;
- the price variable which is being changed in the elasticity calculation is different in the two papers; and
- we impose a quantity constraint, in this paper, that total child care hours (formal, informal and paternal) be at least as great as a mother's working hours which allows hours of formal child care to exceed hours worked by the mother. There was no such constraint imposed in the previous paper.
- The last two points are the most important. Gong et al. (2010) look at the effect on women's labour supply of changing all child care prices whereas this paper only looks at changing the price of child care for pre-school children. Naturally changing more child care prices has a larger effect than changing fewer prices so it is not surprising that this paper reports a smaller elasticity. Regarding the quantity constraint, Duncan et al. (2001) showed that elasticities may be overestimated if quantity constraints are not taken into account.
1 In estimation of the model, we do not include fringe benefits tax which may be related to child care if it is received as part of a compensation package. We also do not include Child Care Rebate (CCR) which was introduced (as the then Child Care Tax Rebate) during our analysis period but which was initially paid to families with a long delay. We argue that the rebate, in its form at the time, would have had only a minor effect on families' decisions about child care; and in the prices we construct from the data provided by families it appears that they did not include the rebate in their calculations at that time.