Childcare Choices and Early Cognitive Development
This study uses the data from the National Institute for Children Health and Development Study of Early Child Care and Youth Development to evaluate features of wage and childcare price changes that are associated with positive effects on children's early cognitive skills. Identifying beneficial characteristics of changes in market variables is especially relevant in a policy environment where the main priority of tax incentives related to the use of childcare is not facilitating the formation of children's cognitive skills, but reducing reliance on the welfare system through increase in employment among poor households.
We estimate jointly the discrete household choices related to the employment status of the mother and the use of a paid care mode, the demand functions for quantity and quality of childcare, the production function for cognitive outcomes, the wage process for the mother, and childcare price equations based on the hedonic pricing method, while at the same time introducing unobserved heterogeneity in the disturbance terms of the estimated outcomes. Our strategy for handling selection problems also utilizes the exogenous variation in childcare prices across the 10 geographical markets defined by the study sites in the NICHD SECCYD dataset, which in our model influence choices, but do not affect cognitive outcomes directly.
Our results show that failing to account for common unobserved characteristics would lead to underestimating the impact of all analyzed wage and price changes. We find that prices and wages do not have a statistically significant impact on the quality of paid care, while the marginal product of that attribute of care is positive for almost all input combinations in the production of cognitive attainment. Therefore, a policy utilizing changes in wages and prices can be effective in improving early cognitive skill only through the impact of those changes on the intensity of paid care use.
The comparison of the effects of wage and price changes on early cognitive skills for three sets of values of the observable household characteristics representing low, middle and high income households lead to the following conclusions: (1) a tax credit for working mothers and childcare subsidies for center-based care can bring disproportionate gains for children in low and middle income groups; (2) subsidizing paid home care for children less than three and a half years old can be more effective than subsidizing center-based care for the same age group in terms of improving cognitive outcomes at the age of five; (3) conditioning childcare assistance for paid care on the employment status of the mother does not seem to have a strong negative effect on early skill formation; and (4) tax incentives affecting wage rates and childcare prices prove to be beneficial for the formation of early cognitive skills only when they are implemented while the child is less than three and a half years old.
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