Question

Suppose the government is considering implementing a child care subsidy for low-income single-mother households. This subsidy would provide low-income single mothers $5 per hour worked to spend on child care (and only child care).

a. Is this child care subsidy equivalent to a wage subsidy to low-income single-mother households? Explain. (Note: assume that all low-income single-mothers use formal child care in order to work.)

b. Why might the government want to regulate the quality of child care? What problems might this sort of regulation cause? Explain.

Answer 1

a) If cost of child care is more than $5 per hours, it is equivlane to a wage subsidy. All low-income single mothers were spending more than $5 per hour in child care before child care subsidy out of their wages. After the subsidy $5 is paid by the subsity program and all low-income single-mothers do not have to pay these $5 for child care for every hour they work and use child care --- they can keep $5 for every hour they work. Therefore, it is a wage subsidy --- it subsidises their wage by $5 per hour.

b) Government can regulate the quality of child care to keep it of good quality to keep children in good health and prevent developmental problems, lower parental anxiety, lower need of parents to take time off for child care, including sickness. However, this regulation can drive up the cost of child care centers, and the price parents pay for child care. Those low-income parents (for example, two-parent households) who do not have subsidy, may find it difficult to pay increased price of child care centers and may not be able to find low-cost child care centers they can afford, or easily afford. They can thus be driven out of the child care market.