Question

Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents who send their child(ren) to childcare. Assume there are no other subsidies in operation in the industry.

1. Examine the effects of this subsidy on consumers, produces and the wider market.

2. Anecdotal evidence suggests that the number of children attending childcare services has NOT increased. How could you explain this?

Answer 1

In 2008, the federal government allotted $7 billion in child care subsidies to low-income families through the state-administered Child Care and Development Fund (CCDF), now the government’s largest child care program (US DHHS, 2008). Although subsidies reduce costs for families and facilitate parental employment, it is unclear how they impact the quality of care families purchase.

The study investigates the impact of government subsidization on parents’ selection of child care quality using multivariate regression and propensity score matching approaches to account for differential selection into subsidy receipt and care arrangements. Data were drawn from the Child Care Supplement to the Fragile Families and Child Wellbeing Study (CCS-FFCWS), conducted in 2002 and 2003 in 14 of the 20 FFCWS cities when focal children were 3 years old (N = 456). The results indicate that families who used subsidies chose higher quality care than comparable mothers who did not use subsidies, but only because subsidy recipients were more likely to use center-based care. Subgroup analyses revealed that families using subsidies purchased higher-quality home-based care but lower-quality center-based care than comparable non-recipients. Findings suggest that child care subsidies may serve as more than a work support for low-income families by enhancing the quality of nonmaternal care children experience but that this effect is largely attributable to recipients’ using formal child care arrangements (versus kith and kin care) more often than non-recipients.

Parents with a child care subsidy should purchase higher quality child care than comparable families without one because subsidies decrease income constraints, increase purchasing power, and, thereby, multiply child care options. In order for this theory to be supported, however, three assumptions must hold true. First, parents would need to spend their subsidy income on higher-quality care rather than simply using subsidies to purchase the same quality care they would otherwise and reallocating their savings to other household expenditures; that is, parents would need to prioritize child care quality. Second, even if parents did prioritize quality, they would need to be able to distinguish higher- from lower-quality care among their options.