Understanding the Effects of Income and Child Care Subsidies on Children's Academic Achievement

In Milwaukee, Wisconsin (1994-1997) an anti-poverty intervention, "New Hope," randomly assigned an income supplementâsimilar to the EITCâand a child care subsidy to a group of economically disadvantaged families. The experimental evaluation found positive effects of the program on labor supply, income, and child care use. Notably, the program also boosted various measures of child academic achievement. However, since policies were given in a single package, little is known about the mechanisms by which New Hope affected child outcomes. The goal of this paper is to disentangle the mechanisms that explain the impact of income and child care subsidies on children's academic achievement. To this end, I estimate a dynamic-discrete choice model of the household and child academic achievement using the New Hope data. I use the model to quantify the importance of household inputs in explaining the impact of New Hope and similar policiesâsuch as the EITC and the CCDFâon children's academic achievement. I find that the negative effect on child human capital due to the program-induced increase in labor supply is more than compensated by the positive effects of additional income and a higher probability of using center-based child care. Given the dynamics of the technology of skills production, the effects of income and child care subsidies become economically significant only when children are exposed to these policies for many years.