A Structural Model of Labor Supply and Child Care Demand

This paper specifies and estimates a structural model in which the decision to purchase market child care-and the quality purchased-is made simultaneously with the employment decision of the mother. Separate analyses are performed for married mothers and single mothers. The structural estimates are used to simulate the effects and costs of changes in the federal child care tax credit. The simulations indicate that a refundable child care tax credit would distribute child care benefits more equally across the population by increasing the shares of subsidies received by low-income families, and would induce a considerable increase in expenditures on market child care. Labor supply also increases, but by considerably less than child care expenditures. A surprising result is that, despite large increases in child care expenditures, the overall quality of child care does not change very much. The primary beneficiaries of more generous subsidies are current users of high quality free care who are induced to purchase slightly higher-quality market care.