Entering the Labour Market by Single Mothers
Decision to enter the labour market for single mothers is linked with the issue of taking care of their young children. Child care costs will continue to be an important factor determining welfare participation in the welfare reform environment because of the low expected earnings of low-skilled workers and the high percentage of earned income that must be devoted to purchase reliable quality care. In addition to facilitating mothers’ employment and thus reducing poverty and the need for income supplements, quality child care is also an important social concern in and of itself, given the strong link between quality child care and positive child outcomes, particularly for at-risk children.
In this paper, we analyze the effectiveness of child care assistance policies indirectly by considering explicitly the effect of the cost of child care on welfare recipiency. We find that, over a set of alternative specifications, welfare recipiency and employment of single mothers are sensitive to the predicted hourly price of child care.
1. Brief Review of Existing Evidence
There are three main sources of information related to our research question on the effect of the price of child care on employment and welfare recipiency. The first source is econometric works on the effect of child care costs on employment. Second is a set of papers focused on the welfare side of the coin. Finally, there is some evidence from evaluations of welfare -to-work demonstration projects of the importance of child care costs to employment and welfare recipiency.
In terms of the econometric work on the effect of child care costs on employment, that body of work has been well summarized elsewhere (Berger&Black 1992; Blau&Alison 1998). Almost all the studies on employment find a significant negative effect of child care costs on women’s employment, although the estimated child care price elasticity with respect to employment varies widely across studies. Most relevant to our current topic are three papers—Berger and Black (1992), Blau and Alison (1998), and Bowen and Neehan (1993)–each of which uses data to look at differences across marital status. Each of these papers finds evidence that the elasticity of single mother’s employment with respect to child care costs is greater in absolute value than married mother’s employment elasticity.
Blanck (1985, 1989) review the relationships between welfare recipiency and childcare costs and suggested that a 50% child care subsidy would increase the labor force participation of single parents by 2.9 percentage points and that a 20% reduction in the AFDC guaranteed payment would increase the labor force participation of single parents by 1.6% and reduce their welfare transfer program participation by 1.2 percentage points.
Evidence of a positive relationship between child care costs and welfare recipiency can also be found in a number of evaluation studies of welfare -to-work demonstration projects, though the results are not uniform. Graham and Beller (1989) reviewed evidence from several major welfare -to-work demonstration projects that included child care components. They wrote, “Although the confluence of services, mandates, and incentives in these demonstrations suggests caution is required in interpreting their results, based on this evidence it seems reasonable to conclude that subsidized child care may have a modest effect, at best, in increasing employment levels of very low-skilled, single mothers with small children” (Graham and Beller, 1989, p.665). However, as the authors point out, none of these demonstrations explicitly examined the importance of child care costs within an experimental framework, so any conclusions relating to the importance of child care costs are tentative at best.
The Minnesota Family Investment Program (MFIP), which was included in Joesch review (1991), deserves extra scrutiny. This program was an innovative program based on the dual (and often competing) goals of encouraging work and making work pay. It contained two key work incentive provisions, the second of which related to child care. The MFIP paid child care costs directly to providers for all parents working or participating in employment-related activities. The AFDC reimbursement scheme differed because the parents paid the providers directly and were reimbursed later. The practice of reimbursing the mother after the expenditure occurred may have hindered the mother’s efforts to get and stay employed. Also, the AFDC reimbursement rules tend to discourage providers from accepting such subsidized clients because of the uncertainty of receiving payment. The report finds significant impacts in numerous areas, including employment rates and earnings of the MFIP approach.
Finally, Waldfogel (2001) analyzed Massachusetts state data on current and former TANF recipients who also receive child care vouchers. He found that increased funding for child care subsidies and availability of full-day kindergarten are associated with increased probabilities that current and former welfare recipients will work.
In sum, a thorough review of the broad literature relevant for this paper reveals a uniformity in the direction and significance of the child care price effect but a rather broad range of empirical estimates concerning the importance of child care costs on employment probabilities of single mothers.
2. Single mothers’ choices in welfare recipiency
One of the most important aspects of the market for child care is that individuals face widely different costs for similar services depending on the availability of low- or no-cost child care options. We begin with analysis of individual decision making that represents the discrete choices about welfare recipiency and employment of mothers with young children. In our case, we assume that mothers of young children seek to maximize their utility over goods and child services, subject to four constraints: a money budget constraint combining the mother’s labor income and nonlabor income, a production function for child services, a mother’s time constraint, and a child’s time constraint. Child services are the commodity parents are consuming from their children; it could be companionship or love or pride in one’s progeny. They are produced with a combination of the mother’s time at home, the child’s time with other caregivers, and money inputs. Total nonlabor income is the sum of family income from sources other than the mother’s labor market participation and means-tied transfer income, such as welfare payments. Mothers have three uses of their time: work in the labor market, time spent with children, and leisure. The child has two types of time: time with the mother and time with a nonmaternal caregiver.
From these assumptions, we derive that single mothers decide whether to be employed or not taking into account two or four different values corresponding to the different possible work and welfare outcomes. Increased expenditures on child care lower a woman’s effective wage in the labor market when she is not receiving AFDC. Also included among these factors will be her predicted wage, nonlabor family income, dichotomous factors indicating that the mother is nonwhite or unhealthy or lives in an urban area or in the South, factors affecting the value of a woman’s time at home (specifically, two factors indicating whether the youngest child is age zero to two years and whether there are two or more preschoolers in the family), the state’s average Medicaid expenditures per enrollee, the state’s average monthly AFDC payment, and the state’s unemployment rate.
Because of kinks in the budget line caused by AFDC regulations, as well as possible discontinuities in hours of employment and child care availability, it is reasonable to suspect that decisions about AFDC recipiency are made jointly with decisions to work for pay.
3. Demographics, Employment, and Child Care
According to Berger and Black (1992), employed single mothers are 28.5 years of age, on average, and have 12.5 years of education. Only 26% live in poverty, but two-thirds have income less than twice the poverty threshold. Approximately one-fourth work part time, and 53% report paying for child care. The oldest single mothers are those who are employed and paying for child care, and this subgroup also reports the highest education levels, with 12.6 years of education. Focusing further on the issue of paying for child care, those single mothers employed and paying for care are a bit less likely to be nonwhite and less likely to live in poverty or receive welfare than all employed single mothers. Additionally, they are less likely to work part time, and they earn higher average hourly wages ($8.96 vs. $8.25 an hour).
4. Employment and Welfare Status
According to Berger and Black (1992), the working single mothers not reporting welfare recipiency are the oldest and have the most education and the lowest poverty rates. Their higher nonlabor income may indicate that they are more likely to be receiving child support payments. The other group with relatively higher nonlabor income is the group not employed and not on welfare. Some of these women are also receiving child support, but there is substantial variation among themselves, as the high poverty rate indicates. Others may be queued for welfare, waiting for their savings to be depleted.
The nonwelfare group is far less likely to be employed part time and receives a considerably higher average hourly wage. In addition, while the welfare recipient group is less likely to pay for care (36% vs. 56%), the recipient group pays a higher hourly price for child care. This may reflect the higher cost of part-time child care or the receipt of child care subsidies.
5. Child Care Mode Choice and Weekly Expenditures by Mode of Care for Employed Single Mothers
According to Bowen and Neehan (1993), single mothers receiving welfare are more likely to rely on relative care and less likely to rely on center-based care. But recall that they are also more likely to work part time, an employment state more often associated with this pattern of modal choice. In addition, the welfare recipients are less likely to pay for relative care and less likely to pay for center-based care. Neither subgroups are very likely to pay for relative care. The welfare recipient subgroup’s average weekly payment for center-based care is considerably higher than for those not receiving welfare. For all single mothers, center-based care is the most expensive, followed by home-based care and relative care.
Child care costs present a problem for the researchers in that they are often unknown unless the mother is engaged in market work. This situation is similar to the problem of wages that are unobserved if the person is not employed. In addition to the problem of limited observation of the relevant variable, child care is complicated by the fact that many families do not pay the “market price” for child care. Nonprofit centers are often subsidized in the form of free rent and require no return on investment capital. Relatives and friends may be willing to provide child care at a reduced price or at no charge either because they receive in-kind payments or because they enjoy caring for the child.
How one approaches this problem depends in part on the information available and in part on the question one is trying to answer. Because the focus here is on the mother’s decision, only the portion of the cost she pays is relevant. Since we are interested in the effect of child care costs on welfare recipiency and employment, we analyze the cost of child care per hour of employment, not the cost per hour of child care used. This is the relevant decision choice for mothers of young children who are evaluating the costs and benefits of entering the labor market, with one alternative being receiving welfare.
As it was previously mentioned, differences among families in their access to low- or no-cost care is a very pertinent issue for our problem. Using the average local market price of child care alone ignores substantial differences among families in access to below-market child care. The problem is that there is not really an exogenously given price of child care that is relevant to all consumers in the marketplace. Instead, because of differences in family circumstances and location of residence, each individual faces her own price per hour of child care. Nonwhite mothers, mothers who reside in urban areas, and mothers reporting poor health are more likely to receive AFDC. The state’s average AFDC payment per enrollee is related positively to AFDC recipiency, but the average Medicaid expenditure per enrollee is related negatively (Graham and Beller, 1989, p.668).
6. The effect of predicted child care expenditures on the probability of AFDC recipiency
According to findings of Berger and Black (1992), that effect of predicted child care recipiency is positive and significant. Those with higher nonlabor incomes are also less likely to receive welfare, while families in which the youngest child has one or more siblings under the age of six are more likely to receive welfare.
With child care expenditures reduced to one-half for all single mothers, AFDC recipiency would fall further to 12.5%, while employment is predicted to rise to 74.7% (Blau and Allison, 1998, p.105). Tying the child care subsidy to a reduction in average state benefits reduces the receipency rate still further to 15.1% and increases the employment rate to 69.5% with further cost saving in AFDC expenditures (Blau and Allison, 1998, p. 104). Subsidizing child care costs for all single mothers may be an important policy tool leading to lower AFDC recipiency rates. These subsidies could be packaged with existing federal TANF program restrictions on length of total, lifetime welfare recipiency, and work requirements to improve living standards for ex-recipients by helping to “make work pay.”
Conclusion
This paper looks specifically at the effect of child care costs on the decisions of single mothers concerning employment and AFDC recipiency. In doing so, it seeks to answer the questions made so relevant first by the Family Support Act of 1988 and more recently by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996: Can subsidizing child care reduce the welfare dependency of single mothers? The answer seems to be an unequivocal yes, though the size of the estimated effect is found to be sensitive to the estimation strategy used.
In the short run, AFDC benefits should be made more uniform across states, and raised, at a minimum, up to the federal poverty level. If the policy goal is to expand the labor market options available to welfare recipients, the most important consideration should not be welfare reform, but rather raising the effective wages of the work that is available. Such a change, which would affect all single mothers, not merely those collecting public assistance, would begin with the important first step of raising the minimum wage.
Publicly provided health care and child care programs are needed if women are to support themselves and their families through participation in the labor market. Child care must also be available for low-income working women. First steps toward the establishment of a national child care system include the extension of Head Start, a federally funded program for economically disadvantaged preschool children.
For too long social policy has assumed that single mothers should derive income from either the labor market or the state. Today’s welfare-to-work programs presume that paid employment will end women’s need for government support. However, the reality for most single mothers is that neither labor market income nor public assistance at current levels can adequately support their families. A meaningful family policy would expand the opportunities and the income available to women with children–both from the labor market and from the state.
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Andrew Sandon
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