A Structural Model of Childcare, Welfare, and the Labor Supply of Single Mothers

This paper considers the simultaneous relationship of the single mother’s decision to choose paid childcare, welfare participation and labor supply, and estimates a structural model that allows for a free error covariance. We use a discrete approach to the choice of labor supply together with the discrete choices of utilized paid childcare and welfare participation, which allow formulating the model as a multiple-choice problem. The results show that there is an association between social assistance, paid childcare and labor supply, but that the relationship is non-symmetric. An increase in the social assistance norms has a relatively small effect on paid childcare utilization, but a relatively larger effect on the mean labor supply. In contrast, a corresponding reduction in the childcare cost has a relatively large effect on the social assistance utilization but a relatively small effect on the mean labor supply. Our estimates suggest that a decrease in childcare cost increases the labor supply of those working rather than encourages non-workers to start work, which implies that childcare cost is foremost a barrier to fulltime work rather then a barrier to work at all.