Child care and female employment decisions: A theoretical note

The empirical literature is divided over the issue of whether child care costs are a significant barrier to female employment. In this paper we develop a theoretical model that contributes to the literature (1) by allocating mother's time between work, leisure and child care and (2) by introducing the possibility of uncertainty in second period income because of a greater probability of divorce. We examine how these changes affect decisions on labour supply and purchase of child care. We show that although an increase in the price of child care reduces the demand for child care, it has an ambiguous impact on female employment decisions. From a policy point of view, this implies that government subsidies aimed at mitigating the cost of child care, may not have their desired impact in encouraging greater female labour force participation. However, an increase in the probability of child care unambiguously increases female labour supply and purchase of child care.