Child Care Markets, Parental Labor Supply, and Child Development

This paper develops and estimates a model of child care markets that endogenizes demand andsupply. On the demand side, families with a child make consumption, labor supply, and child care decisions within astatic, unitary household model. On the supply side, child care providers make entry, price, and quality decisionsunder monopolistic competition. Child development is a function of the time spent with each parent and at the childcare center; these inputs vary in their impact. The structural parameters of the model are estimated using the2003 Early Childhood Longitudinal Study, which contains information on parental employment and wages, child carechoices, child development, and center quality. The estimates are used to evaluate the impact of severalpolicies, including vouchers, cash transfers, quality regulations, and public provision. Amongthese, a combination of quality regulation and vouchers for workingfamilies leads to the greatest gains in average child development and to a large expansion in child care use andfemale labor supply, all at a relatively low fiscal cost.