Abstract
This study estimates the causal effect of child support on consumption and labor supply of single mother families. Using data from the 1999 to 2013 waves of the Panel Study of Income Dynamics and the instrumental variable estimations that control for individual fixed effects, we do not find convincing evidence of significant influence of child support on consumption of custodial mother families. At the same time, we document a statistically significant and quantitatively important negative effect of child support on mothers’ probability of working and the amount of labor supplied. We also find the negative effect of child support on earnings conditional on positive labor income. We conclude that single mothers, especially those with weak attachment to labor force, might value time out of work, perhaps additional time spent with their children, more than the marginal gains in consumption.
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Notes
Single parent recipients of TANF are automatically referred to the Child Support Enforcement and must cooperate to obtain a support order. Under the current law, states are permitted to keep the money to reimburse themselves and the federal government for public assistance. However, states have the option of allowing some of the child support payment to be passed through to the recipient parent and child. Individuals who do not receive public assistance must file an application to obtain a child support order.
We did not use data collected before 1999 because the PSID did not measure income and wealth variables with sufficient precision prior to this date. For example, information on financial wealth used to be collected every five years before 1999. The 2013 wave was the latest available when the work on this project started. The 1999–2013 period was quite stable in terms of regulations regarding child support policies. The last landmark legislation regulating child support policy was passed in 1996 (Personal Responsibility and Work Opportunity Reconciliation Act). This law introduced new enforcement tools intended to strengthen the child support system, most of these tools are still in use by child support enforcement bureaucracy across the United States.
Details of these estimations are not reported here but available upon request.
The PSID data set contains separate questions on child support receipt and amount but does not explicitly distinguish between court-sanctioned and informal voluntary transfers. The measurement error could arise if respondents include informal transfer from non-custodial parent in their answers to the child support questions.
See Wooldridge’s (2010) textbook "Econometric Analysis of Cross Section and Panel Data", p. 265–268.
The difference between single mothers’ annual income and consumption could imply that they saved a portion of their income or used it to pay off their debts. Also, note that the out-of-pocket health care and education-related expenditures (averages of $942 and $602 in our total sample) were not included in our measure of consumption as they might represent investments. Finally, some residual consumption categories (vacation, entertainment, clothing, home renovations or improvements, etc.) were not measured consistently in the PSID during the timespan of our analysis and are left out of our measure of consumption.
Lewbel (2012) showed that the heteroscedastic covariance exclusion restriction can be used for identification in the two-stage least squares regression. If $$Z$$ is a subset of exogenous variables $$X$$ from the first-stage regression (Eq. 2 above) and $$\widehat{\tau }$$ is the error term, $$\gamma $$ in the second stage (Eq. 1 above) can be consistently estimated by using $$\left(Z-\stackrel{-}{Z}\right)\widehat{\tau }$$ as identifying information. We used the state-level instruments mentioned above as well as this generated set of instruments to isolate exogenous variation in child support receipt and the amount of support received.
Results are not affected by this exclusion.
To account for “selection into labor” while assessing the effect of child support on earnings, we also estimated panel data models designed to correct for both endogeneity and selection as described in Semykina and Wooldridge (2010). These models resulted in coefficient estimates with signs consistent with the results that we present in the paper. However, the coefficient estimates were unrealistically large in absolute terms (which we attribute to the weak instruments problem) and we chose not to report them. To the best of our knowledge, there is no proven procedure for combining internally-generated instrumental variables (so that the desired strength of instruments could be achieved) with selection correction in models that additionally control for individual fixed effects.
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Acknowledgements
The authors wish to thank the editor and two anonymous reviewers for their helpful comments. The authors also thank the seminar and conference participants at University of Georgia, American Council on Consumer Interests, and Allameh Tabataba’i University. The usual disclaimer applies.
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Barardehi, I.H., Babiarz, P. & Mauldin, T. Child Support, Consumption, and Labor Supply Decisions of Single-Mother Families. J Fam Econ Iss 41, 530–541 (2020). https://doi.org/10.1007/s10834-020-09690-z
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DOI: https://doi.org/10.1007/s10834-020-09690-z