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Enticing even higher female labor supply: the impact of cheaper day care

Abstract

We ask whether cheaper child care can spur labor supply of mothers in an economy with high female labor supply. We exploit exogenous variation in child care prices induced by a public reform. A triple difference approach is put forward. The results show that reduced child care prices led to a rise in labor supply of mothers by approximately 5 %. A “back-of-the-envelope” calculation estimates an elasticity of approximately −0.25, which is at the lower end compared to other studies, suggesting that labor supply is less elastic when female employment is high. Since a capacity-increase was introduced at the same time, the positive labor supply effect may be a result of both reduced prices and increased capacity.

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Fig. 1
Fig. 2

Notes

  1. 1.

    Evaluated at the present exchange rate. In the rest of the paper, when using US dollars, this is the exchange rate we use.

  2. 2.

    Initially, the reform was set up in an even more ambitious manner. It said the cap should be set to 2500 NOK (420 US dollars) by May 2004, and reduced further to 1500 NOK (250 US dollars) in 2005. Full coverage rate should be met during 2005. Public economic constraints and dispute over the timing of capacity rise versus price decrease hampered the process. In addition, the four parties who agreed on the reform were not part of the government at the time, and the government (which was a minority government) had as its goal to ensure a high capacity before prices decreased to the full amount; even though the capacity increased considerably from 2003 and onwards, it did not quite reach the intended speed.

  3. 3.

    There is an on-going debate in Norway on whether the generous and long parental leave (mostly taken up by women) may hamper the career development of women. The stubborn gender wage gap and the very low share of women in top positions in the labor market are by some taken as indications of the “boomerang-effect” from the generous family policies. However, no conclusive research evidence on this mechanism has been reached (see Datta Gupta et al. 2008 for a general discussion of the potential “boomerang” effect in a Nordic setting).

  4. 4.

    Child day care centres in Norway can be either publicly or privately owned; as long as they are publicly approved, they are subsidized. Roughly 50 % of the market consists of private day care centres, the costs of which are shared by the state, the municipality, and the parents.

  5. 5.

    Coverage rate is the relative share of children in a given age group with a slot in a day care center, and this is the standard measure of child care coverage. One weakness with the measure is that it says little about the number of children who actually demand and are offered a slot.

  6. 6.

    Norway and the US are quite different when it comes to the distribution between formal and informal care. In Norway, the vast majority of child care is formal care. In the US much of day care is informal family dare. Therefore, limiting the study to formal care would lead to a much larger underrepresentation of the supply of child care slots in the US than in Norway.

  7. 7.

    In the data at hand, we can only distinguish between married and not married mothers. We do not have information on cohabitation. This implies that cohabitating mothers will be included among the non-married.

  8. 8.

    Non-married mothers, for which we do not have information about the husband, are given the value zero on the husband characteristics. This is the usual approach in these types of analyses. This strategy is also used for single mothers. Approximately 12 % of mothers in Norway are single mothers at time of birth.

  9. 9.

    This means that we exclude self-employed. The share of women in Norway that are self-employed is very low, approximately 3 % (Rønsen 2012).

  10. 10.

    According to the rules, all leaves expected to last more than 2 weeks shall be reported to the register. Periods on paternity leave will therefore be reported to this register. While on leave, these individuals are reported as not working (zero working days). In the analyses of working days, mothers with zero hours of work are dropped.

  11. 11.

    There are three categories of working time: full-time (30 h or more per week), long short time (15–30 h per week), and short part-time (fewer than 15 h per week). If a worker works full time, she gets weight 1, if she works long part-time she gets weight 2/3, and if she works short part-time she gets weight 1/3.

  12. 12.

    The mean price reduction is calculated for the household income group in the middle (income 375), see Fig. 1. The formula for the “back-of-the-envelope” labor supply elasticity is: \( Elasticity = \frac{{(Mean{\kern 1pt} persentage{\kern 1pt} increase\,in\,labour\, supply)}}{Mean\,percentage\,price\,reduction\,in\,childcare\,prices\,between\,2005\,and\,2006)} \) where the nominator is 5 % and the denominator is 20 %.

  13. 13.

    We have also carried out analyses using a somewhat stricter definition of labor supply. As an alternative approach, we defined employed as: (1) being registered in employment as above and (2) having an income above the minimum threshold in the Social Security System. For instance, in 2006 this sum was equal to 62892 NOK (approximately 10500 US dollars). The use of this alternative measure of labor supply did not alter the results in any significant way. Therefore, we proceed with the original measure.

  14. 14.

    Results not presented in this article, but available in working paper; Hardoy and Schøne (2013).

  15. 15.

    Finally, we also carry out the analyses as presented in Table 3, but for men. We do not expect to find any labor supply effects for fathers, since we know that in Norway the mother is the main caregiver for small children. Finding an effect would raise doubts as to whether the DDD set-up might be picking up some simultaneous labor market trend or occurrence affecting the general demand for parents with children of different ages taking place at the same time as the introduction of the MP reform. The results show that the effect of the MP reform for fathers is equal to zero.

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Acknowledgments

The authors thank Erling Barth, Astrid Kunze, seminar participants at Institute for Social Research, and participants at the 3rd Joint IZA/IFAU Conference on Labor Market Policy Evaluation in Uppsala, October 2010 and ESPE Conference 2011 in Hangzhou, for fruitful comments and suggestions. All remaining errors are the responsibility of the authors. The Norwegian Research Council project, “Public Policy and the Labor Market Attachment of Different Households”, is gratefully Acknowledge for financial support.

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Correspondence to Pål Schøne.

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Hardoy, I., Schøne, P. Enticing even higher female labor supply: the impact of cheaper day care. Rev Econ Household 13, 815–836 (2015). https://doi.org/10.1007/s11150-013-9215-8

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Keywords

  • Labor supply
  • Family policy
  • Child care costs
  • Difference-in-differences-in-differences

JEL Classification

  • J13
  • J18
  • J22