The second half of the 20th Century involved some massive social change in Western countries. One of those changes was the rapid increase in female labour force participation, including an increase in labour force participation among mothers of young children. As mothers have increasingly gone to work, fathers have in the main not compensating by decreasing their work time. So, childcare has become increasingly important over time. On top of that, there is a lot of tension (and judgment) associated with the decision by mothers to return to work or not.
A useful question to consider, then, is what is the impact of mothers working on their child's outcomes, compared to the mother staying out of work to care for the child. That is essentially the question addressed in this 2023 NBER Working Paper (ungated version here) by Jonathan Gruber (MIT), Tuomas Kosonen (VATT Institute for Economic Research), and Kristiina Huttunen (Aalto University School of Economics). They look at the case of Finland, where they look at the effects of:
...the Finnish Home Care Allowance program (HCA). This program provides substantial payments to mothers who stay home with their children from age ten months through 3 years old, rather than placing the children in formal child care, which is almost exclusively publicly-financed and of relatively high-quality in international comparison. The HCA program has a long tradition in Finland. It was introduced in 1985 and more than 80% of mothers in Finland utilize the HCA. As a result, the share of children in formal child care is much lower in Finland than in other Nordic countries...
Gruber et al. exploit variations in the value of HCA across municipalities, because each municipality could provide a supplement to the HCA, and many have done. The value of these supplements changes over time, and that is the variation that is key to assessing the impact on mothers and children. Essentially, they look at how differences in the amount of HCA assistance affect mothers' work, and children's outcomes, using linked data from the Finnish population register, birth registry, tax and benefits records, early childhood data from clinical assessments of children's readiness for school, and education and youth crime records for when the children were older. The early childhood data are interesting:
The individual tests we consider for four years olds (from 2010 onwards) are Cross (needing to draw a cross, where the two lines intersect), Ask (the child is able to ask following types of questions: when and where?), Details (the child is able to explain details from a specific picture), and Colors (the child is able to identify three out of four main colors from a color card). The tests for five years old (prior to 2010) are Circle (the child can cut a circle from a paper with scissors), Square (the child is able to draw a square on paper), Human (the child can draw human that has at least head, body and limbs come out of body, not from head), and Instruct (the child is able to follow three-part instructions).
Gruber et al. apply a difference-in-differences approach with a continuous treatment variable (the amount of HCA assistance received), which essentially estimates how a 100-Euro change in the HCA supplement amount affects outcomes between the years before and after the supplement changes. The results in terms of mothers' employment are summarised in Figure 1 in the paper:
Notice the big drop in employment that occurs at Time 0, which is when there is a 100-Euro increase in the HCA supplement. However, eyeballing the figure, while the point estimates are negative, it looks like they are not statistically significant (at the 5 percent level). When they move to a more standard difference-in-differences (rather than a dynamic DID approach), the results are statistically significant. Nevertheless, for this analysis Gruber et al. note that:
Maternal labor supply then falls by about 1.5% for each 100 euro increase in the homecare allowance and remains at that level in the municipalities that increased their supplement amount. So supplements are clearly reducing maternal work in favor of at home care, and the effect corresponds to about 5 percent reduction when compared with mean share of employment of mothers of one-year-old children.
Gruber et al. also show that the HCA supplement leads to a decrease in maternal labor income, but an increase in total income." Interestingly, they go on to show that their:
...estimates are large enough to explain the entire difference between the Finnish and (for example) Danish levels of short run child penalties of 20%.
Turning to children's outcomes, they find that:
...children become more likely to fail the cognition test at age four or five when their parents were eligible for higher HCA supplements at child’s age 1...
After an increase in supplement when one year old, enrolling to academic high school declines and committing a youth crime increases.
Needless to say, these are all bad outcomes for children. Gruber et al. then move onto a standard DID approach in order to better quantify the effects, and find that:
...the impact of receiving a 100 euros per month supplement when the eligible child is one year old is to reduce the employment of mothers by -1.27 percentage points, which is a roughly 5% decline in the odds of working... the impact on annual labor earnings is –194 Euros. Given the increase in HCA of 273 Euros... this suggests an almost three-quarters “crowdout” of the income benefits of HCA; that is, for every dollar of HCA received, mothers offset 72 cents through lower labor earnings... the effect of supplement on all income including earnings and taxable income transfers (including HCA and supplements). The effect on this outcome is 237 Euros.
So, mothers work less, earn less labour income, but receive higher total income as a result of the HCA supplement. In terms of child outcomes though:
...a 100 euro per month increase in the supplement leads to a statistically significant 1.78 percentage point increase in the odds of failing a test; the effect size represents about 7% increase from the baseline failing rate...
...higher HCA in form of supplements when the child is one year old leads to -.6 percentage point decline in the odds of enrollment in an academic high school, which is about 1 percent of the sample mean...
...each 100 euros per month of supplement leads to a rise in youth criminal sentencing of .22 percentage points, off a mean of 4 percentage points, a roughly 6% effect...
All of those effects are statistically significant. And they all point to the homecare supplement having negative impacts on children's short-term and long-term outcomes. Perhaps that is uniquely due to the homecare supplement? Gruber et al. go on to investigate a daycare reform in 1997 that unified daycare fees across the country. As a result, some families ended up paying higher daycare fees, while others paid lower fees. A 100-Euro increase in daycare fees should have a similar (but opposite direction) effect to a 100-Euro increase in the HCA supplement. Indeed, Gruber et al. find an effect of the daycare fee change that is of a similar magnitude, but in the opposite direction, to the HCA supplement results.
That they find similar effects based on changes in HCA supplement and daycare fees should provide some confidence in the results. However, we should treat them with a little bit of caution for at least a couple of reasons. First, as I noted in this post, the 'two-way fixed effects' approach that they have adopted has recently attracted a lot of criticism (which is nicely outlined in two posts on the Development Impact blog, here and here, as well as this post). The short version is that the two-way fixed effects approach is likely to lead to biased estimates of the treatment effect. Gruber et al. do try a few ways of dealing with this, and the results are robust to the approaches they adopt, but given that their dynamic DID results are statistically insignificant, this still leaves me concerned. Second, Finland is somewhat unique in the pervasiveness of homecare. As they note in the paper, 80 percent of mothers make use of the homecare allowance, which is a high take-up rate. It's not clear that similar effects would be observed in other countries.
This external validity problem is the biggest issue for me. Mothers are essentially choosing between homecare, where they look after the children and teach them the basics required to prepare them for school (with whatever resources and support they have available to them), or they send the children to a daycare service, which employs professionally-trained early childhood educators to perform the task. There are pros and cons either way, but in terms of school readiness, the daycare may have the edge. On top of that, Finland has a high-quality, publicly funded daycare system, which further tilts the balance in favour of daycare. In countries where the daycare system is of lower quality, the negative impacts on child outcomes are likely to be smaller, or perhaps absent entirely.
Gruber et al. conclude that:
...there may be limits to general international lessons from such policy analyses, and that conclusions are best drawn on a country-by-country basis.
Given the issues of external validity I've noted above, I'd say that further research in other countries is imperative, before we definitively conclude that homecare of children is bad for them.
[HT: Marginal Revolution, last year]
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