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child care and the rates are much higher across the OECD countries in ages between 3 and 5. Given the high enrollment rates in child care services and pre-school programmes, the quality of child care can have dramatic effects on entire generations.

The differences across OECD countries in the methods of child care provision and financing can result in quality differences. Unlike prices, for which indicators are widely available, measuring child care quality is difficult. Blau (1997) makes the useful distinction between structural indicators such as staff to child ratios or staff qualifications as inputs and the quality of children’s educational experience and child-caregiver interactions as outputs of quality production in child care centers. The latter is defined as process quality by developmental psychologists and are measured using assessments based on classroom observations. Unlike attending formal child care where there is mixed evidence regarding effects on child development, higher process quality is generally positively related to child development (Burchinal et al., 2000; Vandell et al., 2010).

Due to the cost of measuring child care quality, most surveys including it are country specific. In this thesis, a recent survey of Dutch child care centers and parents, Pre-Cool, is used to analyze the production of child care quality. The Pre-Cool survey is similar in structure to the well-known longitudinal panel of the American National Institute of Child Health and Development (NICHD) called the Study of Early Child Care and Youth Development (SECCYD). The Dutch child care system has undergone considerable transformation since the Child Care Act of 2005, which introduced a private market for the daycare services with concurrent subsidies for parents’ child care expenditures. The policy trend between 2005 and 2008 was towards increasing subsidies especially for high income parents, which led to the current situation where over 300,000 of households with children receive child care subsidies. As of 2012, the subsidies became less generous for middle income and high income families and were especially reduced for second sibling in child care. Figure 1.5 shows that across OECD countries in 2010, the Netherlands had one of the largest proportions of children under 3 in child care.

Other than the large size of its child care sector, the Netherlands has has three distinct advantages for the analysis of child care quality and its effects. First, the introduction of the private daycare market in 2005 allows for a study of how market forces, primarily competition, affects child care quality. Second, the recent changes in the subsidies paid to parents allow for natural experiments that exploit these changes.

Figure 1.5: Child care enrollment rates 2010

Source: OECD Family Database

Third, Dutch playgroups, which are pre-schools targeted to children aged 2.5 and 4 and provide part-time child care for single income families, form a potential control group for the effects from market forces or subsidies on daycare centers since they are funded by municipalities.

1.2 Outline and overview

Any economic study on child care or female labor force participation can trace its lineage to the theoretical work by Becker (1960) on household behavior and to the econometric foundations of Heckman (1974) in estimating female labor supply. While the starting point for the present thesis is the economic literature on female labor supply, the latter part of the thesis introduces and analyzes child care quality as defined by developmental psychologists. Within economics, the study of child care quality and child development in general is more recent than the study of labor supply. While effects on mothers’ employment from child care services is analyzed within the labor supply literature, effects on child development are closer to the human capital literature. If early childhood and consequently child care quality has large effects on future life outcomes, study of pre-primary education becomes a natural extension of the human capital literature in economics that largely focuses on post primary schooling (Heckman, 2006).

The thesis begins with two chapters that directly study mothers’ employment. Chapter 2 reviews and analyzes, using meta-analysis techniques, the extensive literature on child care prices and labor supply. The chapter shows that methodological improvements have been made over time, especially with the introduction of studies

using natural experiments and flexible multinomial choice models. However, even more than the methodological differences, the context and timing of the studies may explain the variation found in the estimated elasticity of employment with regards to child care prices. Over time, child care prices have become less important in women’s decision to work. In countries like Sweden where female employment rates are similar to that of male employment, Lundin et al. (2008) have found that further decreases in already low prices do not seem to dramatically affect employment behavior. A similar result is found in Norway using a natural experiment by Havnes and Mogstad (2011a). This is in contrast to earlier studies in the United States where large employment elasticities were found (Ribar, 1995; Connelly and Kimmel, 2003a). Using regression techniques from the meta-analysis literature, the chapter attempts to determine whether there are clear patterns to where and when child care prices have a large effect on employment.

The other main public policy besides subsidizing child care has been paid or unpaid parental leave arrangements. Chapter 3 updates the results of earlier studies, particularly that of Ruhm (1998), by using a difference-in-differences to estimate the effects of changes in parental leave legislation on female labor market outcomes. Using aggregate OECD data from 1970 to 2008, a dataset is generated that traces the changes in parental leave legislation during that period for 16 European countries. Male labor market outcomes serve as the main control group to estimate the effects of changes in parental leave legislation on female employment, wages and occupations. We use ILO wage data for manufacturing and financial sectors as proxies to study both low and high skill wages.

The following three chapters of the thesis analyze the production of child care quality and the effects of quality on labor supply. The primary dataset in all three studies is Pre-Cool, a longitudinal survey of child care centers and parents from the Netherlands. Chapters 4 and 5 of the thesis focus on the production of quality itself. Blau (1997) provides early evidence on how center characteristics such as size or age affect child care quality. One possible framework to analyze the production of quality is to define it as an outcome of variables from three sets. The first set of variables are the previously studied center characteristics such as staff-to-child ratios, teacher qualifications and center size. The second set is the market in which the center operates. The final set of variables consists of national policies and legislation that affect the behavior and decisions of both the centers and the parents. In chapter 4, I study the second level by analyzing the effects of market competition. In chapter 5,

the level of national policies are studied through an analysis of subsidies. Analogous to studies in schooling, and other sectors such as manufacturing or

health care, chapter 4 considers how competition affects child care quality. Similar to other service sectors, the effects of competition on quality and prices are not theoretically straightforward due to market imperfections and information asymmetries. I use the number of centers in Dutch neighborhoods as the competition variable and instrument it using number of schools and births from previous years to estimate its effect on child care quality. Child care quality is measured within the Pre-Cool survey using process quality measures introduced in the child development literature. The chapter analyzes the potential effects of private sector competition on the quality of both the private daycare centers and the municipality funded playgroups.

Chapter 5 introduces the role of public financing of child care services. Specifically, we analyze the effect of a subsidy reduction in 2012 on Dutch daycare centers’ quality. Previous studies of such effects relied generally on reduced-form, crosssectional evidence (Johnson et al., 2012). The timing of the Pre-Cool survey before and after the subsidy reduction provides an interesting opportunity to estimate potentially causal effects using quasi-experimental methods. The playgroups that are funded through the municipalities are not affected by the subsidy cut and are used as the control group. Using both linear and non-linear difference-in-difference estimators, I estimate both the main and quantile effects.

Chapter 6 returns to the labor market to analyze the effects of child care quality on female labor supply. Quality is introduced into the existing structural econometric models found in Ribar (1995) and Tekin (2007) as a variable similar to child care prices. Reduced form equations are used to predict wages, child care prices and child care quality for the women in the Pre-Cool sample. These predicted values are included in a random coefficient multinomial logit model that estimates their effects on mothers’ choice of employment. While the data sample is small compared to previous literature on child care prices and employment, the chapter provides a rare analysis of effects from child care quality on female labor supply.

The final chapter summarizes and discusses the main results and considers their policy implications. Several future research avenues based on the chapters are also suggested.

confidence bounds.

A number of explanations can and have been offered for the variation in estimated elasticity sizes. A first set of explanations refers to study-specific factors such as methodology employed or sample characteristics; a second set takes into account macro level factors such as the overall female participation rate or the flexibility of the labor market. Aggregate indicators and institutional factors are inevitably ignored in micro level studies since they are essentially exogenous to the analysis and show no variation. However, a meta-analysis of the results found in the literature can scrutinize both groups of explanations for variation in elasticity estimates, since we can compare results from different labor markets and samples. The estimates we collected allows for a study of estimates from 12 countries and spanning 30 years.

The rest of the chapter is organized as follows. Section 2 provides a brief overview of the basic labor supply models with child care and discusses how macro level factors may be interpreted within the micro level model. Section 3 discusses the literature findings and describes the methodologies used, the differences in sample characteristics and the macro level trends in elasticity estimates over time and across countries. Section 4 presents a meta-regression, testing the various explanations offered in sections 2 and 3 for the variation in elasticity sizes. Section 5 concludes.

2.2 Theoretical Framework

2.2.1Basic Models of Child Care and Labor Supply

The importance of child care prices for female labor supply was recognized in Heckman (1974) which is called the ’pioneering study in the field’ by Blau and Robins (1988). The most commonly found theoretical basis for analyzing the effect of child care prices on labor supply in the literature is grounded on the simple static labor supply model with modifications to include child care prices and choices. A number of variants of the static model have been proposed with varying degrees of flexibility by including child care quality, unpaid care and household decision making (Blau and Robins, 1988; Connelly, 1992; Ribar, 1995; Powell, 1997; Tekin, 2007). The general setup and implications of the models do not differ significantly. This section begins with the simplest version of the static labor supply model and adds two of the more common and empirically relevant modifications: unpaid care and quality.

The starting point of labor supply models involving child care is a utility function consisting of consumption C and leisure l. The maximization problem has two constraints; time l + h = 1 and budget C = y + (w p)h where y is non-labor income, h is hours of work and p is price of formal child care. In this basic budget constraint, the price of child care is treated like a tax on wages with each hour of work requiring the purchase of an hour of child care. The implications of changes in the price of child care are thus similar to a change in taxation, with higher prices making it less

likely for the effective wage rate w p to exceed the reservation wage.

Two common modifications to the basic model found in the theoretical side of

the literature are unpaid care and quality. The addition of unpaid care to the model

relaxes the assumption that hours of formal child care use must be equal to working

hours and provides an explanation for the observation of working women who do

not use formal care. Instead, as in Blau and Currie (2006), the sum of unpaid care hours u and formal child care hours hf may be assumed to be equal to working hours, u + hf = h. If the costs of unpaid care are assumed to be equal to the caregiver’s

market wage, the shadow price of unpaid care could be added directly into the budget

constraint. A simpler approach is to add the leisure lc of the unpaid caregiver directly into the utility function. Subject to the time constraint of the informal caregiver

u + lc = 1, there is a disutility associated with the use of unpaid care. If child care quality is equal across care types, the price of child care can be related to unpaid care

with the condition Ulc = p. This equality implies that the cost of an extra hour of

Uu

formal care is equal to that of informal care. The price of formal care can then be used as an indicator of the shadow price of informal care.

A second modification is based on relaxing the assumption that the quality of child care is homogenous among maternal care and other care types, by defining and including in the utility function a term for quality given by q = (1 h,C). It is assumed that care quality is improved by maternal care and consumption goods. Following Ribar (1995), the resulting maximization problem from these two modifi-

Subject to the consumption constraint C = y + hw hf p and time constraints h + l = 1, lc + u = 1 and hf + u = h. Manipulating the first order condition of this problem with respect to h, the reservation wage can be defined as: