Are Higher Child Care Wages Affecting the Labor Supply?

In our previous post, we examined the labor force participation (LFP) rates for various demographic groups to see whether the availability and cost of child care have had an impact on the labor supply. That examination did not yield clear evidence supporting such a hypothesis.

In this post, we analyze state-level data over time to determine whether higher child care wages are affecting the labor supply. We examine whether states that saw greater increases in child care costs also showed weaker rebounds of LFP rates for individuals with children.

The exposure to pandemic-related factors may vary for different population groups, and the groups may exhibit different trends in the labor supply unrelated to the pandemic. By using state-level data, we can control for group-specific trends in LFP. Moreover, there may be a noncausal comovement of child care wages and labor supply.

Analyzing the Impact from Rising Wages of Child Care Workers

Rising child care wages may reflect the general tightening of labor markets and increasing wages in other industries. To control for this comovement, we examined LFP rates of different groups only in comparison to the baseline group—the group which is unlikely to use child care services.

To perform this analysis, we employed the Quarterly Census of Employment and Wages (QCEW) and the Current Population Survey (CPS). QCEW is conducted by the U.S. Bureau of Labor Statistics every quarter. It provides information on employment and wages reported by employers covering more than 95% of U.S. jobs available by detailed industry at the county, metropolitan statistical area, state and national levels. We used it to obtain state-level wages of child care workers.

CPS is conducted by the U.S. Census Bureau every month. It provides individual-level information on labor market outcomes and demographics. We used it to construct state-level LFP rates for different population groups. We focused on changes over the period between the first two quarters of 2019 and the first two quarters of 2022.

We estimated the effect of child care worker wages on four groups of the population:In this post, we did not separate groups by children’s age due to sample size issues.

• Partnered men with children
• Single men with children
• Partnered women with children
• Single women with children

Rising Child Care Wages Slightly Dampened LFP Growth Rate

To this end, we estimated a regression model for each group. For each regression, we worked with all 50 states and two groups—one is the group of interest and one is the baseline comparison group, which we chose to be represented by men under the age of 55 without children in the household.We regressed the change in LFP rate of group g in state s on a constant (which captures the nationwide trend for the LFP rate of the baseline group), the dummy for the group of interest (which captures the additional nationwide trend specific to the group of interest), the state-specific change in child care weekly wages (the coefficient captures noncausal comovement of wages of child care workers and LFP rate of the baseline group) and the same term interacted with the dummy for the group of interest. We are interested in the coefficient on this last (interaction) term (i.e., the causal effect of child care worker wages on the LFP rate of the group of interest).

Our model estimated the causal effect of child care worker wages on the LFP rate of the group of interest. These estimates, along with their standard errors, are given in the table below.

The negative effect is seen for all groups with children in the household, except for single men. The effect is statistically significant (at a 5% level) for only one of the groups—partnered women with children, which is indeed the group that typically exhibits higher elasticity of labor supply. For this group, the estimated effect measures -0.03: This implies that the 21% increase in child care worker wages (that’s the aggregate increase from the first half of 2019 to the first half of 2022) dampened the growth in the labor force participation rate of partnered women with children by 0.63 percentage points relative to men younger than 55 without children.

Rising Child Care Wages Appear to Have Affected Recovery in Partnered Women’s LFP Rate

During the first half of 2022, the LFP rate of partnered women with children increased by 1.06 percentage points. In fact, our previous post (which covered rates through early 2023) pointed out that partnered women with young children showed the strongest labor supply rebound among the groups.

Our results in this post suggest that, had it not been for rising child care worker wages, we would have likely seen an even stronger LFP rate of partnered women with children today. One reason why this group dramatically increased their market work, despite the rising child care prices, may be related to the rise in prevalence of telecommuting jobs for which this particular group has a high preference.

Overall, child care costs do not explain the LFP sluggishness seen among the other demographic groups. Moreover, different trends seen for different groups are unrelated to child care costs and driven mainly by aggregate group-specific trends.

Notes

1. In this post, we did not separate groups by children’s age due to sample size issues.
2. We regressed the change in LFP rate of group g in state s on a constant (which captures the nationwide trend for the LFP rate of the baseline group), the dummy for the group of interest (which captures the additional nationwide trend specific to the group of interest), the state-specific change in child care weekly wages (the coefficient captures noncausal comovement of wages of child care workers and LFP rate of the baseline group) and the same term interacted with the dummy for the group of interest. We are interested in the coefficient on this last (interaction) term (i.e., the causal effect of child care worker wages on the LFP rate of the group of interest).