The Determinants and Consequences of Child Care Subsidy Receipt by Low-Income Families

This paper provides an early analysis of child care subsidies under welfare reform. We review the literature on child care subsidies and discuss the potential for such subsidies to be an effective part of the effort to make low-income families economically self-sufficient. Previous studies of child care subsidies use data from the pre-welfare-reform period, and we discuss the potential difficulties in drawing inferences from those studies that can be applied to the very different post-reform environment. We use new household survey data from the early post-reform period to analyze the determinants of subsidy receipt and the effects of subsidy receipt on employment and welfare participation. The analysis uses data from the National Survey of America?s Families (NSAF), conducted by the Urban Institute in 1997. This is the only available national household survey from the post-welfare-reform period that includes information about child care subsidies. The NSAF includes a large number of current and former welfare recipients and other low-income families. State of residence is identified in the NSAF, so we are able merge information on the characteristics and rules of state welfare and child care subsidy programs with the household data. We use the data to address two issues. First, how do household characteristics and state subsidy rules and expenditure affect the likelihood of receiving a subsidy? Key household characteristics include family size and structure, and past participation in welfare. Second, how does subsidy receipt affect employment and welfare participation? Child care subsidies were received by about 10 percent of the sample. Subsidy recipients were about 2.5 percentage points more likely to be employed than nonrecipients, and about 5 percentage points more likely to be employed after controlling for family characteristics. Subsidy recipients were also about eight percentage points more likely to be enrolled in school, no more likely to be unemployed, and about 15 percentage points more likely to be on welfare than nonrecipients. The welfare participation difference falls to 10 percentage points after controlling for family characteristics. We cannot determine whether these are causal effects, since there is no source of plausibly exogenous variation in subsidy receipt in our data. Taken at face value, the results suggest that child care subsidies encourage employment and school enrollment among welfare recipients, but not among nonrecipients. The child care subsidy program created as part of the welfare reform of 1996 - the Child Care and Development Fund (CCDF) - is intended to facilitate participation in employment and employment-related activities such as education and training. Thus it is not surprising that a mother is more likely to be employed or in school if she receives a child care subsidy. The guidelines for implementing the CCDF state explicitly that current and former welfare recipients and families at risk of reliance on welfare should have priority for child care subsidies. This may explain why subsidy recipients are more likely to be on welfare than nonrecipients. This paper appears as Chapter 10 in the edited volume The Incentives of Government Programs and the Well-Beings of Families. To view the contents of the entire volume, please click here.