Letting the “Childless Cat Lady’s” Cat Out of the Bag: New Evidence on Childcare Costs, Female Labor Supply, and Fertility Rates

A new study by last year’s Nobel prize winner in Economics, Claudia Goldin, reveals that a widely subsidized childcare program didn't boost the female labor supply, but alternative solutions exist.

Image generated by DALL·E 3

The coupling effect of declining fertility rates and soaring childcare costs have sparked widespread concern. While some politicians resort to the tactic of scapegoating women for these issues, media outlets often simplify the conversation with catchy, oversimplified slogans like “$10 a day” childcare policies, mirroring Canada’s approach. 

A 2019 New York Times article also reignited discussions about reviving WWII-era childcare policies akin to the Lanham Act, which to this day, is the only example in U.S. history of an (almost) universal, largely federally-supported childcare program. 

The Lanham Act, signed into law in 1940, was a federal infrastructure bill that was used during World War II to fund childcare programs for the preschool and school-aged children of working mothers.

The New York Times article claims that the Lanham Act should serve as a model for modern childcare policy, pointing out its benefits during wartime. However, a distinguished group of economists, including last year’s Nobel Laureate Claudia Goldin, argue that the program's effectiveness falls short of justifying its use as a blueprint for a large-scale federally funded policy today​​.

Analyzing city and town data, including war contracts, childcare program expenditures, and the reserve labor force of mothers, the study found that although these programs received substantial funding, they started late, were narrow in their reach, and did not significantly boost women's employment on a large scale. 

The reason these programs were not effective in boosting women’s employment is largely because the programs served areas with already high female labor participation, effectively supporting children of women who were already part of the workforce. This selection effect meant that the programs did not significantly draw new women into the labor force thus failing to boost it. 

Furthermore, data from the 1944 Women's Bureau surveys show that only about 5% of employed mothers with children under 14 utilized nursery schools provided by the program.  That’s partly because the majority of childcare was managed informally, with family members, including siblings, or by husbands working alternate shifts stepping in.

Therefore, claiming that the Lanham Act should be the model for nationwide federally funded childcare programs is misguided. It’s of course possible to make such a program today more effective, but policies like the Lanham Act would not do much in addressing the disproportionate penalty women face in lifetime earnings compared to men when they have children, even in countries with heavily subsidized childcare. For example, the evidence from Denmark (which has one of the most highly subsidized childcare programs in the world), shows that the “arrival of children creates a long-run gender gap in earnings of around 20 percent driven by hours worked, participation, and wage rates.”

That’s primarily because childcare is still considered a female labor issue, despite the reality that most children have two parents. In today's economy, while many families benefit from dual incomes with women increasingly advancing on the earnings front, men have yet to match their contributions to home production at the same pace. For example, the American Time Use Survey shows that even in families where wives are the primary earners, husbands enjoy an average of 8.8 more hours per week of leisure time than their wives when work hours, leisure, and caregiving are taken into account.

This trend makes sense to those who understand how monetary incentives work. As soon as labor market barriers were lifted for women, they rushed to become more competitive, earn degrees, and innovate in the new world—driven not only by their ambition but also by a clearer incentive: salary. However, for men, addressing the gap in domestic responsibilities is not driven by direct monetary incentives. Addressing the childcare challenge requires a fundamental shift in society, one that strengthens negotiation and cooperation within households. This is the dialogue we need for long-term social reform.

In the meantime, there are few things that we know work.

Solutions to Reduce Childcare Costs

Cutting back on child-care regulations and bringing in more low-skilled immigrant workers can help make child care cheaper, enable more women to enter the workforce, and boost fertility rates.

For instance, a 2024 study revealed that reducing regulations on childcare facilities has a great impact on fertility preferences. Although the study doesn't delve into women's labor force participation, it does highlight an equally important area—fertility preferences. Here, the impact of reducing regulations around childcare facilities is strikingly significant. It's surprising that while the discussion often focuses on the high costs of childcare, a fundamental economic principle is overlooked: the price of a service, such as childcare, is dictated by its demand and supply. When excessive regulations inflate childcare costs, these facilities are unable to offer their services at prices that parents can afford.

The authors find that states with less stringent childcare regulations have narrower fertility gaps. Since easing regulatory requirements for group size and child-to-staff ratios, while preserving quality through teacher training, reduces childcare costs without necessarily compromising quality, lowering these costly regulations would better support women in achieving their desired family sizes.

Other research also considers the impact of childcare regulations on mothers’ labor market outcomes. One study specifically finds that decreasing the child-to-staff ratio by 2.0 children per teacher would raise the average cost of center-based care by 12%, leading to 8% fewer children being placed in these centers and a 1% drop in the number of mothers entering the workforce. Additionally, another study points out that tighter regulatory controls significantly diminish the availability of licensed childcare centers in a region.

Other approaches to reducing childcare costs include increasing low-skilled immigration in the U.S., which tends to lower the cost of household services. This reduction can encourage natives, particularly those with high time-opportunity costs, to outsource home production tasks and potentially increase their participation in the labor market. Countries like Singapore, Hong Kong, and those in the Middle East have specific programs that issue temporary visas to foreign domestic workers (FDWs) to work in their household sectors. These FDWs provide affordable, live-in assistance, significantly benefiting households— for instance, in Hong Kong in 2006, about 8% of households employed at least one live-in FDW, and this figure rose to over one-third among families with young children. Unlike direct childcare subsidies from the government, these market-based solutions tend to more effectively influence the labor choices of highly skilled women, who stand to gain the most from hiring household help.

However, for some parents, lowering the cost of formal childcare may not do the trick. Evidence shows that highly educated parents prefer to personally raise their children. If these parents prefer to spend considerable time on childcare, simply providing unlimited cheap childcare may not address the issues of low fertility, the female labor supply, or the disproportionate impact of childrearing on women's lifetime earnings. Indeed, intra-household bargaining to achieve equitable distribution of home production becomes relevant again in this context. 

Conclusion

The Lanham Act intended to provide support to working mothers in selected industries and regions chosen by the government during World War II to meet the demands of the war, where women were already working. To match the economic realities today, we need to dive deeper and untangle what actually makes childcare unaffordable and explore existing solutions that may be more effective than implementing large-scale federal programs like the Lanham Act. Reducing regulations around childcare facilities and allowing more domestic workers can do exactly that.

For a vast majority of households, reforming some policies that inflate the costs of childcare can be a good start. At the same time, as societal narratives evolve to promote greater emphasis on intra-household negotiations, this could help ensure an effective distribution of domestic responsibilities in the long-run.