Child Care Costs and the Return-to-Work Decisions of New Mothers
Barrow, Lisa, Economic Perspectives
Introduction and summary
Women's labor force participation has nearly doubled over the last 50 years, from 31.0 percent in January 1948 to 60.6 percent by March 1999 (based on monthly data from the Current Population Survey). For women with young children, the increases have been even more dramatic. From 1947 to 1996, the labor force participation rate of women with preschool-aged children increased by more than a factor of five, rising from 12.0 percent to 62.3 percent (U.S. House of Representatives, 1998). The rapid increase in participation of women with young children indicates that women are spending less time out of the labor force for child bearing and rearing. Indeed, looking at new mothers in the National Longitudinal Survey of Youth (NLSY), of those who were working prior to the birth of their first child, three-quarters were back at work within a year of the birth.
An important consequence of the trend toward more rapid reemployment of new mothers is that recent generations of women will have more actual labor market experience (at each age) than their predecessors.  In labor economics, a standard analysis of the relationship between wages and education and age (reflecting potential experience) shows that wages increase with years of potential experience. For women, potential experience is likely to exceed actual experience by more than for men. Thus, the increase in women's actual work experience should be reflected in a narrowing of the gender earnings gap. In fact, despite the growing wage inequality of the 1980s, the male-female earnings gap has been closing steadily since the late 1970s. From 1978 to 1990, the ratio of female to male earnings rose from 0.73 to 0.85 for whites and from 0.60 to 0.70 for African-Americans.  According to O'Neill and Polachek (1993), about one-quarter of the closing of the male-female wage gap over the 1976-87 period can be attrib uted to changes in the actual labor force experience of women and an additional 50 percent can be accounted for by changes in returns to experience for women relative to men. Realistically, working women who choose to have children will have to take some time off of work either by taking family, sick, or vacation leave or by exiting the labor market entirely. However, given the importance of experience in determining wages, the faster women return to work following childbirth, the closer their actual experience will be to their potential experience and the smaller the average earnings penalty for women who have children.
In this article, I examine the economic determinants of a woman's decision to return to work quickly following childbirth. I consider three key factors in this decision: the opportunity cost of taking time out of the labor force (that is, the potential wage rate available to a woman), the wealth effect of other family income, and most particularly, the opportunity cost of working outside the home in terms of child care costs.
I first describe a simple theoretical model of a new mother's return-to-work decision. The model predicts that the decision to return to work will depend on a woman's wage net of hourly child care costs and other family income (including spouse or partner income). I then test the theoretical model as closely as possible. In order to get a measure of child care costs faced by women as they decide whether to return to work, I calculate average child care worker wages across states and over time to proxy for variation in child care cost across states and over time. I find that women with higher wages are significantly more likely to return to work, and women facing higher child care costs or having greater other family income are significantly less likely to return to work after first birth. I also find that older women, women with more education, and women whose adult female role model was working when they were teenagers are more likely to return to work.
Additional interest in women's labor force participation has been generated by the reforms to welfare programs that have a primary goal of getting recipients off of welfare and into the work force. …