The Impact of Regulations on the Supply and Quality of Care in Child Care Markets

Abstract

We examine the impact of state child care regulations on the supply and quality of care in child care markets. We exploit panel data on both individual establishments and local markets to control for state, time, and, where possible, establishment-specific fixed effects to mitigate the potential bias due to policy endogeneity. We find that the imposition of regulations reduces the number of center-based child care establishments, especially in lower income markets. However, such regulations increase the quality of services provided, especially in higher income areas. Thus, there are winners and losers from the regulation of child care services. induces child care centers to use less-skilled aides and fewer teachers. Second, to the extent that imposing regulations actually eliminates lower quality child care services, some parents and children -especially those who are poor -may be "priced out" of the market for such services or face inadequate supplies of such services. Finally, states only regulate part of the market for nonparental child care services and the stringency of these regulations can vary across types of child care providers. While most states regulate the providers of organized child care (e.g., childcare centers), they often impose fewer and less stringent regulations on other non-relative forms impose on the learning of other children (Edward Lazear, 2001).3 of care (e.g., family day care homes), and typically do not regulate care provided by relatives (e.g., grandparents) at all. Because compliance with regulations usually is costly and can result in higher prices, some parents may be induced to substitute away from regulated providers so their children may end up in lower quality care.To determine the intended and unintended consequences of the child care regulation, we investigate the impact of imposing minimum standards on the inputs used in production of child care services on supply and quality of such services. For this purpose, we have assembled a unique panel dataset obtained by merging child care center data from the Census of ServicesIndustries (1987, 1992, and 1997) with state regulation data and information on the accreditation of child care centers by the National Association of Education for Young Children (NAEYC).The resulting data set contains detailed information on establishments, including their legal form of organization, tax-exempt status, revenue, payroll, employment and accreditation, as well as the state-level child care regulations on various aspects of the provision of child care services.Furthermore, we have gathered state-level data on family day care homes for the corresponding Census years to examine the cross-effects of center regulations on this alternative form of child care.Ours is not the first study seeking to estimate the causal effects of child care regulations on the supply side of the child care market. We have three sets of findings. First, the imposition and greater stringency of regulations of child care centers reduces the number of these cent...

Entry and Quality Choices in Child Care Markets

“…The model presented in Section 3 and the empirical ndings we have documented are consistent with the estimates reported by Hotz and Xiao (2010). In the context of the equilibrium patterns represented in Figure 4, let us assume that a minimum quality standard q m is imposed, which applies to every child care center in the city.…”

“…Using panel data for the United States, Hotz and Xiao (2010) report two main ndings: (1) more stringent regulations on establishment inputs reduce the number of child care centers, especially in lowerincome markets; and (2) such regulations increase the quality of care, as measured by the share of establishments accredited by an independent authority, especially in higher-income locations. Hence they conclude that the costs of regulation are disproportionately felt by consumers in poorer markets.…”

“…In in uential work, Hotz and Xiao (2010) examine U.S. panel data on state regulations and child care centers, and conclude that the imposition of more stringent minimum standards generates winners and losers, the latter of whom tend to be concentrated in low-income areas. In particular, they provide evidence that the regulation of child care inputs: (1) reduces the number of child care centers, especially in low-income markets; and (2) increases the quality of provision, as as measured by the share of centers accredited by an independent authority, especially in high-income areas.…”

“…We have not pursued this path, as in the data it is common to observe centers with similar brand operating in different city districts. For the US, Hotz and Xiao (2010) are able to identify precisely child care centers af liated with a chain, and report that a chain may have as many as 1,000 establishments. Notice, however, that all results would prevail if we were to assume that there exists a continuum of local providers in each district, and that each provider decides whether or not to enter the corresponding district.…”

The Early Years: Child Well-being and the Role of Public Policy

“…If the standard is too low, the market may offer too many providers close to the minimum quality, leaving the demand of parents willing to pay for a higher standard unsatisfied. If the standard is too high, the total supply of childcare services may be too low to satisfy demand, particularly for lowincome parents, which may drive them to a completely unregulated sector (Hotz and Xiao 2011).…”