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With strings attached: Grandparent-provided child care and female labor market outcomes Eva Garc´ıa-Mora´n and Zoe Kuehn Universitat della Svizzera Italiana, Center for Economic and Political Research on Aging, Universidad Aut´onoma de Madrid, Departamento de An´alisis Econ´omico: Teor´ıa Econ´omica e Historia Econ´omica

August 2013

Online at http://mpra.ub.uni-muenchen.de/49248/ MPRA Paper No. 49248, posted 23. August 2013 13:33 UTC

With Strings Attached: Grandparent-Provided Child Care and Female Labor Market Outcomes∗ Eva Garc´ıa-Mor´ an† Zo¨ e Kuehn‡ August 2013 Abstract Grandparents are regular providers of free child care. Similar to other forms of child care, availability of grandparent-provided child care affects fertility and labor force participation of women positively. However, grandparent-provided child care requires residing close to parents or in-laws which may imply costly spatial restrictions. We find that mothers residing close to parents or in-laws have lower wages and that the probability of having to commute increases if relatives provide child care. We build a model of residence choice, fertility, and female labor force participation that can account for the observed relationships. We simulate our model to analyze how women’s decisions would change if the availability of grandparent-provided child care or family policies were altered. We find that if child care subsidies were raised to the Swedish level, fertility and mothers’ labor force participation would increase, while mobility would remain unchanged. The absence of grandparents, on the other hand, would increase mobility, while it would only have limited negative effects on aggregate fertility and labor force participation. JEL classification: J13, J61, H42, R23 Keywords: grandparent-provided child care, fertility, labor force participation, spatial restrictions, regional labor markets

∗

Earlier versions of this paper have been awarded UWIN Unicredit’s Prize for Best Paper in Gender Economics 2012 and the Etta Chiuri Prize 2012. We would like to thank all participants of the Workshop on Gender Equality at Bocconi University for their interesting comments and observations, especially Barbara Petrongolo, Alberto Alesina. We are grateful to Vincenzo Galasso for his useful comments. We would also like to thank two anonymous referees for their useful comments. Zo¨e Kuehn gratefully acknowledges financial aid by FEDEA (Fundaci´on de Estudios de Econom´ıa Aplicada) in the context of the project “Evaluaci´ on de Pol´ıticas P´ ublicas (ECO2011-30323-C03-01) of the Spanish Ministry of Science and Research. † [email protected] · Center for Economic and Political Research on Aging · Universit`a della Svizzera Italiana ·Via Giuseppe Buffi 6 · 6900 Lugano· Switzerland. ‡ [email protected] · Universidad Aut´ onoma de Madrid · Departamento de An´alisis Econ´omico: Teor´ıa Econ´ omica e Historia Econ´ omica · Campus de Cantoblanco · 28049 Madrid · Spain.

1

Introduction

Grandparents are an important source of child care. According to data from the 2nd wave of the Survey of Health, Ageing and Retirement in Europe (SHARE), between 18% (Denmark) and 49% (Italy) of grandparents take care of their grandchildren age six or younger on a daily or weekly basis. More than 30% of grandparents in the Netherlands, Belgium, and Switzerland provide weekly care, whereas in Italy, Greece, and Poland almost 30% look after their grandchildren each day (see Figure A-1 of the Appendix A).1 The availability of child care and especially cheap or even costless child care has important effects on fertility and mothers’ labor force participation.2 For Italy, Del Boca [2002] shows that both the availability of child care and the possibility of part time work increase labor force participation and fertility. Blau and Robins [1989] establish a similar pattern for the US. Within the context of already high female labor force participation rates in Sweden, M¨orck et al [2009] is one of the few papers that focuses exclusively on the positive effect of lower child care costs on fertility. In a literature summary, Del Boca and Vuri [2007] point out that most studies find that high child care costs deter female labor supply, while availability of child care is found to have positive effects on mothers’ labor force participation. These findings suggest that the main barrier that mothers face at the time of working is to obtain affordable child care.3 Free grandparent-provided child care seems to be the perfect solution for working mothers. However, in order to enjoy grandparent-provided child care on a regular basis, residence choices of adult children and elderly parents have to coincide. Data from the 2nd wave of SHARE show that the frequency of grandparent-provided child care is clearly related to the geographical distance between parents and their adult children. Figure 1.1 displays the frequency of grandparent-provided child care, together with the geographical distance between grandparents and their grandchildren (age six and younger) for Germany, Denmark, Italy, and Spain. Across the four selected countries the frequency of care varies strongly, but common to all countries those who provide care more frequently tend to live close by.4 1

In the US, 22.7% of children under 5 are regularly cared for by their grandparents (Overturf Johnson [2005]). 2 While female labor force participation has increased tremendously over the past decades, mothers are still participating significantly less. Across OECD countries, the average difference in labor force participation rates for women and mothers (of children age 3 or younger) is around 10 (20) percentage points. Scandinavian countries are an exception where labor force participation rates of mothers are equal to or even higher compared to those of women in general, OECD [2008]. 3 For instance, for a US family living below the poverty line, child care costs amount to 30% of income (US Census Bureau [2011]). 4 The same pattern can be observed across the rest of the countries included in SHARE; see Figures A3-A-2 of the Appendix A.

Figure 1.1: Frequency of care for and distance to grandchild, ≤ 6 Germany

Denmark

0.6

0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0

0

Daily Care

Weekly Care

Italy

Daily Care

Monthly or Less Frequent Care

Weekly Care

Spain

0.6

0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0

Monthly or Less Frequent Care

0

Daily Care

Weekly Care

up to 5km

Monthly or Less Frequent Care

Daily Care

5-25km

25-100km

Weekly Care

Monthly or Less Frequent Care

more than 100km

Data: Survey of Health, Ageing and Retirement in Europe (SHARE), 2nd wave.

Grandparent-provided child care – similar to other types of child care – may have positive effects on fertility and mothers’ labor force participation. However, – different from other types of child care – it imposes spatial restrictions which may affect female labor market outcomes negatively. Looking at German data we find that women residing close to parents or in-laws have lower hourly and monthly wages. Furthermore we find that mothers are more likely to incur in commutes if their children are regularly cared for by relatives. Similar to other studies, we also find that women residing close to parents or in-laws are more likely to have children, and that as mothers they are more likely to hold a regular full or part time job. Given strong interdependencies of decisions regarding residence, fertility, child care arrangements, and female labor force participation, our empirical analysis faces problems of endogeneity and reversed causality. While our findings can thus not be interpreted as causal, the observed relationships provide the motivation for our theoretical model. We build a model of residence choice, fertility decisions, and female labor force participation. In our model there are two regions. Both regions are characterized by the same distribution of wage offers. Women who decide to work need to purchase child care. In one of the two regions free grandparent-provided child care is available. A woman decides 2

where to reside upon observing her potential wage-were she to work- and her spouse’s income in each region. Both her wage and her spouse’s income are independent across regions. So when deciding where to reside women might accept lower wages in turn for free grandparent-provided child care. This mechanism generates the observed relationship between lower wages and living close to parents or in-laws. Given that women are more likely to have children and to work if child care is free, our model also replicates the positive relationships between fertility, labor force participation, and living close to parents or in-laws. In our model, the simultaneous interaction of child care costs with two important determinants of family migration decisions – husbands’ and wives’ wages – generates the observed relationships.5 We then simulate the model to analyze how women’s decisions would change if the availability of grandparent-provided child care or family policies were altered. We find that if child care subsidies were raised to the Swedish level, fertility and mothers’ labor force participation would increase, while mobility would remain unaltered. The absence of grandparents, on the other hand, would increase mobility, while it would only have limited negative effects on aggregate fertility and labor force participation. To the best of our knowledge the current paper is the first one that explicitly incorporates spatial restrictions imposed by grandparent-provided child care into a model of fertility and labor force participation decisions. There is a strand of the literature analysing fertility and labor force participation in general equilibrium models as for instance Attanasio et al [2010], Erosa et al [2010], Garc´ıa-Mor´an [2010], Greenwood et al [2000], or Guner and Knowles [2009]. Closely related is Cardia and Ng [2003] who – different from the current paper – explicitly incorporate grandparents’ decisions into a general equilibrium model of grandparent-provided child care. The authors suggest that subsidizing grandparents’ time is the most effective child care policy in terms of output and capital accumulation. However, they do not consider the spatial restrictions and potential costs in terms of labor market outcomes implied by grandparent-provided child care. Also related to this paper are the works by Bick [2010] and Mendez [2008]. Within a life cycle model, the former analyzes data for Germany and concludes that informal child care (by relatives) plays an important role given that mothers’ labor force participation exceeds child care enrollment for children up to 2 years. However, different from the current paper the author does not model relative-provided child care, nor the spatial restrictions that it imposes. The paper by Mendez [2008] attempts to account for differences in geographical mobility and female labor force participation across European countries. His model of residence choice, fertility, and female labor force participation is similar to ours, but the author does not provide any evidence for individual costs associated with living close to parents or in-laws. 5

Mincer [1978] finds husbands’ wage offers to be determinant for family migration decisions, but to a lesser extent if the wife is working and if her work is permanent and well paid. Hence, husbands’ and wives’ wages jointly determine migration decisions.

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Thus, our paper is also - to the best of our knowledge - the first one to document possible costs related to the geographical proximity between parents and adult children. The existing literature, on the contrary, has highlighted its positive aspects. Studying fertility intentions rather than outcomes, Raymo et al [2010] find that Italian and Japanese women living close to their parents have higher fertility intentions. Holdswoth and Dale [2009] study labor force participation decisions of mothers in Spain and Britain. They estimate that the probability of being in employment is 1.24 times higher for Spanish women whose parents live in the same town. For the US, Compton and Pollak [2011] find that married women with small children living close to mothers and mothers-in-law have a 10 percentage point higher probability to be in employment. The studies by Dimova and Wolff [2011] and Zamarro [2011] use SHARE data and estimate simultaneous equation models of labor supply and grandparent-provided child care. Zamarro [2011] only finds a positive effect of grandparent-provided child care on mothers’ labor force participation for Greece and the Netherlands. For ten European countries Dimova and Wolff [2011], who also include financial transfers into their model, find a positive effect of grandparent-provided child care on the extensive margin of female labor force participation but no effect along the intensive margin. Arpino et al [2010] and Posadas and Vidal-Fern´andez [2012] for Italy and the US respectively, find that grandparent-provided child care – instrumented by grandparents being alive – increases in particular labor force participation of low educated mothers of young children. Our paper is also related to a broader literature on intergenerational time transfers. Most of this literature focuses on time transfers from children to elderly parents. One interesting paper that also incorporates residence choices is Konrad et al [2002]. The authors develop a game theoretical model of strategic choice of residence among siblings who try to avoid having to take care of elderly parents. Looking at German data, they find support for their model’s predictions of older siblings locating further away from their parents than younger siblings. With a similar approach in mind, Stern [1995] estimates care choices of elderly parents together with location decisions of children. His work is closely related to the current paper as he also takes into account how the child’s location decision affects his or her work decision. Alesina and Giuliano [2010] argue that the extent of intergenerational time transfers within the family – care of children or the elderly – is strongly determined by the value of family ties in a society. The authors find that across countries a higher value of family ties is associated with lower geographical mobility, higher fertility, but also with more traditional gender roles and thus lower female labor force participation. In the current paper – on the contrary – we find that within a country grandparent-provided child care is related to higher female labor force participation.

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The remainder of this paper is organized as follows: the next section presents our empirical analysis, Section 3 presents the model, Section 4 describes our calibration strategy, Section 5 presents the results of the model, and in Section 6 we discuss the model’s mechanisms in detail. In Section 7 we perform two counterfactual experiments and Section 8 concludes.

2

Empirical Analysis

2.1

Data

For our empirical analysis, we consider data from the German Socio-Economic Panel (GSOEP), an annual household survey. The GSOEP provides extensive information on individuals’ labor market participation, marital and family status, wages, education, etc.6 It also includes variables of particular interest for our analysis: child care provided by relatives and geographical distance to parents. In four waves (1991, 1996, 2001, and 2006) survey participants were asked to categorize their parents’ relative residence as in: i) the same house, ii) the same neighborhood, iii) the same town, iv) another town but within one hour by car, v) further away, or vi) in a foreign country. We construct a dummy variable “parents or in-laws close” that takes on value one for individuals whose mother, father, or in-law lives in the same neighborhood or town. For individuals who live in the same house as their parents or in-laws we construct a different dummy variable “parents or in-laws in same house.” This particular form of co-residence mostly arises because young individuals still live at home or due to the need for intensive care of parents, and in most cases it represents a temporary living arrangement. Only in two of the four waves considered (2001 and 2006) did the survey also include questions about relative-provided child care. We construct a dummy variable “child care by relatives” that takes on value one for all mothers with children age six or younger if relatives regularly take care of this child and a dummy variable “child care non-relatives” that takes on value one if the child age six or younger attends a nursery or is being cared for by others than relatives. We report these variables for two different age groups, for children up to the age of three and those between the ages of three and six. In Germany, for children younger than three very few spots in public or publicly subsidized nurseries are available, whereas for children between the ages of 3 and 6, those spots are almost guaranteed.7 6

For more details on the GSOEP, see SOEP [2005]. In 2011 only 25.2% of children younger than three attended some form of private day care (85%) or public or publicly subsidized nurseries (15%), compared to 93.4% of children between three and six (less ¨ than 1% of them in private day care) (Statistische Amter des Bundes und der L¨ander [2011]). However, 7

5

Given pronounced differences in mothers’ labor force participation rates between East and West Germany, we introduce dummy variables to distinguish between individuals living in East and West Germany.8 To account for possible cultural differences, we also distinguish between individuals of German and other nationalities. We define three levels of education following the International Standard Classification of Education (ISCED 1997) designed by the UNESCO[1997]: (i) primary education (ISCED levels 0 and 1), (ii) secondary education (ISCED levels 2, 3, and 4 ), (iii) tertiary education (ISCED levels 5 and 6).9 Town sizes are grouped into small communities (up to 20.000 inhabitants), medium-sized communities (20.000-100.000 inhabitants), and large communities (more than 100.000 inhabitants). We also construct dummy variables for each federal state.

Sample For our analysis we pool the data from the available four waves. We only consider women age 25 to 50.10 We exclude those born outside of Germany, because for these individuals both key variables of our analysis, (i) availability of child care by relatives and (ii) residence relative to parents, might be determined by very different aspects. Our sample consists of 10,732 women and 8,129 mothers.11 Descriptive Statistics Table A.1 of the Appendix A provides descriptive statistics for our sample. Individuals are on average between 37 and 39 years old. Approximately 76% of women between 25 and 50 have children and 10-13% are mothers of small children (age 0-2) and 14-19% have children age 3-6. Around 36% of women have a regular fulltime most of these nurseries (for over 60% of children) provide only part-time arrangements, see European Commission [2009]. Compulsory schooling for German children starts at age 6-7, reducing the need for child care drastically. ’Regular child care by relatives’ includes child care by any relative but it is mostly grandparents who provide child care. Similar spatial restrictions would apply for child care by other relatives. 8 Labor force participation rates of East German mothers of small children (0-3 years) have traditionally been very high and even today they continue to be around 15 percentage points higher than rates for West German mothers (Bundesministerium f¨ ur Familie, Senioren, Frauen und Jugend [2005].) In our sample, labor force participation rates of mothers are 67% and 48% in East and West Germany respectively. 9 For our regression analysis we only differentiate between individuals with and without tertiary education. 10 We exclude individuals living in East Germany from the 1991 wave, because for this wave information for most labor market variables (participation, wages) are missing for East Germans. 11 We also exclude individuals who report to have worked regular full-or part time jobs but who also report to have worked fewer than twenty hours a month as well as those who report to work regular full-or part time jobs but do not report their wage income or firm tenure or report zero or negative values for any of the two variables.

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job and 24% hold a regular part time job. Mothers are more prone to hold part time jobs (29%) compared to fulltime jobs (25%).12 Around 42-44% of women and mothers live in the same neighborhood or town as their parents or in-laws and 43-44% live at least one hour away. Approximately 13-14% of individuals live in the same house or household with parents or in-laws. Only 14% of mothers of children younger than age three, but 84% of mothers of children between the ages of three and six use nursery care, sitters or other types of paid child care. Around one third has their children cared for by relatives on a regular basis.13 Hourly wages of women and mothers are around 12A C.14 Around 50% of individuals commute to their place of work. Proximity to Grandparents and Relative-Provided Child Care Child care by relatives is not only likely to influence mothers’ labor force participation decision, but at the same time its use might be determined by mothers’ decision to work. This reversed causality introduces a potential bias into a direct measure of grandparent-provided child care. Using geographical proximity to grandparents as an indirect measure of grandparentprovided child care solves this problem. However, as residence choices might not be independent of mothers’ labor force participation decisions, a caveat remains. Descriptives statistics show that geographical proximity to grandparents and child care provided by relatives are very much related (see Table A.2 of the Appendix A). The clear relationship displayed in Figure 1.1 regarding child care by relatives and proximity to grandparents hence also holds for our data set. We thus feel confident to use geographical proximity as an indirect measure of grandparent-provided child care. Furthermore, geographical proximity reflects more than just currently provided child care by grandparents. It might also reflect child care provided by “potential” grandparents if living close to parents or in-laws affects fertility decisions. Thus, geographical proximity proves particularly useful to test effects on fertility. In addition, geographical proximity might also reflect “child care provided in the past” if individuals continue to live close to parents or in-laws after children have grown beyond the child care age. In this case the indirect measure can also 12

These figures correspond to 1991-2006 and are thus lower compared to more recent data. While in 1996, 75.7% of women and 58.5% of mothers age 25 to 54 participated in the German labor market, by 2004 these rates had increased to 77.0% and 63.1% respectively. This increase was almost exclusively due to an increase in labor force participation rates of mothers in West Germany from 54.4% in 1996 to 61.6% in 2004 (Bundesministerium f¨ ur Familie, Senioren, Frauen und Jugend [2005]). Regarding labor force participation of mothers with children under 6, those increased from 51.4% in 1991 (OECD [2001]) to 66.3% by 2009 (OECD [2008]). 13 Those two options are not exclusive. For children ages (0-2) and (3-6), 36% and 35% of mothers who use private care also have relatives looking after their children on a regular basis, and 15% and 86% respectively of those who use relative-provided care also use private care for their children. 14 When pooling the sample we only adjust wages for the change from Deutschmark to Euro. We do not adjust for wage growth, given stagnant real hourly net wages in Germany between 2001 and 2006 (see Figure 1 in DIW [2009]).

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be used to test long-lasting effects of on wages. However, geographical proximity is only a necessary condition for grandparent-provided child care. Other aspects such as employment status, age, or health status of grandparents may determine if grandparents actually provide care for their grandchildren. Mothers of around 20% of women in our sample also participated in the GSOEP during the four waves considered. The number of observations for these mother-daughter pairs is extremely limited and thus not suited for regression analysis. However, considering descriptive statistics we observe that grandmothers who live close to their daughters who in turn report to use relative-provided child care are younger, and they are also less likely to work (see Table A.3 of the Appendix A). Surprisingly, these grandmothers also report worse health conditions. This might be explained by the fact that grandmothers’ status of health does not only determine if they provide child care, but caring for grandchildren may have a negative effect on grandmothers’ health.15

2.2

Benefits of Grandparent-Provided Child Care

In line with findings in the literature discussed before, we find geographical proximity to (“potential”) grandparents to affect fertility and labor force participation of mothers positively. Women living in the same neighborhood or town as their parents or in-laws have a 4 percentage points higher probability to have children (see Table A.4 of the Appendix A). We find this positive effect to be particularly strong for women with university education.16 Regarding participation, we find that mothers residing close to their parents or in-laws have a 3 percentage points higher probability to hold a regular part-or fulltime job (see Table A.6 of the Appendix A).17 This last number is close to the 4 percentage 15

According to Hughes et al [2011], a “ growing literature suggests that for many people, the net health effects of grandchild care are negative”(p.111). 16 See Table A.5 of the Appendix A for the regressions with interaction terms. Estimation results are consistent to the inclusion of a polynomial for age instead of age group dummies as well as to including years of education instead of educational categories. Given that marital status and spouse’s income might be correlated with living close to parents or in-laws we also check consistency of results, excluding both variables. 17 For our estimations regarding labor force participation we only consider a woman in the labor force if she works a regular part-or fulltime job. All estimation results are consistent to the inclusion of a polynomial for age instead of age group dummies as well as to including years of education instead of educational categories. Results are robust to the exclusion of the variables marital status and spouse’s income. Including interaction terms of living close to parents or in-laws and educational attainment seems to indicate that the positive effect of living close to parents or in-laws on mothers’ labor force participation is driven by individuals with tertiary education. However, coefficients are only (negatively)

8

points lower bound of estimates for the US in Compton and Pollak [2011]. The latter argue that geographical proximity is a good instrument for child care arrangements because its positive effect on labor force participation does not extend to groups for which grandparent-provided child care is not a determinant for labor supply. Similarly, in our data the effect does not extend neither to men nor to single childless women (see Table A.7 of the Appendix A).

2.3

Costs of Grandparent-Provided Child Care

Lower wages Controlling for selection effects, we find that mothers living close to their parents or in-laws earn lower hourly wages.18 The first column of Table 2.1 displays the coefficients for the Heckman selection model for log hourly wages for mothers in Germany age 25 to 50. Living close to parents or in-laws or in the same house increases the probability of holding a regular part-or fulltime job, but it reduces hourly wages by almost 5%.19 Other control variables show the expected signs. Wages are higher for those living in larger communities, they increase with firm tenure, and tertiary education. On the other hand, having more children, living in small communities, not being German, and living in East Germany are all aspects that affect hourly wages negatively.20 We also check if our results are driven by low-educated individuals. Running the regression separately for individuals with and those without tertiary education shows that this is not the case. On the contrary, the penalty in hourly wages for staying close to parents or in-laws turns out to be higher – more than 6% – for the group of highly educated individuals (see Tables A.11 and A.12 of the Appendix A). The two exclusion restrictions that we use are: (i) having a child younger than age three and (ii) spouse’s income. Both variables affect mothers’ labor force participation (see Table A.6 of the Appendix A). However, none is directly related to mothers’ hourly wage rates. Given that we only consider mothers, differences in a child’s age are mostly exsignificant for individuals with primary or secondary education. 18 For this analysis, we only consider wage incomes of dependent workers of regular full-or part time jobs. 19 Using log monthly wages, controlled for by hours worked, leads to slightly more negative coefficients for living close (see Table A.8 of the Appendix A), as does not controlling for selection effects (see Table A.9 of the Appendix A for an OLS regression of log hourly wages). 20 Estimation results are consistent to the inclusion of a polynomial for age instead of age group dummies as well as to including years of education instead of educational categories. We also check the robustness of our results to the exclusion of the variables marital status and spouse’s income (see Table A.10 of the Appendix A).

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Table 2.1: Proximity to grandparents and hourly wages Coefficients of Heckman Selection Model for mothers’ log hourly wages Log hourly wage (1) Married, living together -0.009 Number of children -0.037*** Other than German nationality -0.134* Tertiary education (ISCED: 5,6) 0.293*** Parents or in-laws close -0.049*** Parents or in-laws in same house -0.050** Small community -0.040** Large community 0.046** in East Germany -0.069 Log (Spouse’s income)† Children 0-2 Tenure in firm 0.016*** Constant 1.905*** Observations

8,129

(0.016) (0.010) (0.077) (0.015) (0.014) (0.020) (0.017) (0.019) (0.044)

(0.001) (0.046)

Selection Equation (2) -0.324*** -0.286*** -0.312** 0.441*** 0.073** 0.056 -0.006 0.045 0.294** 0.015*** -1.114***

(0.044) (0.017) (0.140) (0.036) (0.033) (0.048) (0.039) (0.044) (0.119) (0.005) (0.056)

0.188**

(0.087)

8,129

†Missing values and values < 1 are set to 0. Standard errors in parentheses *** p