The purpose of this paper is to examine the responsiveness of partnered women’s labour supply to the price of child care in Australia. We show that the way in which child care prices are constructed can have very large impacts on findings, which is an important methodological point for researchers studying the effects of child care prices in any context. We find, in contrast with previous studies of Australia, that partnered women decrease their labour supply in response to an increase in the price of child care. We show that measurement error in the construction of the child care price is the main factor which explains the difference between our findings and previous Australian studies.
Four recent studies in Australia have found that the child care price elasticity of labour supply of partnered women is very small and generally not statistically different than zero. Doiron and Kalb (2005) and Kalb and Lee (2008) find that work hours for partnered women decrease by .02 per cent in response to a one per cent increase in child care prices. Rammohan and Whelan (2005) find slightly larger, but statistically insignificant elasticities while Rammohan and Whelan (2007) find no effect of child care price on the choice between part-time and full-time work. These results have produced a consensus that maternal labour supply is not responsive to the cost of child care in Australia.
As we discuss in section 2.2 below, studies of women’s labour supply response to changes in child care price have often had to deal with incomplete information about hours spent in child care or costs of child care. This has led researchers to construct approximate child care price measures which potentially suffer from measurement error. In this paper, we will show the degree to which this measurement error can influence results, focusing on the case of Australia.