The presence of pre-school children often complicates women’s labor supply decisions by forcing them to consider the costs of child care. In this problem, you are asked to consider the labor supply decision of a single mother with one child of pre-school age.
1. Show (graphically) how the woman’s labor supply decisions are affected by child care costs. (Hint: For every hour that a woman is working and hence cannot look after her child, she must purchase an hour of child care services in the market, at price c). What is the effect of child care costs on the labor force participation rate of women with young children?
2. The government is considering two proposals designed to assist women in covering the costs of child care:
Proposal A: A subsidy equal to some fraction of a household’s total child care expenses.
Proposal B: A per-child subsidy to households for each child of pre-school age.
If the government wishes to increase the labor supply and labor force participation of single mothers, which of these two policies would you recommend and why?