The Impacts of Minimum Quality Standards on the Childcare Market V. Joseph Hotz (Duke) Mo Xiao (Arizona) NASM, 2008

Minimum Quality Standards MQS: extensively adopted for health, safety & environmental industries –Autos (safety & pollution) –Health care (licensing of providers) –Child Care (focus of this paper) Why? –Information asymmetries about product quality –Externalities associated with consumption –Harm due to low quality product may be irreparable

Theory on Effects of MQS Leland (1979), Shapiro (1986) –Results of Imposing MQS Eliminate low-quality firms & thus raise quality of goods/services Raise price of goods/services reduce supply Can improve consumer welfare

Theory on Effects of MQS (cont.) Ronnen (1991), Crampes & Hollander (1995) –Key difference is allowing for imperfect competitive markets So there can be price and/or quality competition –Can induce strategic responses by competitors High-quality sellers may produce even higher quality to avoid competition with lower-quality sellers facing binding MQS –MQS can raise quality of products of all sellers

What We Do Investigate empirically the impacts of MQS on firm behavior in the childcare market –Aggregate supply –Exit –Employment –Quality Choices –Wage, Revenue, Profit Our Paper relative to literature –Use census of child care establishments, rather than sample of firms –Use longitudinal data on firms so can look explicitly at firm level decisions –Longitudinal data allows us to consider richer set of estimators (fixed effects) to account for various sources of bias –Use quality of quality (accreditation of centers by 3 rd party) is unique.

State Child Care Regulations Child care industry regulated by states, via licensing requirements. States don’t directly regulate quality of care; regulate inputs such as –Labor intensiveness (child-to-staff ratios & group size) –Staff qualifications (educational attainment, criminal backgrounds, on-going training) These two dimensions of child care found to be associated with measures of child care quality (cognitive, emotional & social development)

A Unique Data Set We merge: –The childcare sector from the Census of Services (1987, 1992, and 1997) for establishments with employee payroll –State-level regulation data –The NAEYC accreditation database –Market level Census of Population We use zip-code as definition of a child care market –Child care very localized –Zip-codes have radius of 3-4 miles –Larger geographical units (cities, counties, etc.) too large –We use zip code bundles and counties for robustness check

The Main Empirical Issue Policy endogeneity –Providers’ and parents’ influences in policy making –Also possible confounding of regulatory policies and state market conditions Similar problem if policies are correlated with unobserved labor market conditions –i.e., states with highly-skilled workforces may set child care regulations to reflect this fact. Our Solution: State- and time-specific fixed effects, Establishment fixed effects

Our Empirical Strategy Investigate aggregate supply at the market level Outcome variables: –# of establishments in a zip code –Accreditation rates per zip code

Our Empirical Strategy (cont.) Investigate exit, employment, quality choice, payroll and revenue at the establishment level Outcome variables: –Probability of exit –# of employees –Probability of being accredited –Payroll, revenue, and profit per employee

Some General Observations about Empirical Results Est. Effects of MQS on Outcomes depend on which estimator used –Est. Effects can switch sign & significance by method Results robust to which way MQS are measured (specific vs. average regs) Results robust to different ways treating no regulation Results robust alternative definitions of markets

Main Findings Minimum Quality Standards: –Reduce aggregate supply –Drive establishments out –Crowding out child care slots (establishments do not hire more employees) –Promote accreditation (quality) –Benefit owners –Don’t benefit workers The above results are more significant in poorer areas Education requirements are not as effective as staff- child ratio requirements