CHILDCARE POLICIES BOOST WOMEN'S WAGES AND CAREERS: Evidence from Germany

22 Mar 2018

Government-provided childcare allows women, and particularly mothers, to earn higher wages and climb the career ladder more easily. That is the central finding of research on Germany by Vidhi Chhaochharia, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018.

The study finds that women with small children or many children, women in the highest wage bracket and women who are more educated are more likely to experience these pay and career benefits of government-provided childcare.

In addition, the share prices of firms located in areas with high government-provided childcare react less negatively to the announcement of a gender quota on corporate boards than firms located in areas with lower government-provided childcare. This suggests that government-provided childcare results in a larger pool of qualified women that these firms can draw from to fulfil the gender quota.

One policy implication is that a top-down approach (such as a mandated quota) to correct gender disparity in firms is not the ideal approach if it is not accompanied by other policies such as childcare provision. It is better to take a bottom-up approach that improves women''s career progression through family-friendly policies such as childcare provision.

Gender inequality in firms is an issue that has concerned both economists and policy-makers. In spite of significant improvements in women''s career prospects, the gender pay gap still persists. One crucial component as to why women on average earn lower wages than men is parenthood. This study provides evidence of the positive impact of childcare policies on women''s careers and wages.

To study the impact of government-provided childcare on women''s careers, the research uses a unique employer-employee matched data set from Germany. The granularity of the data make is possible to identify the impact of government-provided childcare on women''s career progression and wages within the same firm across establishments, and even within establishments conditioning on time series variation in local childcare provision.

Since childcare provision in Germany is sponsored by the government, there are no direct costs of providing childcare for firms, and policies regarding childcare are exogenous to individual firm''s family-friendliness.

The new study finds that government-provided childcare has a positive impact on wages of women and thus decreases the gender pay gap. Specifically, a one standard deviation increase in childcare provision leads to a 39.2% decrease in the gender pay gap. The effect on mothers is two to three times larger than the baseline effect on women.

In addition, mothers in counties with more childcare provision experience larger wage changes that are likely associated with promotions. These effects are obtained after including a large set of time varying individual and establishment level control variables, and after including multi-dimensional fixed effects such as, county, year, person, education and employment fixed effects that can account for changing attitudes towards women, mothers and families over time.

The research also finds that women with small children or many children, women in the highest wage bracket, and women who are more educated are more likely to experience these benefits. Taken together, these results suggest that government-provided childcare allows women, and particularly mothers, to earn higher wages and eases out the trajectory over the job ladder from ground up.

Finally, the research contributes to previous work on gender quotas and their impact on firms'' financial outcomes. Investigating the case of Norway, one study found that the announcement of a gender quota caused a significant drop of stock prices of affected firms, and a large decline in Tobin''s Q over the following years, consistent with the idea that firms choose board members to maximise shareholder value. Following Norway''s lead, many European countries including Germany have all passed similar reforms.

The new study provides suggestive evidence that firms located in areas with high government-provided childcare react less negatively to the announcement of a gender quota in Germany than firms located in areas with lower government-provided childcare. This is consistent with the view that government-provided childcare results in a larger pool of qualified women these firms can draw from to fulfil the gender quota.

One policy implication of these results is that a top-down approach (like the mandated quota) to correct gender disparity in firms is not the ideal policy method if it is not accompanied by other tools such as childcare provision. A bottom-up approach that improves women''s career progression through family-friendly policies such as childcare provision is important to ease the progress of women over the job ladder.

In other words, our results suggest a complementarity between government-provided childcare policies and mandated board quota to promote gender equality in the top echelons of the firm.

Vidhi Chhaochharia

vchhaochharia@bus.miami.edu