The Unintended Consequence of Mandatory Child Care in Chile

Chile has one of the lowest female, labor force participation rates in Latin America, with only 49 percent of the female population 15 years old and older either working or actively seeking work. Policymakers in Chile have instituted several policies to increase the labor force participation of women, including a requirement stating that firms with 20 or more female employees must provide childcare for all children under two years of age at a separate facility close to the workplace.

A new paper by the National Bureau of Economic Research examines the impact of mandatory childcare on female wages in Chile. The authors estimate that the starting wage of women decreases between 39 and 87 USD annually as a result of mandatory childcare. Average starting wages of women at firms impacted by the policy are an estimated 9 to 20 percent lower than those of women at firms unaffected by the policy.

The authors gather data from the unemployment insurance system in Chile, which contains monthly information about all employees who started a new contract between 2002 and 2013. To estimate the causal effect of the policy, the authors compare the starting salaries of women at firms just above and just below the cutoff threshold of 20 female employees.

A major assumption of this analysis is that large firms with just under 20 female employees do not differ significantly from large firms with just over 20 female employees. For example, the authors assume that firms with 19 female employees would have similar childcare policies to those with 21 female employees, absent the federal mandate. If this assumption is incorrect, then comparing starting salaries between these two sets of firms does not successfully isolate the impact of the mandatory childcare policy.

The authors argue that, in the long run, firms are not typically able to avoid surpassing the cutoff threshold of 20 female employees by substituting male workers for female workers: they point to longitudinal data that indicates that only 24 percent of large and new firms had fewer than 20 female employees during the years analyzed.

The authors limit their analysis to newer firms, defined as those that began operations after 2004, and to firms with over 200 employees. Constraining analysis to newer firms allows the authors to ensure more consistent data reporting, since information was not automatically entered into the unemployment system prior to 2002. In addition, looking at larger firms helps ensure that the firms included in the analysis actually comply with the mandatory childcare policy, since larger firms face a higher degree of regulation and scrutiny.

While limiting analysis to larger, newer firms allows the authors to achieve greater precision in their estimates, it also limits the applicability of the findings to other settings. In particular, they cannot make claims about the impact of the policy on the wages of women working at smaller or more established firms in Chile, since they did not include data from those firms in their analysis.

The authors’ findings that the policy lowers the starting salaries of women in large firms highlights an unintended consequence of initiatives like mandatory childcare. The goal of the policy is to incentivize women to enter the labor force by making childcare easier to find and less costly for women. Yet, by mandating childcare, the policy also increases the costs that firms face when hiring women. This can result not only in lower salaries for women, as this research indicates, but also in women being hired at lower rates—an issue not explored in this paper but one that may be of interest in future research.

Article Source: The Effect of Mandated Child Care on Female Wages in Chile, Prada et al, National Bureau of Economic Research, 2015.

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