This paper evaluates the effects of home inputs on children’s cognitive development using the sample of single mothers from the National Longitudinal Survey of Youth (NLSY). Important selection problems arise when trying to assess the impact of maternal time and income on children’s development. To deal with this, we exploit the (plausibly) exogenous variation in employment and child care use by single mothers generated by differences in welfare regulations across states and over time. In particular, the Welfare Reform of 1996, as well as earlier policy changes adopted by States under federal waivers, generated substantial increases in work and child care use. Thus, we construct a comprehensive set of welfare policy variables at the individual and State level, and use them as instruments to estimate child cognitive ability production functions. We use local demand conditions as instruments as well. Our results indicate that the effect of child care use is negative, significant and rather sizeable. In particular an additional year of child care use is associated with a reduction of 3.0 % (.16 standard deviations) in child test scores. But this general finding masks important differences across types of child care, child age ranges, and maternal education. Only informal types of child care used after the first year lead to significant reductions in children’s achievement. Formal child care (i.e., center based care, pre-school) does not have any adverse effect on cognitive outcomes. In fact, our point estimates imply that formal care has positive effects on cognitive outcomes for children of poorly educated single mothers, but these effects are imprecisely estimated. Finally, we also provide evidence of a strong link between test scores at ages 4, 5 and 6 and completed education.
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