We study how child care subsidies funded by the Child Care and Development Fund program (CCDF- the most widespread childcare subsidy program in the US) affects the employment status and earnings of low income mothers. Employing a rich database of administrative records, we compute instrumental variables and control function estimates of the program's effects. As an exclusion restriction, we take advantage of differences in efficiency levels across administrative agencies in charge of processing subsidy applications and payments.

We find that CCDF-funded subsidies affect employment outcomes thorough the extensive margin of labor supply. The effects of this program last for the first year after subsidy receipt.

Our analysis suggests that in the short term, child care subsidies are effective at promoting employment for low-income mothers. Mothers receiving child care subsidies exhibit higher earnings than what they would have earned had they not participated in the program, but those effects are primarily driven by increase in the extensive margin of labor supply. Despite being positive, the short-term effects are modest, and they fade out quickly with time (although at different rates, depending on which subgroup is analyzed). Our results indicate that different subpopulations are affected differently by the childcare subsidies program: white mothers and/or those who are older exhibit great impacts than mothers who are black and/or younger. Grounded in rigorous analysis of data, our research provides insights about the nature of the selection process that drives low income mothers to participate in CCAP (as other studies have done, notably Meyers et al. (2002) and Herbst (2008)). To the best of our knowledge, our study is the first to document the importance of the pre-baseline dynamics of earnings, employment status and TANF as fundamental drivers of participation in the CCDF program.

CCDF-funded child care subsidies are programs that impact two generations: mothers and their children. In this paper we have shown that those subsidies modestly affect the earnings prospects of some mothers. Those subsidies, however, also have the potential to affect the developmental trajectories of the children whose mothers participate (see for instance Herbst and Tekin (2010)). While the program has modest effects on earnings, a comprehensive cost-benefit analysis should assess whether the program affects the developmental prospects of the children of participant mothers. Research on this issue is in its early stages. Further research should be encouraged to provide a more comprehensive assessment of the efficacy and value of the investment represented in this program.