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In this paper I focus on the labor supply and child care decisions of women immediately following birth, in order to evaluate the effects of mothers' decisions on the well-being of their children. In particular, I am interested in assessing the impact of both employment and child care decisions on children's cognitive ability. Previous studies have provided evidence that test scores measured early in a person's life have significant effects on future educational and labor market outcomes29. It seems at least interesting to try to understand whether there are any parental inputs that can enhance cognitive ability of individuals during their early stages of life. For this purpose I use data from the National Longitudinal Survey of Youth and, in particular, I look at the quarterly employment and child care histories of women after birth and until their child enters primary school at age 5. I assess the impact of these histories on Peabody Picture Vocabulary Tests scores and Peabody Individual Achievement Test scores (Math and Reading Sections). The key issue dealt with in the paper is the potential endogeneity problem that arises as a result of the existence of unobserved characteristics of both mothers and children. In fact, women are heterogeneous in both the constraints they face and their tastes. At the same time, children are heterogeneous in their cognitive endowments. As we would expect, mothers' decisions with respect to working when children are young, and/or placing children in child care are influenced by these heterogeneous characteristics of both mothers and children. Hence, children of working women or children of women that use child care will differ systematically from those whose mothers stay at home or do not use child care. This sample selection issue makes evaluation of the effects of women's decisions on child outcomes very difficult.

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The 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 2.8 percent (.15 standard deviations) in child test scores. But this general finding masks important differences across types of child care, children's ages, and maternal education. Indeed, only informal care used after the first year leads to significant reductions in child achievement. Formal care (i.e., center-based care and preschool) does not have any adverse effect on cognitive outcomes. In fact, these estimates imply that formal care has large positive effects on cognitive outcomes for children of poorly educated single mothers. Finally, the authors also provide evidence of a strong link between children's test scores at ages 4, 5, and 6 and their completed education.

We evaluate the effect of childcare vs. maternal time inputs on child cognitive development using the single mothers from the National Longitudinal Survey of Youth (NLSY79). To deal with non-random selection of children into childcare, we exploit the (plausibly) exogenous variation in welfare policy rules facing single mothers. In particular, the 1996 Welfare Reform, and earlier State level policy changes, generated substantial increases in their work/childcare use. Thus, we construct a comprehensive set of welfare policy variables, and use them (along with local demand conditions) as instruments to estimate child cognitive ability production functions. Because welfare rules are complex, we need many variables to characterize them. Thus, we face a "many instrument problem" (i.e., 2SLS severely biased toward OLS). We deal with this problem both by using LIML, and by using factor analysis to condense the instrument set. Results from the two approaches are very similar, and quite different from OLS. Using LIML along with factor analysis of the instruments leads to an efficiency gain (i.e., smaller standard errors) relative to using LIML alone. In our baseline specification, we estimate that a year of childcare reduces child test scores by 2.1% (.114 standard deviations). This estimate is quite robust across a wide range of specifications and instrument sets. But we find important interactions with type of care, maternal education and child gender. Indeed, only informal care leads to significant reductions in cognitive outcomes. Formal center-based care does not have any adverse effect. In addition, the value of the maternal time input is greater for more educated mothers, and girls are more adversely affect by childcare than boys. We do not find differential effects by child age or race/ethnicity.