Child care costs, household liquidity constraints, and gender inequality

In a model with endogenous female labour supply and wages, we show that liquidity constraints that prevent households from buying child care generate an inefficiency and amplify gender gaps in the labour market. We evaluate the relative merits of paid maternity leave, child care subsidies, and government loans in mitigating liquidity constraints and promoting gender equality. While an extension in the duration of the leave has ambiguous effects, child care subsidies and loans in the form of child care vouchers remove the liquidity constraints and reduce gender gaps in participation and wages. We illustrate the mechanisms at play in a numerical example using Spanish data.