Last week, Megan McArdle had some intriguing thoughts on the working mother/ child-care conundrum.
I have some not-particularly-related points on the matter. There is some argument that the tax and regulatory regime re: child care favors institutional arragements (i.e. day care) over individual ones (i.e. in-home care) - and not just in requiring a social security number to ward off illegal immigrants.
Speaking from personal experience, if you want to have a nanny and do everything above-board, you have to do an awful lot of things that most individuals aren't used to doing. The SS tax withholding is the famous (Zoe Baird) one, and one of the easier ones to do (though you have to remember to file parallel forms with the Social Security Administration, not just the IRS - and the IRS' current publication on the matter mentions if you look hard enough).
Actually, even that isn't as easy as it sounds, because you have a choice of (a) persuading the nanny to take less up-front than she would get in cash (because you're withholding at least your half of Social Security, and let's say that many prospectivee nannies aren't always interested in taking less upfront for the sake of a future Social Security benefit) or (b) paying her that much more to make up the difference.
And less publicized but more difficult are the things you have to do on the state level - aside from whatever tax requirements there are, you need (in NY State at least) to register as an employer, pay into workman's comp, take out disability insurance and some other things I'm forgetting. And in doing those things, you have to puzzle through forms not really drafted for individuals and deal with the occasional bureaucrat who can't understand why an individual is actually bothering to comply with these requirements.
With day care, all you need to do is write a check.
You see why a massively high percentage of people who hire nannies end up paying them in cash.
It's not as if I have a good answer for the issue - I'm not interested in arguing that household employees should have no protections or rights, and I wouldn't believe it even if I felt like arguing the point. But some simplification is probably in order.