The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal...

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The Economics of The Economics of Childcare Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studies http://www.nottingham.ac.uk/ http://www.nottingham.ac.uk/ ~lezad ~lezad

Transcript of The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal...

Page 1: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

The Economics of ChildcareThe Economics of Childcare

Alan Duncan

University of Nottingham and

Institute for Fiscal Studies

http://www.nottingham.ac.uk/http://www.nottingham.ac.uk/~lezad~lezad

Page 2: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

The Economics of ChildcareThe Economics of Childcareoutlineoutline

Policy contextPatterns of employment and childcare useEconomic rationale for subsidising childcareMethods of intervention in the childcare

marketPossible effects of childcare subsidiesRecent policy initiatives:

the WFTC Childcare Credit

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Childcare and Employment in the Childcare and Employment in the UKUK

some backgroundsome background

The UK government has recently introduced the Working Families’ Tax Credit (WFTC)

represents the latest in a long line of reforms since 1971 motivated by “…objectives of making work pay and tackling poverty” the WFTC program will cost £5bn, £1.5bn more than Family Credit essentially a more generous version of Family Credit, but: includes potentially generous additional credits to offset childcare

costs

This begs some questions: what effects might WFTC have on the provision, quality & use of

childcare? what alternative mechanisms are there for subsidising childcare costs? does the WFTC childcare credit represent good “value for money”

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Mothers’ Employment patternsMothers’ Employment patterns1992 to 20011992 to 2001

20%

30%

40%

50%

60%

70%

80%

1992 1994 1996 1998 2000

year

per

cen

tag

e in

em

plo

ymen

t

single with non-employed partner with employed parner

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Mothers’ Employment patternsMothers’ Employment patternsby age of youngest childby age of youngest child (to 1999) (to 1999)

0

20

40

60

80

100

<1 1 2 3

4 (p

re-s

ch)

4-5

(sch

)

6 to

78

to 9

10 to

11

12 to

15

16 to

18

none

Age of youngest child

Per

cent

age

in e

mpl

oym

ent

With Partner Single

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Childcare Use Among Employed Childcare Use Among Employed Mothers Mothers

by age of youngest childby age of youngest child (to 1999) (to 1999)

0

10

20

30

40

501 3

4 (s

ch) 6 8 10 12 14

Age of youngest child

Per

cent

age

usin

g ch

ildca

re

Informal Only Some Formal

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Childcare Use Among Employed Childcare Use Among Employed Mothers Mothers

by age of youngest childby age of youngest child (to 1999) (to 1999)

0

10

20

30

40

501 3

4 (s

ch) 6 8 10 12 14

Age of youngest child

Per

cent

age

usin

g ch

ildca

re

Informal Only Some Formal

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Should the Government Subsidise Should the Government Subsidise Childcare?Childcare?

Why not allow the market for childcare to operate freely and privately?

The non-interventionist argument: In the main, parents choose to have children It is understand that incomes might fall after having

children Career break effects should be factored into the decision

to have children The role of the state should be limited to ensuring

minimum standards among childcare service providers

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Rationale for Government Intervention Rationale for Government Intervention in the Childcare Marketin the Childcare Market

Market failure in the demand for childcare services

Positive ‘externalities’ in the use of childcare Misperception of the costs of career breaks Barriers to employment/ capital market imperfections

Distributional concerns equality of opportunity for poorer households equality of opportunity for women

Page 10: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

Potential Effects of Childcare Potential Effects of Childcare SubsidiesSubsidies

Incentive (demand) effects increase employment incentives encourage extra use of childcare stimulate demand for increased quality of care

Producer (supply) effects promote additional supply of childcare places promote higher quality of childcare services

Societal effects

Page 11: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

What Type of What Type of Childcare SubsidChildcare Subsidy?y?

universal subsidies Universal voucher schemes Universal child credits Tend to be expensive, & relatively inefficient in

promoting employment

targetted subsidies Targetted on certain demographics Targetted on those in employment Targetted on low income households More efficient at delivering employment incentives WFTC (including the Childcare Credit)

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The Working Families’ Tax CreditThe Working Families’ Tax Creditsome structuresome structure

Replaced Family Credit in October 1999

A tax-credit based system for delivering financial support to low-income working households

Differs from Family Credit in a number of respects: increased credits for adults & children reduction in credit withdrawal taper different system for delivery of financial support a new childcare credit of 70% of childcare costs, up to a maximum

cost of £150 on childcare, replacing the childcare disregard in Family Credit

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FamilyFamily Credit Credit (1995)(1995)

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

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Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)basic creditbasic credit

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

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Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)basic creditbasic credit

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

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Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)basic creditbasic credit

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

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Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)basic creditbasic credit

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

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Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)basic creditbasic credit

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

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0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)with childcare creditwith childcare credit

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0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Hours of work

Family Credit & WFTC

Family Credit WFTC WFTC with childcare

Working Families’ Tax Credit (1999)Working Families’ Tax Credit (1999)with childcare creditwith childcare credit

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The UK tax and transfer systemThe UK tax and transfer systemApril 2000April 2000

0

50

100

150

200

250

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Hours worked @ £3.50

Child Benefit Net earnings Income Support FC / WFTC Rent rebate Local tax rebate

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The Working Families’ Tax CreditThe Working Families’ Tax Creditcaseload & costcaseload & cost

Who receives the WFTC?

Who takes advantage of the Childcare Credit in WFTC?

How much does the WFTC, & the Childcare Credit, cost?

Page 23: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

Number of recipients of FC / WFTCNumber of recipients of FC / WFTCby household typeby household type

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Aug-9

5

Aug-9

6

Aug-9

7

Aug-9

8

Aug-9

9

Aug-0

0

Aug-0

1

w ith partner single all

Page 24: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

Number of recipients of childcare Number of recipients of childcare creditscredits

by household typeby household type

020,00040,00060,00080,000

100,000120,000140,000160,000

w ith partner single all

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Proportion of FC/WFTC recipients Proportion of FC/WFTC recipients who also receive childcare creditswho also receive childcare credits

by household typeby household type

0%

5%

10%

15%

20%

25%

w ith partner single all

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Cost of Family Credit / WFTCCost of Family Credit / WFTC(August 2001 prices)(August 2001 prices)

0

1,000

2,000

3,000

4,000

5,000

6,000

To

tal c

os

t (£

mill

ion

)

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Cost of childcare subsidies in Cost of childcare subsidies in FC/WFTCFC/WFTC

(August 2001 prices)(August 2001 prices)

0

50

100

150

200

250

300

350

Co

st (

£m

illio

n)

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Value of Childcare Subsidies as a Value of Childcare Subsidies as a Percentage of Total Cost of Percentage of Total Cost of

WFTC/FC WFTC/FC

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Page 29: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

The Working Families’ Tax CreditThe Working Families’ Tax Creditsome reflectionssome reflections

What evidence is there that the WFTC, and the Childcare Credit, deliver significant additional employment incentives?

Evidence of small employment gains. Why so small? Interactions with other taxes and benefits dissipate the apparent

financial gains A share of the employment incentive was already in place under Family

Credit

Childcare Credit may provide the most important stimulus

Page 30: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

Do childcare subsidies create Do childcare subsidies create employment?employment?

simulation evidence Recent work has attempted to estimate the

likely impact of the introduction & expansion of childcare credits in WFTC

Use an economic model of employment and childcare choices, and detailed information on (possibly hypothetical) policy reform options

some simulation evidence in the UK which suggests that childcare credits in WFTC have encouraged participation among specific client groups

Page 31: The Economics of Childcare Alan Duncan University of Nottingham and Institute for Fiscal Studieslezad.

Do childcare subsidies create Do childcare subsidies create employment?employment?

From FC to WFTC, including CCTC Estimate an increase of 2% to 4% in

employment among single parent households For women with partners, evidence is more

mixed: 0.5% reduction to 0.2% increase in employment rates

Overall, around 45,000 to 60,000 women are estimated to move into employment following the introduction of WFTC and CCTC