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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
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
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”
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
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
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
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
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
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
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
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)
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
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
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
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
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
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
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
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
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
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
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?
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
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
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
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
)
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)
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%
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
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
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