Child Care and the Labour Supply

Jennifer Buckingham
23 July 2008 | IA97
Child Care and the Labour Supply

Child care is said to be a public good because it supposedly has developmental and academic benefits for children, and increases female labour-force participation and therefore economic growth. Numerous reports state unequivocally—but often without providing supporting evidence—that more women would work if child care was cheaper and more easily available.

The CIS Issue Analysis Child Care: Who Benefits? found little evidence that formal child care has lasting benefits for the broader population of children, and some studies have shown there is a risk of negative effects. This paper seeks to verify the claims about child care and female labour supply. It includes four major findings.

Finding 1: Child-care usage has grown markedly in the last quarter century, but in the last decade the major trend has been the crowding out of the informal sector.

  • In 1980, only 23% of children not yet at school were in formal or informal care. In 2005, 67% of children aged under five years were in some sort of child care.
  • Most of the increase in child-care usage occurred in the 1980s. There was a small increase in total child-care usage from 1990 to 2005, but this masked an important underlying change—a decrease in informal care along with an increase in formal care. Higher child-care subsidies allowed families already using child care to use formal care rather than informal care.

Finding 2: The cost of child care has risen at a greater rate than inflation, against a background of massive increases in government subsidies.

  • Over the last decade, child care has become more expensive. Increases in the cost of child care have far exceeded increases in the general cost of living. The annual average increase in the Child Care Index from 1997 to 2007 was 7.8%, compared with an annual average increase of 2.6% in the Consumer Price Index.
  • Government subsidies reduce the out-of-pocket cost to families considerably. Child-care costs remained a fairly small proportion of household income in general in 2004, but the effects of child-care subsidies were uneven for different family types and different types of care.
  • Child care might reasonably be considered unaffordable if cost is the main reason a family has decided not to use it. This is true for a small minority of families. Surveys suggest that unavailability is a greater obstacle, and that demand exceeds supply more often than cost is prohibitive. Indeed, these two factors are likely to be related.

Finding 3: Each new injection of government funding has been followed by an escalation in the cost of child care.

  • In the 1980s, the rate of growth in child-care costs was less than the rate of growth in the general cost of living. At the end of a ten-year period where real annual government spending on child care more than doubled, child-care costs are rising at an annual rate five times higher than rises in the cost of living.
  • Reviewing three decades of data, it appears that government funding is making child care temporarily more affordable for families, but is failing to reduce costs in the medium to long term. Such a pattern of inflationary spending on child care is unsustainable.

Finding 4: There is only a weak relationship between the cost of child care and female labour supply.

  • It is widely believed that if child care was more affordable, more mothers would participate in the labour force. Governments have embraced this argument. But statistical and empirical evidence on the strength of the association between female labour-force participation and the cost of child care tell a somewhat different story.
  • Labour-force participation of women aged 25–34 and 35–44 increased by 50% over the period from 1974 to 2007. Government spending on child care over the same period increased by 4000% (that is, by a factor of forty). Most of the increase in government spending occurred from the beginning of the 1990s, while most of the increase in female labour-force participation occurred in the preceding decades. Women were already working in increasing numbers well before child-care spending escalated.
  • Empirical research findings on child-care costs and labour supply are often presented as ‘elasticities.’ This is a measure used in economics to describe the relationship between two variables. In published research to date, the price elasticities of labour supply (participation and hours) fall into the range generally described as ‘inelastic.’ In all but one instance, international research has found a weak negative relationship between the cost of child care and whether and how much mothers work.
  • Evidence dating from the 1980s suggests that child-care costs have a small, economically insignificant relationship to total female labour supply in Australia, with a stronger but still modest relationship for single and low-income mothers.
  • This aligns with survey data indicating that personal preferences and attitudes to parenting are more salient.
  • Cost-benefit analyses, including modelling of the 50% Child Care Tax Rebate, have found that child-care subsidies are unlikely to ‘pay for themselves,’ except for single mothers. There is likely to be an overall net cost to government.
  • The evidence indicates that in middle- to high-income families where both parents work, they do so mainly because they want to, for their own satisfaction or to maintain their preferred standard of living. Taxpayer funding specifically provided to subsidise these families’ use of child care is difficult to defend on the basis of national economic or public goods.

Jennifer Buckingham is a Research Fellow at The Centre for Independent Studies.

Latest Publications

Eight Housing Affordability Myths
Stephen Kirchner
10 July 2014 | IA146

Australians are conflicted in their attitude to this long-run change in real house prices because they are both investors in housing as an asset class and consumers of housing services. This conflicted attitude on the part of the public is reflected in confused public policies followed by Australian governments. Unfortunately, many of the policies pursued by Australian governments in the…

Still Damaging and Disturbing: Australian Child Protection Data and the Need for National Adoption Targets
Jeremy Sammut
16 April 2014 | IA145

In December 2013, the Abbott government announced plans to make it easier for Australian parents to adopt children both locally and from overseas. Acknowledging the official ‘taboo’ on adoption in Australia, Prime Minister Tony Abbott ordered an inter-departmental committee to recommend ways to take adoption out of the ‘too-hard’ basket. The chief barrier to raising the number of local adoptions…

Why Jaydon Can’t Read: A Forum on Fixing Literacy
Jennifer Buckingham, Justine Ferrari, Tom Alegounarias
18 February 2014 | IA144

Many thousands of Australian students have very low levels of literacy after spending four or more years at school. The Spring 2014 issue of the CIS journal Policy contained an article called ‘Why Jaydon Can’t Read: How Ideology Triumphed Over Evidence in Teaching Reading’, which concluded that students were not being provided with the most effective evidence-based reading instruction in…

Independent Charities, Independent Regulators: The Future of Not-for-Profit Regulation
Helen Andrews
06 February 2014 | IA143

The Australian Charities and Not-for-Profits Commission was established by the Gillard government in 2012 with the intended purpose of cutting the red tape faced by Australia’s charities. So far, the regulator has failed to make any significant progress on this goal or on its two other main goals: increasing public trust in charities and improving the quality of regulatory oversight…

The New Silence: Family Breakdown and Child Sexual Abuse
Jeremy Sammut
30 January 2014 | IA142

Despite family breakdown exposing children to greater risk of sexual abuse, the issue receives scant attention in this country. Child sexual abuse is not fully and frankly discussed because the public discourse is self-censored by politicians, academics, social service organisations, and the media in compliance with politically correct attitudes towards ‘family diversity’—the socially ‘progressive’ and ‘non-judgmental’ fiction that says the…