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.

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