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

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

2 The Economics of Childcare outline Policy context Patterns of employment and childcare use Economic rationale for subsidising childcare Methods of intervention in the childcare market Possible effects of childcare subsidies Recent policy initiatives: l the WFTC Childcare Credit

3 Childcare and Employment in the UK some background The UK government has recently introduced the Working Families Tax Credit (WFTC) l represents the latest in a long line of reforms since 1971 l motivated by …objectives of making work pay and tackling poverty l the WFTC program will cost £5bn, £1.5bn more than Family Credit l essentially a more generous version of Family Credit, but: l includes potentially generous additional credits to offset childcare costs This begs some questions: l what effects might WFTC have on the provision, quality & use of childcare? l what alternative mechanisms are there for subsidising childcare costs? l does the WFTC childcare credit represent good value for money

4 Mothers Employment patterns 1992 to 2001

5 Mothers Employment patterns by age of youngest child (to 1999)

6 Childcare Use Among Employed Mothers by age of youngest child (to 1999)


8 Should the Government Subsidise Childcare? Why not allow the market for childcare to operate freely and privately? The non-interventionist argument: l In the main, parents choose to have children l It is understand that incomes might fall after having children l Career break effects should be factored into the decision to have children l The role of the state should be limited to ensuring minimum standards among childcare service providers

9 Rationale for Government Intervention in the Childcare Market Market failure in the demand for childcare services l Positive externalities in the use of childcare l Misperception of the costs of career breaks l Barriers to employment/ capital market imperfections Distributional concerns l equality of opportunity for poorer households l equality of opportunity for women

10 Potential Effects of Childcare Subsidies Incentive (demand) effects l increase employment incentives l encourage extra use of childcare l stimulate demand for increased quality of care Producer (supply) effects l promote additional supply of childcare places l promote higher quality of childcare services Societal effects

11 What Type of Childcare Subsidy? universal subsidies l Universal voucher schemes l Universal child credits l Tend to be expensive, & relatively inefficient in promoting employment targetted subsidies l Targetted on certain demographics l Targetted on those in employment l Targetted on low income households l More efficient at delivering employment incentives l WFTC (including the Childcare Credit)

12 The Working Families Tax Credit some structure l Replaced Family Credit in October 1999 l A tax-credit based system for delivering financial support to low-income working households l Differs from Family Credit in a number of respects: l increased credits for adults & children l reduction in credit withdrawal taper l different system for delivery of financial support l 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

13 Family Credit (1995)

14 Working Families Tax Credit (1999) basic credit





19 Working Families Tax Credit (1999) with childcare credit


21 The UK tax and transfer system April 2000

22 The Working Families Tax Credit caseload & cost l Who receives the WFTC? l Who takes advantage of the Childcare Credit in WFTC? l How much does the WFTC, & the Childcare Credit, cost?

23 Number of recipients of FC / WFTC by household type

24 Number of recipients of childcare credits by household type

25 Proportion of FC/WFTC recipients who also receive childcare credits by household type

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

27 Cost of childcare subsidies in FC/WFTC (August 2001 prices)

28 Value of Childcare Subsidies as a Percentage of Total Cost of WFTC/FC

29 The Working Families Tax Credit some 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? l Interactions with other taxes and benefits dissipate the apparent financial gains l A share of the employment incentive was already in place under Family Credit Childcare Credit may provide the most important stimulus

30 Do childcare subsidies create employment? simulation evidence l Recent work has attempted to estimate the likely impact of the introduction & expansion of childcare credits in WFTC l Use an economic model of employment and childcare choices, and detailed information on (possibly hypothetical) policy reform options l some simulation evidence in the UK which suggests that childcare credits in WFTC have encouraged participation among specific client groups

31 Do childcare subsidies create employment? From FC to WFTC, including CCTC l Estimate an increase of 2% to 4% in employment among single parent households l For women with partners, evidence is more mixed: 0.5% reduction to 0.2% increase in employment rates l Overall, around 45,000 to 60,000 women are estimated to move into employment following the introduction of WFTC and CCTC

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