WEEKEND READ: The childcare myth

Australia's labour shortage continues to play havoc with some regions and sectors of the Australian economy, frustrating many employers. While retention of older workers and the use of migrant workers can address some of these shortfalls, another obvious factor is the workforce participation of women who have left paid employment to have children.

In this respect, the relationship between child care and the participation of mothers in the paid workforce is frequently raised: it seems obvious that if child care was more affordable, more mothers would work. Indeed, it seems so obvious that this statement is repeatedly made without providing any supporting evidence.

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.

National statistics on child care spending and female labour force participation rates suggest that the relationship works in the opposite direction. Most of the increase in labour force participation rates of women aged 25-34 and 35-44 occurred during the 1980s, while government spending on child care escalated in the 1990s.

Women were entering the paid workforce in increasing numbers well before substantial child care subsidies were introduced. This created a demand for subsidised child care which was not denied. Commonwealth government spending on child care has increased by 4,000 per cent in real terms since 1980.

Empirical research on child care costs and labour supply provides further evidence that the relationship is far from straightforward. Of the 24 most commonly cited studies on child care costs and labour supply, 23 produced elasticity estimates in the range generally defined as inelastic. According to this evidence, and to Australian economists who have reviewed it, the association between child care costs and maternal employment is weak and economically insignificant. There is a stronger but still moderate effect for low income and single mothers but, in general, decreasing the cost of child care has only a marginally positive effect on labour supply.

So what does this tell us? Firstly, mothers take more than the cost of care into account when making decisions about work. Surveys of Australian mothers have found that personal preferences and attitudes to parenting are the main factors in whether and when women begin paid work after having children.

Secondly, it confirms the ‘crowding out' effect of child care subsidies on informal child care identified in child care usage statistics. Increased subsidies for formal child care encourage parents who are already working to move their children from informal to formal child care. The result is a large increase in formal child care usage (and subsidies) but only a small increase in labour force participation.

Finally, it tells us that government spending on child care is unlikely to pay for itself. Economists at the Melbourne Institute modeled the effect on labour supply of increasing the 30 per cent Child Care Tax Rebate to 50 per cent, a policy the Labour party took to the last federal election and introduced this year. The modeling showed that an increase in the rebate would result in a net cost to government, even after taking into account increased taxation revenue and decreased welfare payments.

If the above reasons are not sufficient to ring alarm bells about child care subsidies, there is one further question to consider. Even if government spending on child care is a net cost to taxpayers, does it make child care more affordable?

The answer is apparently no. Despite, or perhaps because of, massive increases in Commonwealth government spending on child care over the last three decades, child care has become more expensive. This is certainly the perception of many families – there was public outcry over the decision by ABC Learning Centres to raise fees by 10 per cent at the end of June, though the company denied at the time that the increase was linked to the increase in the Australian government's child-care tax rebate.

In the 1980s, the rate of growth in child-care costs was less than the rate of growth in the general cost of living. In recent years, child-care costs have been rising at an annual rate five times higher than rises in the cost of living.

If you map child care inflation rates from 1980 to the present against the introduction of new government funding, it is clear that each new injection of cash has been followed by an escalation in the cost of child care. Government funding is making child care temporarily more affordable for families, but is failing to reduce costs in the medium to long term. As costs go up, the demand for increased subsidies intensifies and the cycle continues. Such a pattern of inflationary spending on child care is unsustainable, and according to the evidence, ineffective.

Jennifer Buckingham is a research fellow at The Centre for Independent Studies and author of Child Care and the Labour Supply, available at www.cis.org.au