Childcare Contents

1The economic impact of childcare

Impact of childcare policy on productivity

5.Productivity growth in the UK has been weak since the 2008 financial crisis. The Office for National Statistics estimates that productivity—measured by output per hour—is approximately one fifth below an extrapolation of its pre-crisis trend.2

6.A key objective of the Government’s childcare policy is to improve productivity by increasing labour force participation among the parents of younger children.3 The most common definition of productivity is the level of output per hour worked. While bringing more parents into the labour market will increase economic output, it will only raise productivity if their output per hour is higher than that of the existing workforce.

7.While an increase in parental labour force participation may not automatically increase productivity, it could have a positive impact on other economic indicators, including GDP per capita. It would also increase the tax base and tax receipts.

8.The Committee asked Elizabeth Truss, Chief Secretary to the Treasury, to explain how she thought increasing Government-funded childcare would contribute to improvements in productivity. She pointed to both the shorter-term impact of allowing parents to stay in the labour market and retain their skills and higher rates of pay, and a longer-term impact arising from improvements in child development. The Chief Secretary to the Treasury elaborated on the benefits to productivity of avoiding protracted periods out of the labour market:

If a parent is not able to go out to work when they want to and there is a gap in their CV, all the evidence is that they would tend to miss out on career opportunities as a result. That means that we have a lot of parents, particularly women on the so-called “mummy track”, doing work that is potentially less skilled than those women are capable of. We have schemes like the returners scheme to help people get back into high-skilled jobs but, ultimately, we are losing skills to the UK economy that could be contributing to higher productivity. That is the central issue for productivity I am concerned about. It is not so much the individual’s productivity at the time of going back to work; the gap that is created is a problem.4

[…] For women, hourly wages on return to employment are £2 lower for every year out of work, which indicates what we are losing. That is an Institute for Fiscal Studies (IFS) figure. The gender wage gap is stable until the arrival of the first child and then it gradually rises over the next 12 years, up to 33 per cent. […] the sheer time of being out of work is a factor that is a problem for productivity.5

9.When asked whether the Treasury had quantified the impact on productivity from childcare-related career breaks, Beth Russell, Director General, Tax and Welfare, HM Treasury, stated that: “if you have the same levels of men and women participating in the economy, it could increase GDP by 10 per cent by 2030, which was an OECD estimate”.6 However, the Chief Secretary to the Treasury explained that not all parents want to work, “of non-working mothers, 50 per cent would ideally like to go to work”.7

10.When the Committee asked for further clarification as to what the impact would be, taking into consideration that 50 per cent of women that are not working do not want to enter the labour market, the Chief Secretary to the Treasury stated that the Treasury did not have a specific figure.8 Beth Russell added that it was not easy to perform an analysis that isolated the impact of childcare interventions from other factors that determined labour force participation:

At the moment, we do not have the underpinning data. Actually, even international and academic studies are quite patchy in this area. There are some things from the OECD, and the IFS has done some work about the 15-hours, but it has not been comprehensive enough for us to be able to make concrete assumptions on the basis of it.9

11.The Chief Secretary to the Treasury expanded on this:

There are countries with fairly low childcare support that actually have very high parental participation and there are, conversely, other countries where that is not the case. […] This is something we need to get better at evaluating, as we are doing it, but the historical evaluations in the UK have certainly not been clear. As I have said, there has been a positive increase in maternal employment since 2010. I would imagine that the policies we have been putting in place have had an impact, but exactly how much of it is due to that impact is hard to definitively answer.10

12.The Government’s own economic impact assessment of tax-free childcare states that there could be an impact on productivity in certain circumstances:

Access to affordable, high-quality childcare can help improve productivity in the workforce by reducing absenteeism and problems with timekeeping associated with childcare emergencies. Tax-Free Childcare will increase take-up of childcare from those parents who choose to move back into work or increase their hours.11

Does childcare support increase employment rates?

Chart 1: Employment rates of men and women (aged 16 to 64) with and without dependent children, April to June 1996 to April to June 2017, England

Source: Labour Force Survey, Office for National Statistics

13.A key policy aim of the Government’s childcare schemes is to help parents into work, thereby raising employment rates. It is through this channel that publicly-funded support for childcare is expected to generate the clearest economic impact. The Chief Secretary to the Treasury told the Committee that parental employment rates have been increasing since childcare schemes were introduced but that “it is often quite hard to track the precise reasons”.12

14.Beth Russell added that the Treasury has looked at the international evidence available, and that it had shown:

A small but material impact from a lot of these childcare interventions on the labour market. As the Chief Secretary to the Treasury said, it is one of a number of different factors. There are lots of factors that influence parents’ decisions about how to look after their children.13

15.In a letter to the Committee, the Chief Secretary to the Treasury explained that various studies had found “a positive effect of reduced childcare costs on female labour market participation. However, the size of estimates vary significantly, in part because other factors such as the overall labour market, societal influences, and specific policy design appear to affect outcomes. […] However, the size of the effect found varies considerably between studies”14

16.Studies from the UK include a 2014 report by the IFS “The impact of free, universal pre-school education on maternal labour supply”, which found that:

The increased proportion of children in England who could access free part-time early education by around 50 percentage points between 2000 and 2008, led to a rise in the employment rate of mothers whose youngest child is 3 years old of around 3 percentage points, equivalent to about 12,000 more mothers in work.15

17.The IFS updated this research in 2016 in its report “Does free childcare help parents work?”, which found “no evidence that the work patterns of mothers with younger children, or those of fathers, were affected […] as their children moved from being entitled to a free part-time nursery place (offering 15 hours of free childcare per week) to a full-time place at primary school (which effectively offers parents 30–35 hours of free childcare per week)”.16

18.The Government’s impact assessment of Tax-Free Childcare does not forecast large changes in employment rates:

We expect that Tax-Free Childcare will have a small but positive impact on maternal employment, through encouraging mothers to either return to work or work more hours.17

19.Research carried out over a number of years studying the impact of pre-school childcare on the working patterns of parents in England by a team of academics from the University of Essex, the University of Warwick and the IFS, submitted to the Committee, stated that the impact of providing 15-hours free childcare had not led to a significant impact on the working patterns of parents. The researchers found that:

Being offered free part-time childcare did little to help more parents to work, at least during the first year of entitlement, and that increasing the number of hours of free childcare available from around 15 per week to around 30–35 per week—as children moved from part-time nursery into full-time school—only allowed a relatively small number of mothers whose youngest child was beginning full-time school to enter work. We found no evidence that the work patterns of mothers with other, younger children, or those of fathers, were affected.18

20.The explanation for the small increase in employment was that many parents who wanted to be in work were already in work, and that being given more hours of free childcare simply saved them money:

Some parents did use the free entitlement to take up more childcare, enabling them to move into work (or increase their hours of work), but many working parents were already buying more hours of childcare than the part-time entitlement provides in order to allow them to work; for these parents, more free childcare simply means they spend less on childcare themselves.19

21.As 30-hours free childcare is a relatively new scheme that was only rolled out in September 2017, there is not yet a substantial evidence base upon which to draw conclusions. The Essex, Warwick and IFS submission states that the additional 15 hours is unlikely to have a significant impact on parental employment:

The main impact of the policy is to make full-time childcare cheaper. This might therefore make work more financially rewarding for parents, and this may increase the number of hours that parents will work, or increase the number of parents wanting to work. But there are also reasons why the policy might have only a small effect. For example, if those parents closest to the labour market went back to work when their child was offered free part-time childcare, then the impact of an additional 15 hours of childcare could be smaller than the first 15 hours (because the parents who remain out of work might be those with strong preferences for not doing paid work while they have pre-school children, or those who are less able to find work).20

Gender pay gap

22.In addition to increasing employment rates, economic activity and potentially productivity, the Chief Secretary to the Treasury told the Committee that the Government’s childcare support could reduce the gender pay gap. She said:

The gender wage gap is stable until the arrival of the first child and then it gradually rises over the next 12 years, up to 33 per cent. 44 per cent of women working part-time said they had downgraded occupations to do so.21

23.The IFS report “Wage progression and the gender wage gap: the causal impact of hours of work”, reaches similar conclusions:

there is […] a gradual but continual rise in the wage gap [after the birth of the first child] and, by the time the first child is aged 20, women’s hourly wages are about a third below men’s. The gradual nature of the increase in the gender wage gap after the arrival of children is similar to the gradual accumulation of differences in labour market experience. A big difference in employment rates between men and women opens up upon arrival of the first child and is highly persistent. By the time their first child is aged 20, women have on average been in paid work for three years less than men and have spent ten years less in full-time paid work (defined here as more than 25 hours per week).22

24.In written evidence, the Family and Childcare Trust stated that greater support for childcare has the potential to reduce the pay gap that occurs as a result of women having children:

Women are stuck in jobs which pay below what they could earn, and which do not make the best possible use of their skills. This can have a long-term effect on women’s financial well-being as it can reduce their earnings throughout their career and reduced pension contributions can also impact their retirement. Improving access to childcare will provide parents—and mothers in particular—with real choices about how to balance work and care.23

Alternative policies to increase supply of parents in the labour market

25.The Government’s objective of helping parents into work is being delivered primarily through schemes that provide financial support for the costs of childcare. But the Committee received evidence highlighting other, non-financial, factors that influence parents’ decisions about returning to work. These include:

The economic contribution of stay-at-home parents

26.The Committee received a large number of submissions stating that the Government’s childcare policy ignored those parents who chose to stay at home and look after their children themselves. Many submissions questioned why a childcare worker in the formal economy should be counted as a contributing towards overall economic activity, while a stay-at-home parent is not. Many of these submissions stated that the Government’s objective of ensuring high-quality early-years childcare would be supported by paying stay-at-home parents an hourly wage.

27.The Office for National Statistics has reported that the total value of childcare provided at home was worth £320 billion in 2014, and notes that, in line with international standards for the production of national accounts, this is not included in GDP.25 Were the Government to pay stay-at-home parents an hourly rate, part of this at-home childcare provision would be brought into the formal economy.

28.The Government’s current support for childcare may improve productivity by allowing parents to re-enter the labour market at a level more consistent with their skills. However, the impact on the UK’s overall productivity performance is uncertain and more research would be welcomed.

29.However, to the extent that it increases the employment rate of parents, the Government’s support for childcare will increase GDP, GDP per capita, the tax base and tax receipts. It is also likely to help to reduce the gender pay gap.

30.15 and 30-hours free childcare and Tax-Free Childcare aim to help parents into work. Research suggests that these interventions have only had a small impact on parental employment.

31.The Treasury has made little effort to calculate the economic impact of the Government’s childcare interventions. The Treasury should evaluate Tax-Free Childcare and 30-hours free childcare in order to gain a better understanding of how they affect parental employment and productivity. Until such an analysis is carried out, it is impossible to determine whether the cost to the taxpayer of childcare support is outweighed by the economic benefits.

32.Based on the evidence available, the biggest impact of the Government’s childcare schemes may be to make childcare more affordable to those that receive support, rather than bring parents back into the work place.

33.The Committee notes that many parents choose to care for their young children at home, rather than returning to the labour market, and that the economic value of this activity is not measured in the national accounts. This is a legitimate choice that the Government should take care to respect in setting its objectives for childcare policy. In particular, the over-riding policy objective should be to support parents who decide to return to the labour market, rather than to increase labour force participation among those who choose to stay at home to care for their children.

2 Office for Budget Responsibility, Economic and fiscal outlook, Cm 9530, November 2017, Para 1.16

3 Q2

4 Q18

5 Q19

6 Q11

7 Q11

8 Q13

9 Q14

10 Q14

11 HM Revenue and Customs, Tax-Free Childcare impact assessment (March 2017)

12 Q2

13 Q3

14 HM Treasury (CHI0107)

16 Institute for Fiscal Studies, Does free childcare help parents work? (December 2016)

17 HM Revenue and Customs, Tax-Free Childcare impact assessment (March 2017)

18 University of Essex and other universities (CHI0081)

19 University of Essex and other universities (CHI0081)

20 University of Essex and other universities (CHI0081)

21 Q19

23 CH10075

24 A M Lewis (CHI0099)

25 March 2018