The cost of living crisis has dominated our news cycle for some time. One of the Albanese Government’s signature actions in this space has been to decrease the cost of child care. We saw just last week their latest commitment: a 15% (over two years) wage increase for early childhood educators – so long as centres do not increase their fees by more than 4.4 per cent over the next 12 months. And, in their Employment White Paper, the Government makes clear that cheaper child care is thought to do more than just ease household costs, but also encourage more mums into paid work. But does lowering out-of-pocket child care costs actually do that? It’s not as obvious as one may think.
To understand this, we examine how the 2018 Commonwealth Government reforms to child care subsidies affected maternal labour force participation. In 2018, a new structure to child care subsidies was introduced that increased subsidies received by low- to middle-income households and decreased those received by high-income households.
As my colleague Silvia Griselda and I progressed our research, one thing that became clear is that, well, nothing is clear when it comes to how mothers’ labour market behaviour might respond to changes in child care subsidies. In fact, they may not respond at all.
Let’s look at the factors that affect the decisions of mothers to obtain a job or work more hours, and the trade-offs they face.
Formal child care is a way in which mothers can decrease their time spent in unpaid care. This suggests that the cost and availability of formal child care should be a significant determinant of mothers’ ability to take on paid work.
Under the 2018 reforms, 62.2% of families – largely low- to middle-income households – saw a decrease in the net cost of child care.
So, if the cost of child care has decreased in these households, shouldn’t this have encouraged mothers to work more?
It’s not that simple.
The amount of subsidy a family receives is dependent on household income – the more your household earns, the more you have to pay for child care. There is good intention behind this structure – more support for those who have less means, and less support for those who have greater means.
But when a mother chooses to work, or work more, it will increase total household income, which decreases the subsidy amount they receive, and subsequently increases their out-of-pocket cost of child care.
Whether the decision to increase labour supply makes financial sense will depend on whether those extra wages are high enough to cover higher child care costs, as well as any other expenses or loss of benefits faced by the household.
Indeed, child care costs are not the only thing mothers have to consider in their decision to work.
Another factor that affects mothers’ decision to work is the transfer system – or rather the interaction of the tax and transfer system.
For instance, families can be eligible for multiple income support payments to assist with the cost of raising children, such as Family Tax Benefit A, with low-income households eligible for higher levels of support. However, generally, as your income increases, you are eligible for fewer benefits. This could create a disincentive to additional work.
To illustrate, we have constructed Workforce Disincentive Rates (WDRs) under both 2017 and 2018 policy conditions. WDRs capture personal income taxes, reduction in benefits, and child care costs as a proportion of the wages earned by a worker for an extra day of work.
Let’s look at dual-earner households with two children under the age of 5, where one partner always works full-time, and the other partner is deciding on their work hours. We assume that the mother is the one deciding on her work hours, which is typical of couple families with young children.
While the 2018 child care reforms reduced the WDRs for mothers in low-income households, these disincentives remained high. In a household where both parents earn minimum wage, WDRs were 125% for a mother working an additional day beyond her current 2 days per week.
This means that, for mothers receiving the minimum wage, working more could mean losing all of the extra money earned for that day, plus some of the money earned on other days.
The same decision for a household where both earners are receiving an average wage shows a WDR of 56% for the mother, and where both parents are earning $200,000 each, that WDR sits at 64%.
Not only do low-income mothers face higher WDRs, but the dollar-value of the wages that remain for them are, by definition, much lower than those receiving higher-incomes.
This back-of-the-envelope analysis suggests that increased child care subsidies for low-to middle-income households may not be sufficient to encourage mothers in these households to increase their labour supply.
And that’s exactly what we find.
Our initial results suggest that there was no labour supply response for mothers with young children to the 2018 child care reform. This is consistent with the idea that the cost of child care is, actually, not the only thing that might prevent mothers from working more.
Child care subsidies have been altered since 2018, with new policy proposals floating around today. As policymakers consider their next set of child care reforms, it’s important that they do so understanding all of the factors that affect a mother’s decision to work. One thing is clear: increasing mothers’ labour supply requires more than just looking at the child care system in isolation.
