The macroeconomics of childcare policy

Childcare is using your wage to pay someone else's wage to supervise your child – closing this macroeconomic loop helps us think more clearly about policy settings

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Imagine you are a childcare worker with four young children at home – two sets of twins, 20 months apart.

You have four children aged under 24 months.

You work in childcare.

Are you going to be able to “afford childcare” and return to work?

Given that the maximum staff-to-child ratio at ages under two years is one staff member to four children, you’d be paying someone else to do your exact job. Another worker would be caring for your four children, and you would be caring for four children from other families. It’s a child swap.

You cannot earn more than it costs to pay for your childcare — what you pay must cover your gross income, but come out of your net income.

I have no idea why child-swapping is a rort. It’s the main purpose of the formal childcare system. Source: https://www.theguardian.com/australia-news/2016/jan/03/childcare-ban-on-providers-claiming-for-their-children-saves-millions-coalition

This thought experiment closes the macroeconomic loop on childcare to show that households (and parents) are both users of formal childcare and providers of it.

The net effect of formal childcare as a system is to

1. swap around who looks after which children, and

2. increase the number of children being supervised per adult to free up adults to do other productive things.

The second effect is constrained by maximum child-carer ratios, yet it is often thought to be the main way that childcare improves economic outcomes.

On average, if the typical at-home parent supervised their own 1.8 children below school age, and the maximum ratio for formal care is 7.2 children per adult (for that age distribution of children), then we can increase the number of children per adult by a factor of four at most.

This means that for every four extra parents in the workforce because of formal childcare, at least one is in the childcare workforce looking after the children of this group of four parents.

We have a classic Baumol’s Cost Disease situation in childcare because, once constrained by child-carer ratios, its main effect is to swap who looks after children. Competition won’t solve this.

Yet if we read the extensive report from the Australian Competition and Consumer Commission (ACCC) on rising childcare fees, we might almost be tricked into thinking that competition to bring down profits might help.

They note that the average cost was $124 per child per day for centre-based daycare, with half of the fees falling between $110 and $133 per day. That’s a pretty tight distribution, and there is also very little difference between not-for-profit and for-profit centres — just a few bucks a day per child.

The Grattan Institute is rightly sceptical of the ability of competition to have much effect. But they seem to miss the core economics of the childcare system.

As we have seen, the main input of childcare is the wages of women workers and the price of childcare is also paid out of the wages of women workers.

It is an unavoidable economic logic.

The cost of childcare is at a minimum the following
Cost per child per day = Carer gross employment costs + facilities and food costs

The components of that are
Carer gross employment cost per child per day = Total hours x Gross employment costs per hour x 1/child ratio

At a $50 hourly gross employment cost, including super, payroll tax, holiday allowances, administrative costs, and so forth, and a total of 10 hours of care for a day, we can show the gross employment cost component per child per day for two ages.

For the youngest children, aged below 24 months, the gross wage cost is 10 x 50 x 1/4 = $125. For older children where the ratio is ten children per carer, the gross wage cost is 10 x 50 x 1/10 = $50

Average that out with a quarter of children at a centre aged under 2 and three-quarters older, and you get nearly $70 per child per day in labour costs alone.

Add in facilities, meals, and administration, which might be a third of the total cost, then we get to $105 per child per day. This is not far from the $124 per day national average cost.

Now compare this to what the carer is actually paid. If they work 8 hours their gross employment cost is $400, but their own net after-tax income is probably closer to $200. If they have two children in child care they must spend 24% more than they earn on childcare.

There is an inherent conflict between cheaper childcare and higher childcare wages.

Subsidies and what they achieve

Because of this economic reality, the way we create an option for childcare for lower-income women is by subsidising it. We subsidise about $75 per day per child on average to bring down the cost from $124 to $49.

The question for me is what social objective is being achieved from this subsidy?

The ACCC report notes that we collectively spent $10 billion subsidising childcare in 2021–22, or $7,715 per child.

That’s a big number. It's as big as the proposed once-off Housing Australia Future Fund, but every single year.

Is this the best way to spend $10 billion to help parent support their young children?

I don’t know.

For me, bringing caring for children into the formal economy, by swapping who supervises children, doesn’t seem like an important social objective.

Is the outcome here better than just paying parents of young children $7,715 per child per year?

If we are subsidising formal childcare, why not subsidise a child’s own parents to do the job? Imagine that Mum of two sets of twins. She gets a $31,000 subsidy if a different parent looks after her four children. None if she looks after them herself.

On average, we subsidise each child $75 per day for childcare. Two children in care three days a week is a $450 subsidy.

Perhaps many of those families would prefer cash in their bank account instead so they can choose whether to spend it on childcare or something else that provides them even better value. Providing that as an option seems sensible.

Maybe childcare subsidies increase the number of children being supervised per adult, freeing up more parents to do other productive things.

But most economic commentary around childcare never seems to close the macroeconomic loop. If it did, it would quickly show that affordable childcare is in direct conflict with higher carer wages and fewer carers per child, and that even without formal childcare, all children are supervised by parents, relatives, or other carers.