October 30, 2005
Should Governments Subsidize Child Care and Work Leaves?
Should Governments Subsidize Child Care and Work Leaves? BECKER
Germany and the United States, among many other countries, have been criticized for not having the extensive system of benefits to parents who have children found throughout Scandinavia and some other countries. For example, the Swedish government not only heavily subsidizes day care activities for young children with working mothers, but also allows up to eighteen months of paid leave to care for a newborn child. These benefits are open to both mothers and fathers, but mothers take practically all leaves. Benefits almost fully compensate for the loss in earnings during the first 12 months of leave, while they offset more than half of earnings during the next 6 months of leave. Also companies have to take their employees back at comparable jobs when they decide to return to work from a child leave.
The many advocates of a Swedish-type childcare system believe it permits mothers of young children to work while guaranteeing that their children have adequate childcare at government-run facilities. At the same time, it allows mothers to care for their young children without losing their jobs. In addition, these subsidies tend to encourage families to have more children since they reduce the cost of having and raising children.
Despite these claims, I believe it would be a mistake for the US, Germany, or other countries to emulate the Swedish approach. For starters, middle class and rich families can pay for their own childcare services for young children, such as preschool programs, whether or not the mothers are working. In fact, the majority of such families in the United States do send their young children to day care programs. It is much more efficient to have better off families buy childcare services in a private competitive market than to spend tax revenue on preschool government-run programs for the children of these families. The Swedish childcare system was insightfully criticized along these lines in a controversial but I believe correct analysis by my late colleague Sherwin Rosen (see "Public Employment, Taxes and the Welfare State in Sweden", NBER Working Papers 5003, 1995).
It could make sense to subsidize the preschool activities of children of poor families since these children may well receive inadequate care without such subsidies. The US takes this approach by only subsidizing preschool care of low-income families. These subsides appropriately take the form of a voucher system rather than government-run pre-school programs. Poor families are in essence given vouchers each month that they can spend on any approved private day care program for young children. The market is highly competitive and I believe works well, although there are few careful evaluations of this system. Still, I believe it provides an example of how a voucher system might work for older children in school.
The case is also weak for following Sweden by providing all women who work with generous and lengthy government-financed paid leaves. The US does not have this system, yet many working women leave their jobs at least temporarily, or work part time, in order to care for their children. The vast majority of parents are very concerned about the wellbeing of their children, and give that a lot of weight when deciding whether to care for them rather than using preschool programs and other outside help.
Government –financed payments to working mothers who take a leave of absence to care for their young children subsidizes women who work compared to women who decide to stay home fulltime to care for children and engage in other activities. It is still controversial whether there is a significant benefit to children from having mothers who stay home to care for them instead of having mothers who work, and care for their children (perhaps more intensely) only before and after work and on weekends. On the whole, I believe that work decisions are best left to parents without government subsidies or other government involvement.
Generous government childcare and work benefits for families with young children are advocated sometimes because they promote larger families. European and some Asian countries are particularly receptive to this argument since their birth rates are so low that their populations would begin to decline soon unless births increased a lot, or they accepted large numbers of immigrants. Yet while the Swedish total fertility rate is quite a bit above that of Germany, Italy, and some other European nations, it is still too low to prevent its population from declining in the near future, despite the world's most generous system of work and child care benefits for families with young children.
This may be because the Swedish-type system promotes larger families in an indirect and inefficient manner. The most direct and best way to encourage births, if that is the goal, is to provide monthly allowances to families that have an additional child. Subsidizing births directly encourages larger families without mainly targeting women who work, or women who value childcare services a lot. Moreover, since the vast majority of families even in Europe have at least one child without government subsidies, an efficient family allowance program should concentrate subsidies on the marginal fertility decision; that is, on second, third, or higher order births that may not happen without subsidies.
France has an extensive and complicated system of direct allowances mainly to families that have more than one child. The best study of the effects of this program (see Laroque, Guy & Salanié, Bernard, 2005, "Does Fertility Respond to Financial Incentives?" CEPR Discussion Papers, 5007) shows that it has had a significant effect in raising French birth rate to among the highest in Western Europe, although other factors are also important. However, the system is expensive, and the French total fertility rate is still considerably below its replacement level.
The US does not apparently need any stimulation to family size since its total fertility rate is the highest of any developed country, and it is even above that of many much poorer countries, like China or South Korea. The case for general subsidies to childcare and for work leaves to employees with young children is also weak. So I believe that present American policy in these areas is much better than the Swedish approach, and does not need drastic changes.
Subsidizing Child Care and Work Leave--Posner's Comment
I agree with almost everything that Becker says in his post. For example, I agree that whether or not the government should subsidize day care, it should not provide day care facilities; the subsidy should take the form of vouchers, so that the private sector would provide the facilities. Subsidization and provision should normally be separated, since the government is an inefficient service provider compared to private firms.
I also agree that when the purpose of subsidizing child care and work leave is to increase the birth rate, the emphasis should be on subsidizing the second and third child (to prevent population from declining, there must be an average of 2.1 births per woman), since, as Becker points out, most couples have at least one child.
And I agree that there is no good reason to encourage a higher birth rate in the United States. Not because our fertility rate is higher than that of the other rich (and even many poor) countries (the point emphasized by Becker), though it is, but rather because it is close to the replacement rate, and, more important, because the United States is uniquely attractive to high-quality, easily assimilated immigrants, who are good substitutes for native-born citizens.
One thing that puzzles me is the suggestion that child care and work leave subsidies are intended to encourage women to stay home and take care of their children. I had thought the opposite--that the purpose of child care subsidies, when they take the form of subsidies for day care, and compensated work leaves, was to encourage women who want to have children to work. After all, women who don't work don't need day care or work leave.
From an economic standpoint, women should not be encouraged to enter the labor market unless the social value of their output in that market is greater than the social value of their household production, importantly including their contribution as mothers to their children's human capital (broadly defined). I do not know whether it is. Of course if women want to work and do not receive any child care or work leave benefits, they may decide to have no or fewer children, but as Becker points out, if a higher birth rate is the goal, child care and work leave subsidies are not effective means to it.
I do not agree that if women are better mothers if they stay home with their children, the government should require one parent (who as Becker points out will usually be the mother) to stay home. That would put some women to an unnecessarily hard, and socially suboptimal, choice--women who would be far more productive in the labor market, but who also would be, on balance, superior mothers (maybe just because of a superior genetic endowment!).
I do think fertility has to be a major concern for countries, such as most European countries plus Japan, that have at once a birth rate far below the replacement rate and a difficulty in assimilating immigrants. The ideal solution might be simply for these countries to grow smaller in population terms; the problem is that this would place unbearable strains on social services, and so countries faced with a declining population are under irresistible political pressure to admit immigrants, whether or not they can be assimilated. Europe has a large and growing Muslim immigrant population that is not only poorly assimilated, but, to some extent, a danger to their host countries and the world; and that population is growing rapidly not only through immigration but also because of early marriage and large families. These nations might be well advised to pay women to have a second and third child.
It is doubtful that subsidization, however well designed, will raise the birth rate of the European nations that have birth rates far below the replacement level to that level. Children in such nations are extremely expensive, especially in opportunity costs of parents' time (which is why birth rates are so low), and the tax rates necessary to offset those costs enough to have a significant rate on the birth rate might be infeasible. (Another factor in declining birth rates I believe is reduced gains from marriage, the reduction being related to women's opportunity costs of time but to other factors as well.) However, modest subsidies that reduced the rate of population decline might be worthwhile in moderating the demand for immigrants.