Childcare use has massively expanded in the last few decades, with 98% of 3-to-4-year-olds now regularly attending some form of childcare. Government support of childcare has also grown. Since 2010 all 3- and 4-year-olds in England are entitled to 15 hours’ free childcare for 38 weeks per year, regardless of family income. This is set to increase in September 2017 to 30 hours’ free care for families that meet certain conditions. There are many reasons why lowering the price of childcare might be desirable, but what is the rationale for the government to intervene in this market and spend so much on subsidising childcare?
It is widely believed that reducing the cost of childcare could have two important benefits. First, it can increase the labour supply of parents, particularly of mothers. When childcare costs are high, parents may choose not to work, as the increase in earnings may not, or barely, cover the cost of childcare during the hours the parents are working. Cheaper childcare increases the effective wage, or the difference between the wage they would get in a job and the cost of childcare they would have to pay in order to be able to take up this job. As a result, we would expect labour supply to increase as more parents now have an effective wage above their reservation wage, the wage they need to receive in order to be willing to give up leisure and start a job.
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