Employment and fiscal effects of investing in universal childcare: a macro-micro simulation analysis for the UK

de Henau, Jérôme (2019). Employment and fiscal effects of investing in universal childcare: a macro-micro simulation analysis for the UK. IKD Working Paper No. 83, The Open University.

URL: http://www.open.ac.uk/ikd/publications/working-pap...


This paper analyses the macro-micro linkages between paid and unpaid work, and their fiscal implications, following investment in a public system of universal childcare for all preschool children. Taking the UK as an example of expensive and inadequate childcare provision of uneven quality, the objective of the paper is to show the extent to which large-scale investment in childcare as a form of social infrastructure, often overlooked by policy-makers and economists in their conceptualisation of ‘investment’, is beneficial to society. It benefits children by improving their access to high quality early education, especially those living in lower income families, and thus improving their life chances and social inclusion. It has larger short-term employment effects than corresponding investment in less labour-intensive industries such as construction; and it fosters gender equality in employment by not only providing many high-quality jobs for women but also allowing many mothers to realise their full potential by freeing up their childcare constraints (and improve their lifetime earnings prospects).

The paper estimates the gross cost for central government of investing in universal full-time full-year childcare with highly qualified and well paid staff using different benchmark scenarios for current pay and qualification levels. It then examines labour demand and supply effects from a gender perspective. Not only childcare investment increases demand for direct and indirect jobs which can be estimated, it also changes the labour supply characteristics of potential candidates as it reduces the budget constraints of carers. Estimations of increased employment and corresponding household income are performed so that tax liabilities and benefit entitlements can be calculated on aggregate to analyse fiscal sustainability considerations. Results show that the net annual funding requirement would only amount to 25% of the gross investment, given behavioural effects on employment and consumption, and thus tax revenue. Moreover, we estimate a fiscal break-even point of the minimum number of years required of increased maternal employment and earnings to yield sufficient tax revenue that recoups the total childcare cost. Results show that if mothers of young children can regain their prior level of earnings (ie are not subjected to a child penalty) then the number of years of gainful employment needed before the policy breaks even fiscally ranges between 7 and 13 years for a typical mother of two children in childcare, which is well within a typical working life-course.

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