Can parents afford to work? An update

Linda L. Richardson, Organization for Economic Co-operation and Development (OECD)

This paper documents in empirical detail how government policies impact on the cost of childcare for parents, identifying how these costs interact with tax and transfer policies to determine the financial incentives of parents to seek paid employment. It extends the OECD’s 2007 study of childcare costs and assesses how policies affecting the affordability of childcare have changed since 2004. The primary contributions of this paper are to: measure and compare the affordability of formal childcare across 35 OECD and EU countries; examine how these childcare costs impact on work incentives facing lone parents and second earners in families with young children; explicitly quantify the income gain from employment of mothers of young children and their families by combining gender specific earnings data with OECD tax-benefit models; and identify circumstances where childcare costs and weak work incentives contribute to the risk of families with low earnings potential being trapped in poverty over the longer term. The results are disaggregated to identify policy features that represent barriers to work for lone parents and second earners, with young children requiring care, whose employment decisions are known to be particularly responsive to financial work incentives. The barriers to employment they face, particularly by those with low earnings potential, can be reduced by increased targeting of government assistance. Specific policy reforms undertaken by several countries between 2004 and 2008 seeking to lower these barriers have successfully reduced net costs of childcare. This paper highlights that the appropriate policy response requires consideration of current policy settings beyond those directly related to childcare as well as relative priorities over a range of policy objectives. No one simple set of policy prescriptions is appropriate for observed work incentive issues. Effective policy responses must be multifaceted and tailored to the situation in each country.