Prime Minister David Cameron's pledge to double the amount of free childcare available to UK parents through the British welfare system will have the effect of staging a job creation experiment that ought to be watched closely by economists and anyone else interested in labour productivity.
The childcare pledge is among the least-exciting bits of Cameron's new plan for Britain, but in terms of jobs it might have an interesting multiplier effect.
We told you in January that one of the most curious (and also most ignored) job creation ideas being bandied about at Davos this year was the notion that if governments provided more childcare this would free couples — mostly women — to re-enter the workforce. In turn, this would lead to employment gains, and tax revenues they generate, which would exceed the money spent on providing the care in the first place.
The idea is being pushed by Sir Christopher Pissarides, a Nobel laureate economist at the London School of Economics (who taught Thomas Piketty as a student).
Pissarides noticed that whenever working parents have kids in countries with minimal daytime childcare provision, one partner frequently stops working because the cost of daycare is so high that it makes working 40 hours a week to pay for it seem not worth it. The mere act of having a baby reduces household income by turning a two-earner home into a one-earner home. And no childcare worker is employed because of the cost disincentive.
By providing subsidised childcare, there is an economic multiplier effect: both parents continue working and a third worker in childcare is added to the labour force. All of them pay taxes. Without childcare, two workers are turned into one, and both labour productivity and the tax base shrink by the same.
Currently, Britain only offers 15 hours a week of free childcare. Cameron says he will double it to 30. It was in the Conservatives' manifesto pledge.
Labour had a similar promise, to increase the number of hours to 25 plus some wraparound morning and evening care for kids at primary school.
(It's probably an indicator of just how bad Labour was at communicating with voters prior to the election that the Tory pledge was for a straight doubling of care to 30 hours, whereas the Labour pledge was an increase to 25 hours plus some other hours if you qualified via a set of definitions. It's difficult to know whether Labour was actually offering more or less childcare that the Tories if you only read the manifesto.)
It doesn't sound like much, but in economics labour productivity plays a huge role in GDP growth overall. The more productive a job is, the more an entire nation prospers. The UK's economic growth is currently handicapped because the only jobs we're adding are crappy low-wage, low productivity positions. In the US, the economy is growing nearly twice as fast because tech companies are adding high-paid, high-productivity jobs as fast as they possibly can.
Here is how terrible UK labour productivity is right now compared to its peers, according to the ONS:
Childcare lets two workers continue in jobs that are likely to be paid more or have higher productivity (the mere act of staying in the labour force is likely to raise your wages over time, of course).
Italy, Pissarides says, is a prime example of how this can go wrong. It has a lower female workforce participation rate, precisely because the cost of childcare makes having a job and kids not worth it. (The US also suffers from expensive daycare — if you have kids, or know anyone with kids, you'll know a family where one parent has dropped out of the labour force, lowering the wealth of the household. And, perhaps not coincidentally, tech company jobs are famous for their luxurious side benefits, like childcare).
Sweden is in the opposite position to Italy. The government there subsidises childcare. As a result, "They create at least twice as many jobs in Sweden as Italy," Pissarides told us earlier this year. About 12-15% of jobs in Sweden's economy are care-based he says.
Pissarides is currently working on a larger study of the economic effect of daycare which he hopes will put some harder numbers on its effect on economic growth.
