Universal Childcare Provision
Introduction
Montpetit, Beauregard, and Carrer (2024) quantify the welfare impact of universal childcare provision by calculating the MVPF of Québec’s 1997 reform, often deemed the most ambitious childcare reform in North America. The reform introduced reduced-fare daycare at $5/day/child and increased the number of spaces per preschooler from 18% in 1997 to over 44% by 2003. The reform significantly boosted mothers’ labor supply and childcare use, though it had no notable economic effects on children’s long-term outcomes or on fathers. The analysis leverages newly digitized data on daycare coverage rates by administrative region within Québec matched with longitudinal data on Canadian children and their parents.
The paper estimates two MVPF calculations. The first uses a sufficient-statistics approach with a non-linear difference-in-differences model to estimate mothers’ earnings gains along the income distribution. The second uses a structural model to derive the demand for the policy, accounting for the non-marginal change and non-pecuniary gains.
MVPF = 1.4
Net Cost
The net cost of the reform to the government is the amount of new subsidies allocated to the daycare market less any additional income taxes levied from working mothers. The paper focuses on additional income taxes remitted by mothers in two-parent families because of (i) another simultaneous program affecting single parents and (ii) evidence of null impacts on children later in life and on fathers.
1. Total subsidies: The paper obtained the total subsidy amount from the Québec Treasury Board. As some subsidies existed before the reform, the paper deducted the estimated amount that would have been spent in the absence of the reform. To calculate these counterfactual subsidies, the paper applied a conservative growth rate of 2.1%, reflecting the pre-reform growth rate. The total upfront expenditure for the period analyzed (fiscal years 1997-1998 to 2002-2003) amounts to $2.617 billion.
2. Additional tax revenue and reduced transfers and benefits: Using the estimated labor income gains and the Canadian Tax and Credit Simulator (Milligan 2019), the paper calculates the net fiscal impact for each mother. This fiscal externality is estimated at $971 million using the reduced-form method and $909 million using the structural approach.
Thus, the net cost is $1.7 billion in the reduced-form and $1.708 billion under the structural approach.
Willingness to Pay
The paper uses two approaches to estimate mothers’ WTP for the reform.
The reduced-form estimate uses a sufficient-statistics approach. As the paper focuses on mothers, the impact of the reform on their budget constraint is their net earnings gains. The paper’s non-linear difference-in-differences estimator yields raw earnings gains of $2.213 billion and thus $2.213 − $0.971 = $1.242 billion in net earnings gains. The paper also considers the dynamic impacts on mothers as their children age, as estimated by Lefebvre et al. (2009). Lefebvre et al. (2009) find that mothers of older children, whose child was eligible for the program when younger, experienced an average net earnings gain of $1,995. By multiplying this estimate by the number of mothers in two-parent families with children in the relevant age ranges over the period considered, the paper calculates an additional $1.102 billion in net earnings gains. The total WTP is thus $1.242 + $1.102 = $2.344 billion in the benchmark reduced-form case.
For the structural estimator, the paper calculates the equivalent variation from the simulated reform. The paper shows that, in their model, a mother’s equivalent variation is equal to the ratio between the difference in indirect utilities under the two policy states, and the inverse of her income net of childcare expenses in the status quo. Summing the WTP across the total number of mothers of preschoolers in Québec yields a total WTP of $6.078 billion.
MVPF Summary
The MVPF of the Québec childcare reform under the benchmark estimator is then the ratio of net earnings gains to the net cost $2,344M/$1,700M = 1.42.
Under the structural approach, which includes non-pecuniary gains, the MVPF is the ratio of the simulated WTP to the net cost $6,078M/$1,708M = 3.56.
The paper also performs counterfactual simulations using the structural model and computes counterfactual MVPFs with variation in the level of supply expansion and the price charged to families. The paper finds that the government could have achieved larger welfare gains by channelling more resources towards opening spots rather than to lowering prices. For instance, a reform that increased the daycare coverage rate by an additional 0.05, but doubled the fee (to $10/day/child) would yield an MVPF of 4.02.
Last, the paper also notes that, when accounting for the societal costs associated with the long-run increase in youth criminal activity reported by Baker et al. (2019), the MVPF slightly decreases to 1.40 under the benchmark approach.
References
Baker, Michael, Jonathan Gruber, and Kevin Mulligan (2019). “The Long-Run Impacts of a Universal Child Care Program.” American Economic Journal: Economic Policy, 11(3):1–26. https://www.aeaweb.org/articles?id=10.1257/pol.20170603
Lefebvre, Pierre, Philip Merrigan, and Matthieu Verstraete (2009). “Dynamic Labour Supply Effects of Childcare Subsidies: Evidence from a Canadian Natural Experiment on Low-Fee Universal Child Care.” Labour Economics, 16(5):490–502. DOI: https://doi.org/10.1016/j.labeco.2009.03.003
Milligan, Kevin (2019). Canadian Tax and Credit Simulator. Database, Software and Documentation, Version 2019-1. https://sites.google.com/view/kevin-milligan/home/ctacs
Montpetit, Sébastien, Pierre-Loup Beauregard, and Luisa Carrer (2024). “A Welfare Analysis of Universal Childcare: Lessons From a Canadian Reform.” Canadian Labour Economics Forum Working Paper Series. https://clef.uwaterloo.ca/wp-content/uploads/2024/08/CLEF-073-2024.pdf
Policy Features
- Category
- In Kind Transfers
- Sub-Category
- Child Education
- Beneficiary Type(s)
- Children under five, Parents
- Average Age
- 31
- Country of Implementation
- Canada
- Year of Implementation
- 1997-2003
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- No
- MVPF Publication Link
- clef.uwaterloo.ca/wp-content/uploads/2024/08/CLEF-073-2024.pdf