February 2016 Dr. Gordon Cleveland, University of Toronto Scarborough Affordability, Demand and Parental Employment: How Do Early Childhood Education Policies Make A Difference? February 2016 Dr. Gordon Cleveland, University of Toronto Scarborough

Our ECE systems are market-based and have parent fees Most early childhood education services are purchased by parents. Services are supplied by private providers (for-profit or not-for-profit), rather than public. The fees charged for early childhood influence parental decisions. Parents make decisions about employment, about type of care and particular provider. Social objectives in ECE (e.g., employment, use, quality of education) are achieved through public policies that change provider decisions and parental decisions. Provider decisions are the supply side of the ECE market. Parental decisions are the demand side of the ECE market.

Therefore, ECE policies work through how they affect parental demand or provider supply Demand will change when policies affect cost to parents, returns to working, or parental incomes. Supply will change when policies affect costs of production, or fees that producers can charge. Net effects of policy (and distributional effects) can be dramatically affected by changes in demand and supply We have built a demand model for the City of Toronto to analyze the impact of different possible policy changes

Modelling Demand for Early Childhood Education A team of us built a child care demand model for the City of Toronto last year It models the child care decisions and the employment decisions of the main caregiving parent in families in Toronto

An Economic Model of Child Care Demand and Employment Theory: Model simplifies actual decision-making - Main caregiving parent chooses employment status and child care arrangements for all preschool children to maximize family well-being. Parent can work full-time, work part-time, or be not currently employed. Children can be in licensed child care, unregulated care by a non-relative and parent or relative care (in Canada, most licensed child care is full-day and full-week)

7. Parental care/ main caregiving parent is not employed Types of child care 1. Licensed child care/full time employment 2. Unregulated non-relative child care/full time employment 3. Parental or relative care/full time employment 4. Licensed child care/part time employment 5. Unregulated non-relative child care/part time employment 6. Parental or relative care/part time employment   7. Parental care/ main caregiving parent is not employed Employment Status

Key factors affecting demand Policy Levers - Affordability Net price of child care Main caregiving parent’s potential net income (incorporating effects of education, immigration status, cultural/ethnic background, single vs. two-parent) Spouse’s net income or other net income Background differences affecting decisions – may change over time Age of youngest child Number of children 0-5 years Main caregiving parent’s education Single parent/two parent Immigration status/time Cultural/ethnic background of main caregiving parent

An image of demand Imagine there are 2 families. One has a single mother, born in Canada, of British ancestry, with one child 3 years of age, and the mother has a university degree and a high potential wage. Based on these characteristics, she will have a high probability of being employed and using licensed child care. The other family is two-parent, with the mother born in India and has recently immigrated to Canada. There are two children – 1 and 5 years of age. The mother has a high school education and a relatively low potential wage. Her husband makes a reasonably good income working as an engineer. Based on these characteristics, she will have a high probability of not being employed, but if she is employed, she will probably have a part- time job and provide most of the child care by herself, with help from relatives or her husband (by rearranging their shifts to be available for child care). When Early Childhood Education policy changes, it usually affects either parent fees for child care or the net income of the main caregiving parent or other income in the family. This changes the probability that each family will use licensed child care, but… IT AFFECTS EVERY FAMILY DIFFERENTLY, BECAUSE EVERY FAMILY STARTS IN A DIFFERENT PLACE

What’s the use of a demand model? To forecast future demand for licensed services and future employment patterns, even if policy does not change (driven by changes in total population, family incomes, immigration patterns, education levels, single parent vs. two parent families, cultural and ethnic background of families, numbers of multiple-child families etc.); To predict the effect of ECE policies that change any of these: parent fees for child care, net wages of main caregiving parents, other family income, taxes and benefits related to children (and convenience or quality of services); And, to explicitly model the interaction among different policies To predict the “distributional” effects of policy – who will benefit, by how much, who will be first in line to access scarce services; To know what alternatives families are using, where they go when licensed services become less accessible or affordable, and from which child care arrangements they switched when licensed services become more accessible and affordable; To measure the “affordability” of licensed services and assess the changes in affordability when policies change.

1. To forecast future demand for licensed services and future employment patterns Current Supply and Estimated Demand for Licensed Child Care Spaces 2015 Current Supply Demand Difference Licensed spaces (0-5) 47,136 51,205 4,069 (Percent of population)* (28) (31) (3) Infant 3,311 3,710 399 Toddler 9,087 10,510 1,423 Preschool 22,769 23,415 646 Kindergarten 11,969 13,570 1,601 Licensed spaces (6-9) 18,728 21,975 3,247 (17) (20) Total licensed spaces 65,864 73,180 7,316 (24) (27)

2. To predict the effect of ECE policies SIMULATIONS: #1 - Funding is available to provide child care subsidies to all eligible families #2 - No family pays more than 10% of net family income for licensed child care #3 – The price of licensed child care is capped at $20 per day

Effects of Three Policy Simulations   Current Use Simulation 1: Subsidies for all eligible families Simulation 2: Cap of 10% of family income Simulation 3: Cap of $20/day per child Children 0-5 years 47,136 76,135 79,775 86,625 Additional demand -- + 28,999 + 32,639 + 39,489 (Percent of population) 28% 45% (+17pp) 48% (+ 20pp) 56% (+ 24pp)   Numbers of main caregiving parents Employment 87,270 93,915 94,180 96,115 FT employment 60,705 73,600 75,790 79,260 PT employment 26,565 20,315 18,390 16,885

Interactions among policies All income taxes, employment insurance and compulsory pension contributions are calculated in model for each family. All child-related benefits and child-tax-benefits are calculated for each family. Child Care Expense Deduction is much less regressive than expected due to interactions. Calculating distributional effects requires including taxes, benefits and child care policies

3. To predict the distributional effects of policy Projected Use of Licensed Child Care by Household Income   Expected Household Annual Income (Before Tax) Probability of using licensed child care Base Case Simulation 1: Targeted subsidies for all eligible families Simulation 2: Cap of 10% of family income Simulation 3: Operating Grant to reduce fees to $20/day per child Less than $50,000 38% 62% 56% 54% $50,000 - $99,999 29% 41% 45% 50% $100,000 or more 33% 34% 44% 59%

Distribution by Parent’s Education   Education Level of Main Caregiving Parent Probability of using licensed child care Base Case Simulation 1: Targeted subsidies for all eligible families Simulation 2: Cap of 10% of family income Simulation 3: Operating Grant to reduce fees to $20/day per child High School 28% 45% 43% 44% College 35% 48% 51% 57% University 36% 61% 33% 47% 49% 54%

Family characteristics matter   Average Probability of Using Licensed Child Care in City of Toronto 2015 Youngest child age 1 16% Youngest child age 3 66% Youngest child age 5 39% Recent immigrant – less than 5 years 27% Canadian-born 37% One child 0-5 Two children 0-5 24% High school education or less 28% University degree 36% Sole parent families 53% Two parent families 29% Average of all families 33% Family characteristics matter

4. To know what child care arrangements families are using when they don’t use licensed services The diagram on the next page shows the use of four main child care/employment arrangements that families use In particular, the diagram shows how the use of each one is affected by a change in the net parent fee for the use of licensed care

5. To measure the affordability of licensed services Two measures of affordability for each family in the model. Family Income Affordability Measure (FIAM) – Net cost of child care to parents ➗ net family income Caregiving Parent Affordability Measure (CPAM) – Net cost of child care to parents ➗ increase in net family income when caregiving parent is employed rather than not employed CPAM measures the size of the employment “barrier” due to child care costs. Note that caregiving parent’s income is the income that could be earned if she were employed full-time. “Projected” income.

AVERAGE VALUES OF AFFORDABILITY FOR TORONTO FAMILIES, BREAKDOWN BY SUB-GROUPS   Average value of Family Income Affordability Measure for this group (%) Average value of Caregiving Parent Affordability Measure for this group (%) Youngest child age 1 33.0 87.7 Youngest child age 5 10.0 22.5 Recent immigrant – less than 5 years 32.0 82.0 Canadian-born 20.5 52.2 One child 0-5 21.1 51.5 Two children 0-5 32.5 93.0 High school education or less 30.4 75.1 University degree 19.1 49.1 Sole parent families 26.7 42.9 Two parent families 24.1 68.0 Average of all families 24.6 63.4

Effects on Affordability: Three Alternative Policy Simulations Degree of Affordability Actual % Simulation 1: Subsidies for all eligible families % Simulation 2: Cap of 10% of family income % Simulation 3: Cap of $20/day per child Affordable (<10% of net family income) 25 60.5 100 76 Unaffordable (10%- 20% of net family income) 27 20 Completely Unaffordable (>20% of net family income) 50 12.5 4

Key Price Elasticities Description Size of elasticity Details Elasticity of Licensed Child Care Demand to Price of Licensed Care - 1.14 Across all observations Elasticity of Full-time Employment and Licensed Child Care to Price of Licensed Care - 0.32 Measured at means of explanatory variables Elasticity of Employment and Licensed Child Care to Price of Licensed Care - 0.14 Elasticity of Parent and Relative Care to Price of Licensed Care 0.35

Conclusions/Summary Having statistical models to estimate demand, employment and affordability improves our ability to think about policy impacts This type of model is excellent as the starting point for measuring the costs and benefits of possible policy changes The demand model helps us understand the substitutions families make when affordability changes Affordability of child care is a major barrier to the use of licensed child care and to full-time employment