Childish assumptions

Economics is all about making assumptions to build models that simulate real-world situations. But sometimes, the assumptions don’t make sense.

The federal government considered improvements to child-care policy in 2010 that included raising requirements on providers to establish smaller class sizes and employ teachers with higher levels of education. While the measures were expected to raise costs by 20 per cent, the government forecast the price increase would not affect the number of women staying home with their kids because that’s what existing economic research predicted.

“The main conclusion from that research was that there was zero relationship between the price of child care and women’s decisions about whether or not to work and how much to work,” said ANU College of Asia and the Pacific Economics Professor Robert Breunig.

“The thing we realised was we really didn’t know much about child care in Australia. The research was really quite limited,” he said. “So we set out to address that question.”

Breunig and other economists developed their own economic models that used different data sets and ended up with six research papers on child-care economics.

One showed that women living in neighbourhoods where child care was harder to find were less likely to work and more likely to work part time or for fewer hours. The research was the first in Australia to show evidence that supply-side constraints in the child care market affected the overall labour market.

Breunig’s model restricted choices to adjust day care usage by the day, rather than by the hour, to simulate the reality that most people typically utilise child care by the day. His model also took into account that better child care was worth more than inferior care.

Another research paper quantified the effects of the 2012 National Quality Framework – the government’s new set of requirements applied to most day care, preschool and after-hours care. It found that raising the price of child care lowered women’s participation in the labour force at a rate that was similar to other OECD nations.

Breunig’s research also created a labour-supply model – which can be applied in markets beyond Australia – that allows policymakers and researchers to test various scenarios, including raising or lowering the child care subsidy, or taking into account higher inflation. The Australian Productivity Commission now uses Breunig’s research to show the effect of child care prices on women’s labour supply in its modelling on child care policy.

While setting the level of child care subsidies is a political decision, Breunig said his model is a tool that can be used by policymakers to accurately predict the likely outcomes of those decisions.

“We have a model of the labour market and a model of child care that captures more realistic features of the real world environment,” he said. “What I like about my story is that this is real journal research that is having real impact.”

Research funded by: Australian Research Council

Related website: Tax and Transfer Policy Institute

Related research: Professor Robert Breunig

 

Updated:  24 April, 2017/Responsible Officer:  Dean, ANU College of Asia & the Pacific/Page Contact:  CAP Web Team