The broken childcare market is a classic government failure

Last week came further warning signs about the strains and challenges in the broken childcare sector.

A survey for the Professional Association for Childcare and Early years (PACEY) warned that nursery closures were up almost 50 per cent last year, and that providers were struggling to retain good staff because of funding pressures.

In the not-too-distant future, childcare policy will be taught as a case study in government failure. Well-intentioned interventions are having perverse consequences and rapidly leading to more and more state control.

Let’s start with the government’s expansion of “free” childcare to 30 hours for three and four year olds. This has made nurseries increasingly dependent on government funding. But the state generally provides lower fees per hour than private consumers.

When the state only offered 15 hours of free care, nurseries cross-subsidised these low fees by charging more to non-subsidised customers. With the doubling of free care, their scope for doing this has been much diminished. Some businesses are becoming unviable as a result, and others restrict places, cut costs, or charge parents for extras.

This was all predictable and predicted. But it is only a microcosm of the mess of contradictions that UK governments have tangled this sector in.

At one time or another, Conservative and Labour administrations have justified extensive regulation and state subsidies with the aims of: supporting mothers into work, improving care quality, making childcare more affordable, and ensuring that it is accessible.

Some of these aims are directly contradictory, while the policies result in huge trade-offs.

The “free” care, for example, improves affordability for recipient groups and might allow more mothers to go back to work.

But if PACEY is right that it leads to nursery closures and constrained staff pay, that could reduce accessibility to care settings. Lower wages are likewise likely to attract lower quality staff into the sector.

Similar unintended consequences occur elsewhere.

It is hoped that staff-child regulations will deliver quality care by ensuring that children are not neglected. Yet they either reduce the revenue-earning potential of each carer (since they can be responsible for fewer children at once) or increase the costs of provision for a given number of children.

If this results in lower staff wages, again it will result in lower-quality workers being attracted to the sector, making the overall effect on quality ambiguous.

Increased business costs also reduce supply, as more nurseries struggle and fail. This leads to higher prices for consumers, not only reducing affordability but also encouraging parents to use the informal sector, which may be lower quality.

Indeed, studies of childcare regulation in the US (where more variation exists between states) have estimated that loosening staff-child ratio regulations by one child across all age groups would lower prices by between nine and 20 per cent.

Sir Kevan Collins of the Education Endowment Foundation recently highlighted another policy-induced problem. The government subsidises “free” early years education for disadvantaged two year olds, with the intention of improving their later school performance and life chances. But since staffing ratios for this age group are higher still, the government fees are even worse for them than for three and four year olds.

Providers are therefore encouraged to reduce available places for two year olds in favour of older children. So where government intervention might do the most good, providers instead increase availability for parents who could afford private care at the expense of those who it would help most.

In short, current childcare policy is an unjustified, unholy mess – with unmet objectives and conflicting aims. It is incoherent. Yet the floodgates have opened and interest groups will now push for more and more government funding.

It would be no surprise at all to see Jeremy Corbyn heading into the next election promising the creation of a National Childcare Service to cure supposed market failures, with the state providing pre-school from birth through to primary school.

Such a government takeover of this whole area of life would be an unevidenced disaster. But that’s where we are headed unless policy is overhauled, and the glaring contradictions we see today are eliminated. The state needs to decide on a clear aim for what it is trying to achieve, and stick to it.

At the moment, the government is doing what governments always do in important markets: restricting supply through regulation and requirements, then subsidising demand. A more classic case of the state crowding out family and civil society through regulation and subsidy is difficult to find.

And yet nobody seems to care.


This article was originally published by City AM.


Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK).

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