Discussion: Child Care Subsidy and Consumer Theory: Childcare subsidies are common throughout the world. According to an Organization for Economic Cooperation and Development report in 2012, childcare spending as a percentage of gross domestic product was 0.9% in Sweden and Norway, 0.5% in the United Kingdom, 0.4% in France, 0.3% in Japan, and 0.1% in Germany and the United States.

The increased employment of mothers outside the home has led to a steep rise in childcare over the past several decades. In the United States today, nearly seven out of ten mothers work outside the homemore than twice the rate in 1970. Eight out of ten employed mothers with children under age six are likely to have some form of nonparental child care arrangement. Six out of ten children under the age of six are in childcare, as are 45% of children under age one.

Childcare is a major burden for the poor, and the expense may prevent poor mothers from working. Paying for childcare for children under the age of five absorbed 25% of the earnings for families with annual incomes under $14,400, but only 6% for families with incomes of $54,000 or more. Government childcare subsidies increase the probability that a single mother will work at a standard job by 7% (Tekin, 2007). As one would expect, the subsidies have larger impacts on welfare recipients than on wealthier mothers.

In large part to help poor families obtain child care so that the parents can work, the U.S. Child Care and Development Fund (CCDF) provided $5.7 billion to states in 2013. Childcare programs vary substantially across states in their generosity and in the form of the subsidy.1 Most states provide an ad valorem or a specific subsidy (see Chapter 3) to lower the hourly rate that a poor family pays for childcare.

In 2009, for a family with two children to be eligible for a subsidy, the family's maximum income was $4,515 in California and $2,863 in Louisiana. The maximum subsidy for a toddler was $254 per week in California and $92.50 per week in Louisiana. The family's fee for childcare ranged between 20% and 60% of the cost of care in Louisiana, between 2% and 10% in Maine, and between $0 and $495 per month in Minnesota.

Rather than subsidizing the price of childcare, the government could provide an unrestricted lump-sum payment that could be spent on childcare or on all other goods, such as food and housing. Canada provides such lump-sum payments.

Question:

1. For a given government expenditure, does a per-hour subsidy or a lump-sum subsidy provide greater benefit to recipients?
2. Which option increases the demand for childcare services by more?
3. Which one inflicts less cost on other consumers of childcare?