Can Childcare Waiting Lists be Eliminated? Raising childcare fees seems to be a realistic option

Faculty Fellow, RIETI

On June 2, 2017, the Japanese government published the Plan for Raising Children with Peace of Mind that aims to eliminate childcare waiting lists. This plan takes over for the Plan to Accelerate the Elimination of the Childcare Waiting Lists which had been pursued since the inauguration of the Shinzo Abe administration. In the new plan, the target timing of eliminating childcare waiting lists has been postponed for three years from the initial time, i.e. at the end of 2017, but it is open to question as to whether the new plan can effectively realize such elimination.

The pillar of the new plan is to improve the capacity of nursery schools to allow for enrollment of an additional 220,000 children over the next two to three years. While 530,000 children have already been accepted by nursery schools thanks to the former plan, the government aims to expand the capacity further. However, although the capacity has increased by more than 20% in comparison to that in 2010 (2.16 million children), the number of children on the waiting lists has increased and people are feeling the growing shortage of nursery schools.

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To begin with, waitlisted children refers to those who cannot enroll in nursery schools although their parents wish for this to happen. Expressed in economics terminology, there is excess demand for nursery schools. The mechanism is illustrated by a supply and demand diagram. The vertical axis shows the price (childcare fee) while the horizontal axis shows the quantity (number of children who receive childcare).

As is the case with normal goods, childcare service has a downward sloping demand curve as represented by the solid line. Although the needs for childcare depend on factors such as the family situations and the parents' will to work, the cheaper the childcare fees are, the more there are of applicants holding other conditions constant. On the other hand, if the supply of nursery schools increases, the childcare cost per child also increases as shown by the dotted line. This is due to the fact that, in order to increase supply, a new site will be acquired in an urban area and nursery staff will be hired with higher wages.

In spite of this usual market structure, the actual supply is determined independently of childcare costs. Nursery schools are developed based on the plans of municipalities, and the usage fees are determined in accordance with the national standard. In other words, the supply in the childcare market is given as a point shown as the white circle in the diagram. In this structure, the demand based on the official childcare fees do not necessarily coincide with the supply decided by the government. If demand exceeds supply, there will be waitlisted children who wish to be enrolled but cannot. Moreover, childcare fees are set lower than the childcare costs and the difference is covered by public expense.

In light of this framework, it is obvious that the government's previous and new plans are oriented in the same direction. In other words, the government attempts to solve the mismatch between supply and demand by increasing supply without changing the price schedule. If the quantity can be increased up to point A as shown in the black arrow in the diagram, at least, there will be no waitlisted children.

Figure. Mechanism of How Children Become Waitlisted for Nursery Service
Figure. Mechanism of How Children Become Waitlisted for Nursery Service

Yet, this policy is not realistic. The first reason is that there is a large number of potential waitlisted children. Under the current system, children who can join nursery schools are determined by scoring the degree of priority, and there are many cases where the parents give up applying for enrollment when it is obvious that they cannot fulfill the requirements. Under the new plan, the government intends to adjust the definition of waitlisted children and grasp the actual number, but the number of potential waitlisted children for whom their parents do not apply for enrollment will be continuously excluded from the statistics. Even if the government establishes new nursery schools, more applications will be filed as a result of the lowered required score for enrollment and, therefore, the observed number of waitlisted children will not decrease.

The second reason is that in order to increase supply, the budget must be increased exponentially. Since the supply cost has a positive slope, it is impossible to realize additional supply based on the existing amount of public expenditure. In fact, the problem of increased costs due to the improvement of working conditions of childcare staff members has been revealed, and it is difficult to support the publicly funded portion that are increasing at an accelerated pace for budgetary reason. If the government rushes to realize quantitative increases in the capacity of nursery schools, there will be growing concerns over the diminished quality of childcare.

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If the problem of waitlisted children cannot be solved solely by the quantitative increase of the capacity of nursery schools, childcare fees, which is another policy tool, must be changed. If demand is reduced by raising childcare fees, children who apply for enrollment but cannot be enrolled may be eliminated. This is a policy that aims to reach point B as shown by the white arrow in the diagram. It might be different from what many citizens imagine, but it is a realistic way to eliminate childcare waiting lists. Moreover, it may seem to be contradictory to enriching childcare service, but the current form of childcare fees has many problems and if this is responded to appropriately, it will provide additional advantages.

The cost burden of nursery schools has been regarded as a matter of social welfare because of its historical background, and, therefore, the ability-to-pay principle wherein the users bear the costs according to their ability to pay has been used in conjunction with a low burden level. However, nursery schools currently are now a selectively used service. Taking into account the private benefits of outsourcing the time and effort of childcare, it is unavoidable to introduce, to a certain extent, the benefit principle wherein the users bear the costs according to the amount of service used.

The current childcare fees are far below the childcare costs that are actually required. The average childcare fee per child is less than 30,000 yen per month. In contrast, according to the estimates published by several municipal governments, more than 400,000 yen in childcare cost is necessary for a child younger than one year old. In other words, under the structure where a large part of childcare costs is covered by public expenditures, using nursery schools for several years is equal to receiving several million yen in subsidies.

There are no reasons to maintain such level of childcare fees from the perspective of impartiality. Under the current situation where the result of the application depends on slight differences in the situations of families, large amounts of public expenditure will be the factor that gives rise to a sense of unfairness regarding the system. In addition, there are many cases where the users have a high income, and thus it cannot be justified from the standpoint of income redistribution.

It is preferable to raise childcare fees also from the standpoint of efficiency. From the perspective of encouraging women to play a more active role in society and effective utilization of human capital, parents with high wages and a strong will to continue working should be allowed to have their child(ren) enroll in a nursery school on a priority basis. Under the current standard for enrollment, career formation and willingness to continue working are not evaluated. Since parents with higher level careers and income are considered to have a strong intention to pay for childcare services, the price mechanism will be a more efficient standard for selecting enrollees.

Such measure also has major fiscal impacts. For example, if the childcare fee is raised by an average of 10,000 yen per month per child for the current capacity of nursery schools, i.e., 2.6 million children, a permanent source of government revenue of approximately 300 billion yen per year can be secured. In this way, additional quantitative increase can be realized without sacrificing the quality of childcare.

Yet, considerations must be given to the social welfare aspects of nursery schools. The interests of the users who have been given priority such as single mothers should be preserved. However, it may be preferable to secure such interest by granting cash benefits instead of providing in-kind benefits such as priority in enrollment. Institutional design must be carried out by taking into consideration of the fact that the capacity of nursery schools is a scarce resource.

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Some may say that raising childcare fees is not desirable as it leads to increased burdens of families with small children. In the Basic Policies on Economic and Fiscal Management and Reform 2017 decided by the Cabinet on June 9, making childhood education and childcare free is referred to in the context of enhancing investment in human resources.

However, as discussed hitherto, making childcare free is directly opposed to the effort to eliminate childcare waiting lists. Although such measures may have been proposed as one of the countermeasures for the low birthrate, the number of children who use nursery schools only accounts for about 40% of all children, and low childcare fees will not serve as support for all families with small children. Even if the portion among the childcare services that is equivalent to childhood education is made free, the portion that covers the time and effort of childcare should be borne by the users and the current childcare fees are far too low.

Of course, it is rational that the government pays a portion for childcare since the social benefits outweigh private benefits, or a positive externality. Nursery schools are playing various roles including job assistance for women, childhood education, and reduction of childcare burden, and consequently, they would bring a solution to problems such as the low birthrate and empowerment of women. Yet, the size of public expenditure should reflect the magnitude of the externality, and if childcare fees are raised accordingly, a social optimum would be realized.

At this point in time where quantitative increase is facing a turning point due to the shortage of childcare staff, this type of reform in the structure of the burden of childcare costs is key to solving the issue of waitlisted children.

>> Original text in Japanese

* Translated by RIETI.

June 21, 2017 Nihon Keizai Shimbun

July 11, 2017