The Future of Children, Princeton - Brookings: Providing research and analysis to promote effective policies and programs for children.

Any assessment of these plans or other proposed alternatives should examine their likely political feasibility as well as their likely effects on child care and on participating families.

The current political climate will not tolerate massive expansion of public programs for even the best of causes. Therefore, the proposals in this article suggest spending reductions or redirections rather than revenue increases for the child allowance. New revenues are needed for the parental leave program, but these are private, not public, dollars. The government's role in the parental leave program is to lend money to parents and to legislate that employers must guarantee postleave employment. Responsibility remains in the hands of families: Loans must be repaid or those who retire with negative parental leave account balances will live their retirement years on the guaranteed minimum Social Security benefit.

In at least one sense, that of encouraging work, the child allowance proposal is clearly preferable to the current AFDC system. Under the child allowance program, work disincentives, to the extent they arise, are concentrated only at the 150% or 175% of poverty thresholds. Program benefits are unaffected except at those points. Low-wage workers could work full time without any reduction in child allowance.

Finally, another potential political objection to the child allowance program centers on whether it will increase the number of children born to poor households. Such concerns have arisen in recent discussions of welfare reform.¹⁹ It is exactly to avoid this very emotional political debate that this proposal limits child allowance benefits to the first three children in the household; therefore, this proposal is preferable to the current AFDC program.

The proposed plans would have effects, largely indirect, on child care quality, availability, and cost.

Child Care Quality

The child allowance plan proposed here seeks to improve child care quality indirectly rather than directly. By placing dollars in the hands of parents, who have the best interests of their children at heart, the child allowance should result in an eventual increase in child care quality as parents use the funds to choose higher-quality care. The parental leave account should increase the quality of care children receive by allowing a parent to remain at home and care for a newborn.

Alternative approaches to improving the quality of child care services focus on either increasing direct subsidies to the child care system, increasing regulations associated with child care quality, or tying public expenditures to programs that meet certain standards or are regulated, but each of these approaches has flaws. For example, subsidies such as the Child and Adult Care Food Program are more tightly targeted expenditures that do directly improve the infrastructure of the child care delivery system, but expanding these sorts of subsidies would be prohibitively expensive, and there is no guarantee that child care programs would use the dollars in a way that would improve quality (for example, to increase staff training or wages or to buy more appropriate curricular materials).

Existing regulations for child care programs could be tightened and enforcement enhanced, but this will not produce better quality without also raising costs. Few resources are currently devoted to monitoring child care programs. As Hofferth reports in her article in this journal issue, in many states authorities visit centers only once or twice a year; inspection of family child care homes occurs less frequently, if at all.²⁰ The limited coverage of the existing regulations and the laxity of their enforcement suggest that the current regulations probably have little influence on the quality of care provided,²¹ but it is not at all clear that more stringent controls would produce better results. After all, if even parents, who have very strong incentives to determine the quality of the setting in which their children are placed, face large barriers in ascertaining the quality of care, would not regulatory agencies face exactly the same barriers? Tightening regulations is more likely to raise costs than to improve quality, as more stringent regulations will require the development of an extensive and costly system to monitor and enforce the standards. In addition, if successful, the increased regulatory effort might increase the cost of regulated care and drive some parents into the unregulated sector.²²

Finally, some suggest that public dollars should be restricted to child care providers who are licensed or regulated by or registered with the state, but again, this will not necessarily improve quality, and it may run counter to the wishes of some parents. For example, a relative may not be licensed and therefore would not be eligible to participate in some subsidized programs,²³ yet the parent might know and trust the relative to offer high-quality child care.

The root problem of the child care system is the inability of parents to pay for care, not an inability to recognize quality care or a desire to use poor care. Consumer subsidies, such as those that would be provided through a child allowance, protect parental freedom of choice over the care and upbringing of their children, and would do more to promote child care quality than would tightening regulations.

Child Care Price and Availability

Both the child allowance and parental leave programs will affect the supply of and demand for child care. The child allowance, for example, will increase the demand for child care among the targeted low-income population, and consequently, the price and the availability of child care will probably increase within low-income neighborhoods. Because many nonprofit child care providers (currently the primary center-based providers of child care in low-income communities) operate their programs in donated space, they may not be able to expand services easily. (See the article by Helburn and Howes and Appendix B in this journal issue for additional discussion of child care facilities in low-income communities.) Therefore, the increased demand and associated higher price is likely to be met by for-profit center-based providers or by an expansion of family child care or relative care.

The leave expands the options available to parents and is therefore equivalent to an increase in the provision of child care services for infants. On the one hand, as parents make use of their parental leave accounts and stay home to care for their infants, market demand for infant care will decline as will the price of infant care. Some providers offering infant care may decide instead to serve other children (for example, toddlers), so it is likely that the availability of child care for toddlers and preschoolers will increase. If parents on leave also decide to become family child care providers, the supply of family child care providers will increase, thereby driving down the price of family child care.

On the other hand, the observed price of infant care may increase following the enactment of the parental leave, if parents who have the resources to pay the most for infant care (for example, high-earning professionals) decide to forgo their leaves because they believe that taking a leave would harm their careers or their financial futures. In such a scenario, individuals who would take leaves would be those paying less for infant care. As a result, the observed market price of infant care would reflect primarily those still in the market for infant care (the high end of the market) and thus would increase.

The two financing proposals will also affect families: Both plans put more money into the hands of parents, and that should improve family welfare.

For example, the government loan guarantees through the parental leave program increase access of families to the credit market. Individuals already have some access to credit markets, mostly through credit cards and home mortgages, but private lenders are unwilling to make unsecured loans of the size necessary to finance a year-long parental leave. Parents can save in anticipation of their future childbearing, but most are probably unwilling to postpone child-bearing long enough to accumulate sufficient assets to cover a 12-month leave. The availability of guaranteed government loans increases parents' access to the credit market, distinguishes the parental leave plan from a pure savings plan,²⁴ and makes this a viable program to assist a large number of families.

Once in the hands of families, dollars from parental leave accounts or child allowances can be used for any purpose. That is one of the strengths of these proposals because it ensures that decisions about any one child's care remain in the hands of those individuals who are best able to make decisions that will benefit the child. Nevertheless, because child care expenses take such a large percentage of household income for poor households, it is expected that a primary use of the child allowance, for example, will be to cover these expenses.

Similarly, there is no guarantee that money drawn from a PLA would be used to finance a parental leave. Parents, might, for example, use some of the funds from the parental leave account to pay for subsequent child care or other expenses. In effect, the PLA provides a general line of credit for families to address any crisis or emergency over the first two years of the lives of their children.²⁵ Although some abuses may occur, the PLA proposal is still better than the current situation, which affords parents almost no assistance during the first critical year following childbirth or adoption. Using this plan, a foundation can be laid for stronger and financially healthier families in the future.

The two plans will likely have other consequences for the economy and society. For example, by removing the most pernicious disincentives for work in the current AFDC system, the child allowance permits and encourages parents to become lifelong participants in the labor force. The increased earnings from these households will generate additional tax revenue to help offset the cost of the program.

The parental leave plan would similarly affect the economy and society, including employers, the labor supply, and savings rates. To make the parental leave plan operable, employers must guarantee their employees a job when the employees return from their leaves. In the short run, large establishments are likely to face little burden in meeting this guarantee, but small business establishments have less flexibility in arranging staffing needs and will face significant challenges. Assuming women are the primary leave-takers, women may suffer in the short run if small firms attempt to avoid the adjustment cost of the leaves by hiring fewer women. In the long run, the experience of European countries suggests a more optimistic future may result: Firms will learn how to restructure their work assignments and will develop management techniques to operate with a flexible work force.²⁶

The PLA is likely to decrease the labor supply of parents with an infant. Indeed, the intent of the program is to permit parents the opportunity to be with their children during this important developmental period. Except for the possible increase mentioned above in family child care home providers, fewer parents with infants are likely to be in the work force. But, as their children grow older, parents will be encouraged to work under the parental leave program. As the examples in Table 4 illustrate, parents can most easily finance the leave if both parents are gainfully employed for a large segment of their working careers. Thus, the parental leave program should have the added effect of increasing the labor supply of parents over their careers. Indeed, international comparisons suggest that the countries with the most generous parental leaves (for example, Sweden) also have the highest level of female labor force participation rates.²⁷

The level of the payroll tax for the parental leave program is also likely to affect the economy. If the PLA payroll tax rate is too high, families might be forced to save more than they desire, which, in turn, could become a brake on the economy and slow future growth. If the PLA tax rate is too low, parents might take shorter leaves or more families might end their working careers with negative PLA balances and, consequently, with reduced Social Security benefits. Setting the payroll tax rate for the parental leave program at 3.5% is a fiscally conservative proposal that balances the needs of families with the needs of the overall economy.

For childless individuals, the PLA would be a form of forced savings (one that is better than the current Social Security system because, in the proposed plan, benefits are tied to contributions). Individuals without children would be unaffected as long as the tax rate used to finance the leave was less than what they would have liked to save anyway.²⁸