Economist Stefan Bauernschuster had quite the surprise when he found an e-mail from the "Executive Office of the President" in his inbox. First, he thought: "Those spam emails are getting better all the time." However, after giving it a second glance, he realised that the message was legitimate. The email had in fact been sent by the Executive Office of US President Joe Biden and written by US economist Cecilia Elena Rouse, chair of the President's Council of Economic Advisers.
This agency of leading economists is similar to the Sachverständigenrat or German Council of Economic Experts, except that the Council of Economic Advisers has an office directly in the White House. The US economy experts release an annual report just like their German counterparts. Rouse’s e-mail to Bauernschuster is about this report: "Your work is cited in this volume. I am writing you to thank you for helping us shape this report."
Higher childcare coverage increases maternal labor supply
In the current report from March 2023, the US President's Council of Economic Advisors cites a study conducted by Professor Bauernschuster, who holds the Chair of Public Economics at the University of Passau, and Dr Martin Schlotter, his former colleague from the Ifo Institute who has now moved on to the Bavarian State Chancellery. First published in the prestigious Journal of Public Economics in 2015, the study measures the impact of public childcare on mother’s labor market participation. The two economists demonstrate that increasing the public childcare coverage increases mothers’ labor supply.
The current US Economic Report is mainly concerned with remedying the labour shortage the US economy has been grappling with in the wake of the economic recovery after the COVID-19 pandemic. The President's economic advisors propose a number of measures. One of them: investing in childcare. In reference to Bauernschuster's study, they posit: "The preponderance of empirical evidence suggests that childcare and preschool programs have a positive impact on maternal labor force participation".
The fact that higher public childcare coverage results in higher maternal labor supply might seem obvious at first glance, but it is actually not that simple. "In theory, it is unclear whether public childcare increases maternal labour supply," explains Professor Bauernschuster. This type of care could simply replace other forms of care, including private-sector care or care by grandparents, without affecting the mother's labor supply. A Norwegian study has found exactly that.
Legal entitlement to childcare as a natural experiment
Using data from the German Microcensus and the Socio-Economic Panel, Bauernschuster and Schlotter were able to prove that public childcare in Germany definitely plays a crucial role in improving the labor market situation of mothers, also by virtue of the fact no private-sector market for childcare exists due to the tight regulations in place. This may sound simple but actually requires sophisticated methods and many years of work. The mere fact that the employment rate of mothers who have a childcare slot is higher than among mothers without one does not mean that the childcare slot itself is in effect the reason for the higher employment rate. "The key challenge we have in the social sciences is to distinguish spurious correlations from true causal relationships. To do that, we need suitable control groups that are subject to the very same conditions – just like in an experiment," says Professor Bauernschuster.
In order to provide causal evidence, the economists exploited the introduction of the legal entitlement to a kindergarten slot in 1996. Unknowingly, policymakers had provided the economists with an exciting real world experiment situation: As a result of this reform, children who turned three shortly before the start of a kindergarten year were quickly given an entitlement to a slot, whereas similar children who turned three just a few days later were not offered the entitlement until a year later. This resulted in a quasi-experimental situation that allowed Bauernschuster and Schlotter to confounding factors and isolate the actual causal effect of the kindergarten slot.
The result: An increase in public childcare coverage had a large positive impact on mother’s employment, driven particularly by part-time employment. "We were able to show that one in three mothers whose youngest child was three was able to work only because of the kindergarten slot," summarises Bauernschuster. Investments in childcare also turned out to be less expensive than a comparable increase in child benefits, because, as Professor Bauernschuster puts it: "A large share of the investments quickly end up paying for themselves because mothers who can now return to work pay taxes and social security contributions." "What's more, we were able to show in another study that an increase in childcare coverage also caused the birth rate to rise at a rate five times higher than a comparable investment in child benefits." Papers published by other researchers have shown that childcare positively impacts the development of children as well, especially in socio-economically disadvantaged families.
Germany's family policy impacted
Professor Bauernschuster's study grew out of a project that had evaluated marriage- and family-related policies in Germany in the period between 2010 and 2012 for the Federal Ministry for Family Affairs and the Federal Ministry of Finance. At the time, the economists had presented their findings in Berlin. These had sparked off debates among policymakers and in the media that may in effect have encouraged the direction taken in German family policy. Over the past two decades, family policy has undergone an outright U-turn: "In 2005, no childcare was in fact available for children under three. Since 2013, we have had a legal entitlement for children from the age one," says Professor Bauernschuster.
He considers the email from President Biden's office to reflect a respectful manner of engagement with academics on the part of policy-makers. He is delighted that the study was again cited at such a high level and points out that the paper had gained recognition in academia as well. It has been cited over three hundred times, including by Nobel laureate James Heckman.
German text by: Kathrin Haimerl
Professor Stefan Bauernschuster has held the Chair of Public Economics of the University of Passau since 2013. Moreover, he is a research professor at the ifo Institute in Munich, CESifo Affiliate and a member of the Social Policy Committee of the German Economic Association. He is also one of the principal investigators of the DFG Research Training Group 2720.
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