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The Economics of Childcare Subsidies

Cynthia Cameron
Northern Lakes College
ECON1010: Microeconomics
Alex Tett
November 28, 2021

Table of Contents
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Abstract.........................................................................................................................................3

The Economics of Child Care Subsidies.....................................................................................4

Overview of Child Care Costs........................................................................................................4

Child Care Costs in Canada- Unsubsidized................................................................................4

Graph 1..................................................................................................................................5

Childcare Costs in Canada- Subsidized......................................................................................5

Graph 2..................................................................................................................................5

The Economic Effects of Subsidized Child Care............................................................................6

Subsidized Child Care: The Demand for Care............................................................................6

Graph 3..................................................................................................................................6

Subsidized Child Care: The Impact on Mothers and The Labour Market...................................7

Graph 4..................................................................................................................................7

Subsidized Child Care: Economic Stimulation and Poverty Reduction......................................8

Conclusion......................................................................................................................................8

References......................................................................................................................................9
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Abstract
This report shows that implementing childcare subsidies to incentivize parents to join the
labor market can also have effects in the supply and demand of the labour market, and the
economy. This study analyses the economic benefits concerning the investment of taxpayer funds

into subsidizing the paid care of young children. These benefits are highlighted by comparing the
demand for care, the impact on mothers and single parents, the labour market, and reducing
poverty in low-income families. The report demonstrates that the benefits significantly exceed
any costs, and publicly funded childcare would be a productive use of taxpayer funds.
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The Economics of Child Care Subsidies

A subsidy is a government program that provides a cash payment or discount to users to make an essential
good or service available at a lower price (Sayre & Morris, 2021). Childcare subsidies are intended to provide
financial assistance that helps families in need pay for childcare for their children (Sayre & Morris, 2021). These
subsidies are important because childcare fees are high compared to the income of some families, but many parents
need reliable childcare to participate in, or return to, the workforce or obtain an education.
For many parents in Canada, especially single mothers, a lack of affordable childcare means a continuing
cycle of poverty. With childcare costs increasing at a rapid rate, especially in metropolitan areas like Vancouver and
Calgary, and a lack of available spaces, it makes sense for parents, often represented by women in a household, to
remain at home with children rather than re-enter the workforce. According to Statistics Canada, 52% of Canadian
children younger than 6 were in some form of regulated or unregulated childcare in 2020-2021 (Government of
Canada, 2021). Parents use non-parental care for many reasons but much of the increase in the use of childcare in
recent decades has been a result of the growing labour force participation of mothers.
The participation of mothers and fathers in the labour market depends on the accessibility, availability, and
affordability of non-parental childcare (Lefebvre & Merrigan, 2008). Investing in accessible, high-quality early
learning and childcare programs through subsidies, such as the $10/day childcare subsidy, can positively impact the
economy. This decrease in childcare costs can lead to increased demand for care, increased supply and demand in
the labour market, economic stimulation, and decreased poverty rates.
Overview of Child Care Costs
Each province and territory are responsible for monitoring and licensing regulated childcare services
according to their provincial legislation and regulations. 49.2 % of non-parental childcare is done through regulated
services such as daycares, licensed day homes and preschools (Government of Canada, 2021). The other 50.8% of
non-parental childcare is done through unregulated services such as unlicensed day homes, relatives, or nannies
(Government of Canada, 2021). All provinces/territories except Quebec subsidize low-income families to replace
some or all the fees in regulated childcare, but unregulated childcare is unsubsidized. In Quebec, most of the cost of
regulated childcare is covered by funds paid directly to childcare programs by the Quebec government (Fairholm &
Lynell, 2017). 
Child Care Costs in Canada- Unsubsidized
Monthly costs for childcare range from $179 to $1,934, depending on the province (Macdonald & Friendly,
2020). Childcare is expensive in Canada and varies in price province-to-province. A couple of provinces such as
Quebec and Manitoba have provincially set fees that give parents more affordable childcare (Macdonald & Friendly,
2020). Graph 1 shows a breakdown of the mean average cost per province. There are exceptions in some cities,
within provinces, where they charge more for childcare than the average of the province.
Graph 1
Average Provincial Child Care Costs
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Yukon
Saskatchewan
Quebec
Prince Edward Island
Ontario
Nunavut
Province

Nova Scotia
Northwest Terriitories
New Brunswick
Newfoundland and Labrador
Manitoba
British Columbia
Alberta
0 200 400 600 800 1000 1200 1400 1600 1800
Average Mean Price ($)

Note. Information Retrieved from Statistics Canada (Government of Canada, 2021). There are exceptions in some cities where
they charge more for childcare than the average of the province.
Childcare Costs in Canada- Subsidized
Provincial and federal policies provide tax relief for childcare expenses as long as receipts are presented
when doing your yearly taxes. Eligible low-income families benefit from childcare subsidies by having most, if not
all of their childcare subsidized (Government of Canada, 2021). However, with the implementation of $10/day
childcare throughout Canada, all Canadian families can benefit. Graph 2 shows how much $10/day childcare will
save parents on average in each province.
Graph 2
$10/day Child Care Average Savings

Saskatchewan

Ontario

Nova Scotia
Province

New Brunswick

Manitoba

Alberta
0 10 20 30 40 50 60 70 80 90 100
Average % of Savings

Note. Data Calculated by taking information from Graph 1 and putting it into a formula to get a percentage of savings based on
5 days a week work schedule, Formula = (1- ($200/Mean Price)) x 100. Then the 3 percentages were combined and divided by 3
to get the overall provincial average of savings. Quebec has not included since there would not be any savings
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The Economic Effects of Subsidized Child Care

Subsidized Child Care: The Demand for Care
Subsidies lower the cost of childcare to parents and are therefore likely to increase the demand for care. If
the amount of childcare available were fixed, the increase in demand would drive up prices. The price would rise by
the amount of the subsidy so that parents would end up paying the same amount as they had been before the subsidy,
and the childcare providers would receive an increase in fees equal to the amount of the subsidy (Lefebvre &
Merrigan, 2009). However, evidence indicates that the supply of care will rise to meet an increase in demand for
care without a nominal change in the current price (Fairholm & Lynell, 2017).
Graph 3
Unsubsidized vs. Subsidized: Increased Demand for Child Care

S
Price

D1 = Unsubsidized
S = Supply
D2 = Subsidized

D2

D1

Quantity Demanded

Note. As the cost of childcare decreases it causes a rightward shift in the demand for affordable childcare D1 D2, which causes
an increase in quantity supplied. The price does not increase, the price decreases for the parent because of the subsidy provided
by the government and the fact that most childcare places would not increase their costs to compensate (Lefebvre & Merrigan,
2009). Graph adapted using examples from Principles of Microeconomics textbook (Sayre & Morris, 2021, p. 71).

Subsidized Child Care: The Impact on Mothers and The Labour Market
Childcare fees play an important role in a mother’s decision on whether to return to work at the end of her
parental leave (Fairholm & Lynell, 2017). If the cost of childcare is more than what a mother would make working,
or close to it, a mother may decide not to return to work at all. Multiple studies find that in places with lower prices
of care, mothers are more likely to return to work earlier (Lefebvre & Merrigan, 2008; Fairholm & Lynell, 2017).
For parents that have difficulty finding affordable childcare, the most common consequences are changing their
work schedule, working fewer hours, or having to use multiple or temporary arrangements Access to stable, high-
quality, affordable child care will allow parents to improve their labor productivity by increasing their work hours,
missing fewer work days and pursuing further education (Fairholm & Lynell, 2017).
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With increased availability and decreased cost of childcare, mothers are able to enter the labour market, or
increase their hours from part-time to full-time work. Therefore, the decrease in the cost of childcare would cause an
increase of mothers in the labour market and increased employment opportunities, as fresh staff would be needed to
accommodate new positions available in childcare (Fairholm & Lynell, 2017). The demand for more employees
would then lead to an increase in wages, so that the newly created positions could be filled. Graph 4 illustrates the
change in demand and wage rate when subsidized childcare is introduced, with a rightward shift in demand,
Graph 4
Unsubsidized vs. Subsidized: Increased Human Capital and Wages

S
Wage

D1 = Unsubsidized
S = Supply
D2 = Subsidized

D2

D1

Employment

Note. As the demand for labour increases, rightward shift, so does the quantity of labor that needs to be supplied. This leads to
an increased wage rate given to the worker. Graph adapted using examples from Principles of Microeconomics textbook (Sayre
& Morris, 2021, p. 71).
Subsidized Child Care: Economic Stimulation and Poverty Reduction
Affordable childcare is one of the key factors in reducing the gender gap in today’s labour market. In a
2017 study by McKinsey & Company, addressing inequalities in childcare was one of the five key drivers of change
to allow the advancement of women’s equality in Canada (Fortin et al., 2008). The study found that by increasing
female participation in the labour market, number of hours worked by women, would reduce the gender gap,
particularly in high-productivity sectors, would stimulate our economy and increase Canada’s GDP by $150 billion
by 2026 (Fortin et al., 2008). Since the city of Toronto represents 9.5% of Canada’s GDP, the reduction of the gender
gap in Toronto alone could increase the GDP by an estimated $15.8 billion (Fortin et al., 2008).
Affordable childcare enables parents to upgrade their education and skills, enter or re-enter the labour
market, and move into full-term positions. Affordable childcare has been shown to be a key factor in helping
families move out of poverty and earn higher and reliable family incomes (Fortin et al., 2008). The ability to work
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when children are young can mean the difference between being on income supports, such as social assistance, or
stepping above the poverty level.
Poverty rates for single-mother households declined 52% with the introduction of subsidized childcare by
2011 in Quebec (Toronto Children's Services, 2017). This allowed 104,000 single mother households to rise above
the poverty line and become contributing members to the economy (Toronto Children's Services, 2017). From 1998
to 2008 in Quebec, there was a 55% decrease in single-parent families on social assistance and their average net
income grew by 81% (Toronto Children's Services, 2017). Lowering the poverty rates and creating a higher overall
income, brings a reduction in the dependency on government-funded programs, such as social assistance, and
improves health and safety outcomes (Toronto Children's Services, 2017).
Conclusion
Accessible and affordable childcare needs to be a fundamental part of our society if we want to have a
healthy and thriving economy and benefits to parents, society, and the economy cannot be overlooked. Overall, the
data and research support the implementation of government subsidies for childcare. The Government of Canada has
created a childcare plan that will increase work force participation for women and families, increase job
opportunities and wages, and support families by getting them out of poverty(Lefebvre & Merrigan, 2009). The
government, and hopefully taxpayers, can see the benefits to the economy and society by subsidizing childcare for
all families. The government has already taken steps to invest more time, money, and research into making
affordable childcare a reality.
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References

Canadian Centre for Policy Alternatives, Macdonald, D., & Friendly, M., In Progress Child Care Fees in Canada
2019 (2020). CCPA. Retrieved November 24, 2021, from
https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2020/03/In
%20progress_Child%20care%20fees%20in%20Canada%20in%202019_march12.pdf.

Fairholm, R., & Lynell, A. (2017, January). Socio-economic impact analysis of the $10aday child care plan for
British Columbia. Centre for Spatial Economics. Retrieved November 24, 2021, from
https://d3n8a8pro7vhmx.cloudfront.net/10aday/pages/357/attachments/original/
1484678670/10aDay_C4SE_economist_report.pdf?1484678670#:~:text=Overall%2C%20and%20based
%20on%20data,for%20other%20provincial%20government%20spending.

Fortin , P., Godbout, L., & St-Cerny, S. (2008). Child care and early education research connections. Impact of
Quebec's universal low-fee childcare program on female labour force participation, domestic income, and
government budgets | Research Connections. Retrieved November 26, 2021, from
https://www.researchconnections.org/childcare/resources/23338.

Government of Canada, S. C. (2021, April 7). Survey on early learning and child care arrangements, 2020. The
Daily - . Retrieved November 24, 2021, from
https://www150.statcan.gc.ca/n1/daily-quotidien/210407/dq210407b-eng.htm.

Lefebvre, P., & Merrigan, P. (2008). Child‐care policy and the labor supply of mothers with young children: A
natural experiment from Canada. Journal of Labor Economics, 26(3), 519–548.
https://doi.org/10.1086/587760

Lefebvre, P., Merrigan, P., & Verstraete, M. (2009). Dynamic Labour Supply Effects of childcare subsidies:
Evidence from a Canadian natural experiment on low-fee universal child care. Labour Economics, 16(5),
490–502. https://doi.org/10.1016/j.labeco.2009.03.003

Sayre, J. E., & Morris, A. J. (2021). Chapter 2- Demand and Supply: An Introduction. In Principles of
microeconomics (10th ed., p. 71). essay, McGraw-Hill Ryerson.

Toronto Children's Services. (2017, September 25). The Economic and Social Impacts of an Accessible, High
Quality Child Care System in Toronto. Retrieved November 24, 2021, from
https://www.toronto.ca/legdocs/mmis/2017/ed/bgrd/backgroundfile-107205.pdf.
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Zhang, S., Garner, R., Heidinger, L., & Findlay, L. (2021, July 22). Parents’ use of child care services and
differences in use by mothers’ employment status. Statistics Canada. Retrieved November 26, 2021, from
https://www150.statcan.gc.ca/n1/pub/75-006-x/2021001/article/00007-eng.htm.