Equity and Quebec's daycare program

One of the Conservatives' election campaign promises was to provide financial support to parents directly, to the tune of $1,200 per child. Progressive-minded commentators have condemned this policy in no uncertain terms; their preferred model runs more along the lines of the Quebec government's $7/day (formerly $5/day) program. Maybe it shouldn't.

At the meetings of the Canadian Economics Association in Montreal last month, the Innis Lecture was given by my colleague Jean-Yves Duclos. The title of his talk was 'Equity and Equality', and he offered the Quebec daycare program as a classic case of a policy that appears to be progressive, but which turns out not to be.

Jean-Yves mentioned two types of equity that are generally discussed in public economics: vertical equity (which favours the redistribution from the top end of the income distribution to the lower end), and horizontal equity (which calls for identical treatment of identical individuals).

Suppose that it's been decided that public funds should be use to help parents defray the costs of child care. How does the Quebec model fit in?

First, let's consider two individuals (in practice, invariably the mother), A and B. A and B are identical in every way that matters, except for one thing: A would prefer to stay home and raise her children, while B would prefer to work. Both options are costly. A is obliged to sacrifice the income that she could have obtained by going to work, and B must deal with the financial costs of child care. (Of course, the costs are not just financial: both choices involve significant levels of stress and foregone opportunities.)

If the announced goal of a child-care policy is to help parents defray these costs, then according to the principle of horizontal equity, there's no reason for the government to choose to help one of these mothers and not the other. It turns out that the Quebec model fails this test: it chooses to help B, notwithstanding the fact that A and B are identical in every respect other than the choice of going to work or staying at home.

Since the only way to benefit from this program is to choose to go to work, it's not so much a child care program so much as a program designed to encourage mothers to return to work; Pierre Lefebvre and Phil Merrigan at UQAM have found that - unsurprisingly - the labour supply of women has increased (source - pdf file).

So the Quebec model fails the horizontal equity test. What about vertical equity? Mathieu Grenier, a MA student at UQAM wrote his thesis (available here) under the direction of Lefebre and Merrigan last year on this topic. Here are some of his findings, taken from Tables 5.5 and 5.6:

The utilisation rates and subsidies received increase with income. It's not difficult to come up with some plausible explanations for why this would be the case:

• High-skilled women are more likely to choose to work than those with fewer skills.
• The daycare system is almost entirely designed for those with 9-to-5 jobs, the sort that low-income workers are less likely to have.

So the Quebec model fails the vertical equity test as well.

What about the Conservatives' proposal? Since it's available to all parents, it satisfies the horizontal equity criterion. And since the payments are all equal and all subject to the (progressive) income tax, it satisfies the vertical equity criterion as well.

This doesn't mean that the Conservatives' proposal is perfect, of course. But if progressives are looking for a better alternative that satisfies the basic criteria for equity, it shouldn't be looking at the Quebec model.

 

Comments

[Quebec - what a mess!]

Shouldn't Quebec be looked upon as the best example of economic policies gone wrong? Have they gotten a single policy right in regards to their economy in the past 20 years?

Another reason to not look at the Quebec model of childcare can be seen in the most recent issue of the NBER digest. More specifically, "Canada's Universal Childcare Hurt Children and Families" by Baker, Gruber & Milligan.

http://www.nber.org/digest/jun06/jun06.pdf

Their findings are disturbing; the worsening of behavioral & health dimensions for the children that(are) participated in the Quebec childcare program. Also the program collects $1,874 per child in daycare taxes (due to more working mothers) and spends $4,725 per child, not too cost effective.

The "have-not" province might as well just send the bill to the "have" provinces! Looks like more transfer payments headed to our friends in Quebec!! Sounds to me like they need to give more power to the Feds to run their province, they are clearly incapable.

[Deborah]

In your horizontal equity analysis, you have fallen into the common trap of overlooking an essential element, namely the distortion associated with the the absence of taxation on unpaid work (home production of childcare and household services) carried out by stay-at-home parents. The income associated with this unpaid work should be taxed under a comprehensive income approach (according to the Haig-Simons measure).

Since taxing unpaid household work is a political non-starter, horizontal equity would require a subsidy to those purchasing market-provided childcare equivalent to the size of this taxation distortion. And in the presence of this distortion, it is not legitimate to claim that the only difference between mother A and mother B is their preferences about wanting to go out to work. These preferences are distorted by this bias. Only when the bias has been removed and these choices are being made in a policy-neutral environment could you claim that the only difference between them is underlying preference.

(Of course, this bias only exists because of income tax. Thus shifting from income tax to value-added tax is another way to deal with this bias).

[Stephen Gordon]

That's a good point. But it's worth noting that in Quebec, the lowest quartile doesn't pay income taxes.

[Riverwind]

Actually, taxing unpaid housework would is not such a bad idea since the 'employer' (i.e. the working spouse) would be entitle to deduct the cost of employment. This would allow couples to reduce their overall tax burden. The current regime creates an incentive for both spouses to work for less money because their total tax bill is lower. IOW, it is wrong to say the tax free status of non-paid work is a subsidy that must be rectified via subsidized daycare.