Investing in Children
Work, Education, and Social Policy in Two Rich Countries
BROOKINGS INSTITUTION PRESS
Copyright © 2012 THE BROOKINGS INSTITUTION
All right reserved.
Chapter One Introduction
ARIEL KALIL, RON HASKINS, AND JENNY CHESTERS
Australia and the United States are two wealthy countries with similar levels of income per capita. Although they are both democratic nations that share some historical links, both being former colonies of the United Kingdom, their political institutions differ markedly. Nevertheless, though the institutional settings for the development of public policy differ, the two countries are actively engaged in many similar policy discussions. Discussions include employment policy for the low-income population; poverty policy and strengthening the safety net for low-income families; early childhood education policy; and policies to increase postsecondary education.
The purpose of this volume is to present new research by leading scholars, using the most current high-quality data each country has to offer, to identify contemporary economic arenas in which government policy has a role to play by investing to promote children's potential. We focus on three different but interrelated economic arenas: parental employment; early childhood care and education; and children's educational attainment. These economic arenas are linked by virtue of being the fundamental elements of human capital development and economic success during adulthood in both the United States and Australia. In addition, they contribute greatly to the gross domestic product (GDP) of both nations. Consequently, each country has the potential to learn from the other about promising strategies to build up these important resources. The chapters in this volume also provide insights into the potential effectiveness of employment policies, education policies, and income redistribution policies as tools for encouraging human capital investment in children and reducing resource and achievement gaps. Authors of the chapters employ quantitative analysis of nationally representative data to identify how limited resources in each of these three arenas can compromise child development, and they discuss their findings in terms of promising avenues for public policy. The volume includes several chapters making use for the first time of new Australian data that answer questions about contemporary policy problems that are common to both countries.
Policy Context Related to the Central Themes
There is a surprising degree of similarity in the domestic social issues faced by Australia and the United States. Here we review three important examples of that similarity, all of which are taken up in detail by the chapters that follow. The three issues are the emphasis in public policy on work by poor and low-income parents and the impacts of parental employment on children; policies that attempt to balance the need for child care while parents work with the goal of providing high-quality early childhood programs to boost the development and school readiness of children from poor families; and policies that promote postsecondary education among children from poor families.
Beginning roughly in the 1980s and culminating with passage of welfare reform legislation in 1996, the United States gradually developed an effective strategy for increasing work and reducing poverty in families headed by poor mothers. Given the very high poverty rates of families headed by females and the large and increasing number of these families, a successful antipoverty strategy in the United States must maintain a major focus on female-headed families. After the 1996 reforms, the major aim of which was to increase work rates of single mothers on welfare, there was a 40 percent increase over four years in employment by never-married mothers, a group that previously demonstrated very low work rates and exceptionally high rates of poverty and welfare use. The rapid increase in employment by females heading families was accompanied by a rapid fall in poverty among children in these families and among black children (who live disproportionately in female-headed families). In fact, both poverty rates reached their lowest level ever at the turn of the century. Even today, after the most severe recession since the Great Depression of the 1930s and with continuing high levels of unemployment, the poverty rates among children in black families and female-headed families are lower than they were before the explosion of employment among low-income mothers.
Three factors contributed to these notable increases in work and declines in poverty: the strong work requirements in welfare reform, the gradual construction of a system of work-related benefits for low-income workers with children, and a very strong economy that generated plentiful jobs. The 1996 welfare reforms dramatically altered the previous cash welfare program (Aid to Families with Dependent Children) by creating much stiffer work requirements backed by strong financial sanctions. The major thrust of the state programs that resulted from welfare reform was to require mothers to look for work and to help them find and apply for low-wage jobs. Most states provided mothers with a brief training program, usually lasting for only a few days, that helped them prepare a resume, search local newspapers and the Internet for job openings, contact prospective employers, and practice interviewing. If this type of job preparation training was the soft side of welfare reform, the harder side was that mothers who did not cooperate with the program and make a serious effort to prepare for and find work had their cash benefit cut. In a majority of states, mothers could lose their entire cash benefit if they did not meet the work requirements. In addition, most mothers could not receive welfare benefits for more than five years, thereby signaling that in the end the mothers had almost no choice except to work.
Clearly, there was ongoing tension between the dual aims of U.S. social policy—to help the poor as well as to avoid welfare dependency—and following the 1996 reforms the pendulum swung in the direction of using stern measures to promote work and reduce dependency. In contrast with the demanding cash welfare reforms, the nation's work support system offered substantial financial rewards for low-income mothers who went to work in low-wage jobs. The development of the work support system over many years reflected the realization on the part of policymakers that if welfare inevitably provided people with incentives not to work, the solution was to provide incentives for people to work, even in low- wage jobs. Nevertheless, despite many mothers' desire to work to support their families, long-term welfare reliance remained a problem. Sophisticated research published in the 1980s showed that of the families on cash welfare rolls at any given moment, about 65 percent had been on the rolls for eight years or more (counting repeat spells).
Perhaps the most notorious example of the unfortunate disincentives to work in the old system was that if mothers went to work, they and their children often lost their Medicaid health care coverage. To reduce that disincentive, a series of reforms in the 1980s and 1990s resulted in medical coverage for all children below the poverty level and many children up to 133 percent of the poverty level, regardless of the mother's work status. Health coverage for low-income mothers also was expanded. Similarly, reforms at both the federal and state level increased the amount of money available for child care, and the food stamp program was reformed to make it easier for low-income working families to receive the benefit.
A study by the Congressional Budget Office published in 1998 showed that expansion of programs for child care, children's health insurance, and child tax credits based on earnings resulted in about a tenfold increase in federal and state support for low-income working families. Thus, federal and state reforms of the work support system "made work pay," thereby increasing the incentive to work. If work requirements pushed mothers off welfare, work supports pulled them off.
The third element that accounted for the rise in employment and the decline in poverty during the 1990s was the strong U.S. economy. After the recession of 1990—91, GDP increased in real (inflation-adjusted) terms every year until the Great Recession began in 2007. The economy slowed after 2000, but between 1990 and 2000 GDP increased from $8.0 trillion to $11.2 trillion, a rise of 40 percent. More to the point, between 1991 and 2000, the economy added over 18 million jobs. The economy sputtered after 2000 and then plunged after 2007. Even so, as we have seen, employment of never-married mothers was still higher in 2009 than it had been in the early 1990s and poverty rates for black children and children in female-headed families were also lower than before welfare reform. A reasonable conclusion from this history is that the U.S. strategy of combining strong work requirements in welfare programs with attractive work supports is effective when the economy is expanding but less effective when the economy is stagnant.
Encouraging maternal employment is also of concern to policymakers in Australia, although in Australia there is a much weaker push to get low-income single mothers to work. In contrast to the U.S. low-wage, full-time workforce, the Australian workforce is relatively high wage but highly "casualised" (temporary), with 21 percent of employees working on a casual basis. Casual employees are hired on a temporary basis with no security of tenure, and they are not entitled to any type of paid leave, including sick leave and recreation leave. To compensate for their lack of entitlements, they are paid up to an extra 15 to 25 percent of the hourly rate paid to permanent employees. The percentage of employees engaged in part-time work in Australia, either on a casual or permanent basis, increased from 16 percent in August 1980 to 30 percent in August 2011. However, being employed on a part-time basis allows mothers to combine paid work and domestic work without having to work excessively long hours. The Australian government also provides a 50 percent subsidy for child care to encourage mothers to take up paid work.
Although children growing up in single-parent families in Australia are more at risk of living in poverty than children in dual-parent families, generous welfare provisions lessen the impact. And the population of single-parent families is much smaller in Australia than in the United States. Between 1997 and 2009, the proportion of Australian families that were headed by single parents stayed around 20 percent. In 1997, 21.3 percent of children younger than fifteen years were living in single-parent families, but that percentage decreased to 17.9 percent in 2009 to 2010.
In Australia, the federal government gives a single parent with a child under the age of eight up to $1,390 a month (although the exchange rate between the U.S. dollar and the Australian dollar is set by the market, at the time of writing, one Australian dollar was approximately equal to one U.S. dollar), depending on the parent's income from other sources. Those earning more than $370 per month have their entitlement reduced by 40 cents for every extra dollar that they earn, but they can still receive a partial payment until their income from other sources exceeds $8,852 a month. Welfare payments are subject to an assets test, but the thresholds are quite generous and affect only those with assets valued at more than $186,750 if they own their own home or $321,750 if they do not own their own home. Like other low-income Australians, single parents may also be eligible for a health care card, which entitles them to free or subsidized medical care for items not covered by the country's universal Medicare system. Although health care provided in public hospitals funded by the state and federal governments is free, in some cases waiting lists are long and many low-income people use their health care card to receive treatment for minor illnesses in the private system.
To encourage mothers to remain in the workforce, the federal government recently introduced universal paid parental leave. Parents who are primary caregivers are entitled to eighteen weeks of leave paid at the national minimum wage rate. Although the scheme is funded by the government, the payments are made by the caregiver's employer to maintain the link between the caregiver and the employer. To be eligible, the caregiver must have worked for ten of the thirteen months prior to the birth of the child and must have earned no more than $150,000 in the financial year (between July 1 and June 30) prior to the birth.
The unemployment rate in Australia has declined significantly since the recession in 1993. At that time, 10.6 percent of the Australian workforce was unemployed. By contrast, around 5.1 percent of the workforce was unemployed in August 2011, despite an increase from 62.2 percent to 65.4 percent in the labor force participation rate of 15- to 64-year-olds. The unemployment rate peaked at 6.1 percent in March 2009 during the global recession but steadily declined as the economy recovered. Of more concern in Australia is the proportion of unemployed people who have been out of work for more than fifty-two weeks—a concern that is shared in the United States. This proportion declined from 34 percent of the total number of unemployed people in 1994 to 13 percent in 2009 before increasing to 20 percent by June 2011. In other words, 120,000 of the 597,300 unemployed persons in Australia have been seeking employment for at least fifty-two weeks.
Welfare payments to the unemployed are paid at a standard rate regardless of the person's skills or qualifications or the length of time that he or she has been unemployed. Designed to be a short-term measure, the Newstart Allowance of $1,055 a month consigns the long-term unemployed to living in poverty. Unemployed persons with dependent children are eligible for extra payments depending on the number of dependent children and their ages. Half of those classified as long-term unemployed have low skills and little education.
In recognition of the financial difficulties that low-income earners have to contend with and the high effective marginal tax rates that people on welfare payments face, the Australian government increased the tax-free threshold on earned income. From July 1, 2012, the first $18,200 of earned income is tax free, meaning that 1 million workers will pay no tax and everyone earning less than $80,000 will receive a tax cut. This measure is designed to encourage those who are currently not in the workforce to participate and those receiving welfare payments to at least take on some paid work.
Although low-income mothers will benefit from paid parental leave and the increase in the tax-free threshold, their ability to remain in the workforce depends on the availability of child care. Rather than provide universal child care, the government provides subsidies to parents who then choose private child care providers. Parents with the highest incomes have more options than parents with low incomes, and that presents a barrier to many mothers seeking paid work. Australia and the United States share the problem of providing enough public support for child care to allow all low-income families to receive a child care subsidy, a topic to which we now turn our attention.
Early Care and Education
Policymakers in the United States can make the low-wage sector of the U.S. economy stronger and more effective by improving the work support system. Perhaps the weakest link in the work support system is child care. Not only are the funds now available insufficient to provide a subsidy to all the low-income workers who qualify, but the quality of care is uneven. As many observers have pointed out, the United States could achieve two policy goals if the federal and state governments spent more money to increase the number of low-income families receiving a child care subsidy while simultaneously improving the average quality of care to boost the development of children from low-income families and better prepare them for public schooling.
The United States spends around $30 billion a year at the federal and state level on early education programs, state prekindergarten (pre-K) programs, and child care programs that are usually subject to some regulation but are of uneven quality. About forty of the fifty states have their own preschool programs, some of which have been well evaluated and found to have positive impacts on the intellectual and social development of children, especially children from poor families. Most reviewers of the programs agree that Head Start has modest but inconsistent impacts, whereas the child care programs supported by federal and state dollars, primarily through the Child Care and Development Fund (CCDF), are of exceptionally mixed quality, with the majority of programs being of mediocre quality.
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