Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

How has the Covid-19 crisis affected pre-school childcare?

More than a million 0-4 year olds stopped attending childcare during lockdown. This led to them missing out on social and educational opportunities, parents struggling to balance work and childcare, and financial losses for childcare providers. The prospects for the sector are highly uncertain.

Before the Covid-19 pandemic, around 1.4 million 0-4 year olds attended some kind of formal childcare – nurseries, playgroups or childminders – each day. This represents 90% of 3 and 4 year olds and 40% of those aged 0-2. During lockdown, only a third of childcare providers remained open and fewer than 100,000 children attended on any given day.

Formal childcare usage has been slow to bounce back. There were around 420,000 children attending in mid-July, before the school holidays started, and only slightly more in early September – around 480,000, according to the Department for Education (DfE, 2020).

Despite government assistance, the loss of most, if not all, of their income from parent-paid fees is likely to have led many childcare providers to struggle financially. Private sector nurseries and childminders experienced the largest losses, as they rely heavily on fees, while nursery classes and voluntary sector providers – which rely more on public funding – were less hard hit.

Children lost out on early education opportunities and parents found it more difficult to work while nurseries were closed. If the substantial financial hit taken by providers during lockdown – or a sluggish return of parental demand over the coming months – forces some providers to reduce capacity, raise fees or leave the sector entirely, these effects on parents and children may persist.

Prospects for the sector are highly uncertain: although the childcare market is mature and has responded effectively to large changes in demand as a result of government policy in recent years (for example, the introduction and subsequent extension of free early education places), the shock to both supply and demand caused by the pandemic is unprecedented. Emerging gaps in provision at local level will also need to be monitored closely.

What does the evidence tell us?

How has Covid-19 affected childcare providers?

Childcare providers receive 90% of their income from the combination of parent-paid fees (two-thirds) and government funding of the entitlement to free early education for 3 and 4 year olds and disadvantaged 2 year olds (one-quarter).

When the UK entered national lockdown on 23 March 2020, the majority of parents were required to keep their children home from school and childcare. Although the children of key workers and vulnerable children could continue using childcare, take-up was very low, with just 65,000 children attending in mid-April.

What impact did this have on providers’ income? The government continued to fund the free places offered by providers pre-pandemic even when children were not attending, meaning that income from public sources was (and continues to be – at least until the end of the year) protected. But low take-up of childcare places means that a lot of fee income was lost.

Some of this fall in fee income was offset by the government’s furlough scheme, self-employment income support and other small business support programmes. A recent report estimates that the furlough scheme replaced 55% of pre-crisis fee income at the median nursery, and that self-employment grants replaced 65% of pre-crisis fee income for the median eligible childminder.

Nonetheless, simulations in this report (Blanden et al, 2020) – which is based on data on the income and outgoings of a sample of 1,341 childcare providers from the DfE’s Survey of Childcare and Early Years Providers in 2018 – suggest that between one-fifth and one-quarter of private sector nurseries may have run a significant deficit (earning less than £4 of income for every £5 of costs) during lockdown, assuming they lost 85-100% of their income from parent fees. This compares with just over 10% in a similar financial position pre-crisis.

Childminders – for whom parental fees provide three-quarters of their income – were even more likely to take a financial hit, with an additional three in ten childminders estimated to earn less than £4 of income for every £5 of costs if they lost all income from fees, unless they reduced the amount they paid themselves.

Childcare providers were encouraged to open to all children from 1 June, although the restrictions in place to keep children in small ‘bubbles’ and promote social distancing put constraints on the number of places that could be offered and are likely to have increased costs.

These restrictions have been eased since 10 July, with permitted group sizes returning to normal, although settings may still face some additional costs associated with enhanced cleaning protocols. As infection rates begin to rise, providers may also face supply constraints because of staff shortages (especially as current regulations restrict reliance on agency staff). Nonetheless, at national level, it seems likely that the future of the childcare sector will depend heavily on what happens to parental demand, a point to which we return below.

What are the likely effects on parents?

Childcare is crucial to many parents’ ability to work. The growth in the availability of flexible childcare has played a vital role in making it easier for mothers with young children to remain in employment, underpinning progress in reducing gender inequalities in the labour market.

Recent evidence for England suggests that access to a free 15-hour early education place has little impact on parents’ labour supply – perhaps because most parents were already paying for childcare – but that once a mother’s youngest child is of school age, the availability of (closer to) full-time childcare has a more positive effect. In the first term of entitlement to school, mothers with no younger children are around 3 percentage points more likely to be in the labour force and around 1 percentage point more likely to be in work than similar mothers whose youngest child is not eligible for a school place. These effects rise throughout the first year that a child is in school (Brewer et al, 2020).

This evidence could be read as suggesting that losing up to 30 hours of childcare a week during lockdown would not matter very much for parents’ work status. But this – and indeed most other research evidence on the impact of childcare on parents’ labour supply – focuses on the impact of childcare becoming cheaper and/or more readily available – that is, reducing the price or increasing the supply of childcare places.

There is no evidence on the impact of removing childcare, and there are reasons to think the effects may not be symmetric: parents are probably less likely to leave their job, at least in the short term, if they believe the loss of childcare is likely to be temporary, as was the case during the pandemic. But this says nothing about the struggle that parents may face to balance the demands of paid work and childcare, and what impact this might have on their mental health in the short term and their career prospects in the longer term. These issues may affect parents of school-age children as well since wrap-around care (such as breakfast clubs or after school clubs) also closed temporarily.

Studies of the impact of Covid-19 on self-reported mental health find that women and those with young children are among the groups experiencing the largest deteriorations during lockdown (for example, Banks and Xu, 2020), although we don’t know specifically how lack of childcare affects parents’ mental health.

Surveys of parental time use during lockdown show that while women suffered the biggest reductions in hours spent on paid work, they also spent more hours juggling paid work and childcare (for example, Adams-Prassl et al, 2020; Andrew et al, 2020; Office for National Statistics, ONS, 2020). These effects were particularly large for women with the youngest children (Sevilla and Smith, 2020).

Based on this evidence, it seems likely that a shift away from using paid childcare could set gender equality back, although there is also speculation that the shock of lockdown and the increased involvement of fathers during that time could lead to a rebalancing of domestic gender roles, which might cushion any potential long-term impacts on the career prospects of mothers.

Related question: How has coronavirus affected the division of domestic labour?

What are the likely impacts on children’s development?

Children’s brains develop extremely rapidly in early life, and robust evidence from ‘randomised controlled trials’ and other high quality evaluations of the effects of intensive early childhood interventions, including access to high quality childcare, shows the potential to have large and long-lasting influence on children’s educational attainment, earnings, employment and other adult outcomes (for example, Havnes and Mogstad, 2011; Heckman et al, 2010).

Some research also suggests that effects are larger for those from disadvantaged backgrounds, meaning that disruptions to the take-up of early education – such as occurred during the Covid-19 pandemic – may exacerbate gaps in school readiness and widen gaps in educational attainment at older ages.

Recent evidence for England, however, suggests that taking up a free part-time early education place has only a small impact on children’s test scores at the age of five and that the effects have disappeared completely by the age of seven (Blanden et al, 2016; Blanden et al, 2019). This pattern of initial positive effects that fade out is in line with international evidence (Cascio, 2015).

While there is a danger that the loss of access to early education during lockdown and low take-up afterwards might detrimentally affect some children’s development, the most relevant evidence we have – which looks at the impact of children attending one additional term of early education compared to otherwise identical children born very slightly later – suggests that the effects are likely to be small and may peter out by themselves without further intervention (Blanden et al, 2019).

Of course, if parental demand for early education were to remain low for months or years to come, then the effects might conceivably be larger, especially for children for whom the alternative is lower quality informal care.

Related question: What will be the impact of lockdown on children’s development?

Should the government intervene to support childcare providers?

As the statistics above suggest, childcare attendance is still far below its pre-crisis level. On balance, this appears to be driven by a fall in demand: survey evidence collected during lockdown found that only around half of parents of children aged 0–4 who used some form of childcare before the pandemic intended to use an early years setting once they re-opened to all children on 1 June.

There is a lot of uncertainty about what will happen to parental demand over the coming weeks and months: will it return to pre-crisis levels, and if so, how quickly? Or will there be a permanent reduction in the demand for formal childcare, or permanent changes in parents’ preferences for different types of care – with, perhaps, parents relying more heavily on informal childcare (provided by friends or family), shifting away from group-based care towards childminders, or reducing demand for early and late childcare if they work from home?

The Bank of England’s chief economist, Andy Haldane, recently commented on the need to reduce government support to employers and allow ‘restructuring’ in the economy. The implication is that businesses should close if demand for their services does not return. Depending on the path of parental demand, there may thus be a risk of childcare providers exiting the market or changing their business model in other ways – for example, increasing fees – in order to survive.

There are two reasons why the government might want to intervene to avoid this kind of restructuring in the childcare market. First, if the fall in demand is only temporary and capacity is difficult to build back up – for example, because it is costly and time-consuming to register as a childcare provider with Ofsted – then this might induce periods of unmet demand for childcare, which might have consequences for parents’ ability to work as well as for children’s development.

The second reason is to try to avert a permanent reduction in demand for formal childcare. This is both because childcare has positive benefits for families that they may not take into account fully in making their decisions (for example, they may overestimate the health risks or underestimate the benefits of attending for themselves and their children) and because childcare has ‘positive externalities’ (it enables parents, particularly mothers, to work, underpinning gender equality in the labour market, and also helps to ensure that children, especially those from disadvantaged backgrounds, are ready for school).

If the government did decide to intervene to try to prevent an exodus of childcare providers from the market, then doing so by increasing the funding for providers delivering free entitlement hours would not be the best way of supporting those businesses that were most at risk of financial hardship during lockdown. It was providers most exposed to reductions in parent-paid fees that were most likely to fall into significant deficit, rather than those reliant on public funding.

What else do we need to know?

While we can speculate about the impact of the pandemic on the childcare market in the medium and long run, it depends vitally on how demand for childcare recovers. This is contingent on the paths that the economy and employment take, as well as the wider health concerns of parents.

Early evidence is not very encouraging on this point: recently released DfE figures suggest that only around 480,000 children were attending childcare each day in early September, compared with an estimated 1.4 million before the pandemic (DfE, 2020). We know that September is usually a quieter time for childcare providers – because a full cohort of children (around 600,000 in England) has just left childcare to go to school, and there are fewer new childcare users to replace them in the short term – but this is still far below the number we would expect.

Simulations in Blanden et al (2020) suggest that even small permanent declines in parental demand will lead to more providers tipping into significant deficit unless they adjust their business model. Crucially, we do not know how childcare businesses might respond to these challenges.

Pre-crisis, the childcare market seemed able to adjust reasonably well to changes in parents’ preferences, with large numbers of businesses entering and leaving the market each year. But policy-makers should keep a close eye on whether the pandemic has blunted some of these market forces, and whether the resulting landscape of provision is consistent with the government’s objectives for childcare to support working parents and reducing socio-economic inequalities in children’s outcomes.

Where can I find out more?

Who are economic experts on this question?

Authors: Jo Blanden and Claire Crawford
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