·     Subsidizing daycare and family-based prenursery facilities is an effective policy tool for increasing the employment of mothers with young children. A new analysis of data for Israel indicates that the subsidy also contributes to increased earnings of mothers in the first years after giving birth.
·     Many families that are eligible for a subsidy do not receive it, due to a shortage of slots in the framework in which they can receive the subsidized price. The implementation of government decisions on expanding the supply of the frameworks will assist in making the subsidy more accessible to families that are eligible for it, and thus increase women’s labor force participation rate, reduce gender wage gaps, increase labor productivity and reduce poverty in families with young children.
In recent years, the government decided to increase the number of daycare facilities for children in Israel, and therefore the bureaucratic processes related to setting up daycare facilities were simplified. Nonetheless, the supply of such daycare facilities remains lower than demand. The government offers a subsidized price for supervised daycare and home-based prenursery facilities, but due to the supply limitation of the facilities and the slow execution of government decisions on building additional daycare facilities, only one-quarter of those eligible for education through these frameworks actually utilize the benefit. This review describes the subsidy policy in Israel, focusing on the effect of subsidizing childcare frameworks on the employment of the mothers, and its contribution to more rapid growth in their earnings.
Subsidized childcare and its effect on mothers’ labor force participation rate
The cost of childcare facilities for those younger than age 3 is about 40 percent of the median wage for women. These expenditures reduce the effective wage of the mother and makes employment less worthwhile. Research conducted worldwide indicates that childcare cost has a negative effect on the mother’s incentive to work. In Israel, the effect that was found is relatively limited compared to other countries, but it is negative and statistically significant.[1]
In order to reduce the negative effect of the facilities’ cost on women’s employment, many countries tend to directly subsidize the frameworks for children. The subsidy is justified mainly due to the liquidity problem with which parents of young children deal with during the period of raising them.[2] Much research indicates that enhancing the subsidy and increasing the availability of the subsidized frameworks contributed to growth in women’s employment in various countries. For example, in Quebec, Canada, a childcare subsidy for children 1–4 years old contributed to an increase in mothers’ employment rate from 55 percent to 63 percent.[3] In Spain, subsidizing childcare facilities for 3-year old children contributed to an increase of 8 percent in mothers’ employment and to an increase of 9 percent in work hours.[4] In Germany, an increase of 10 percent in the number of subsidized frameworks for children aged 3–4 increased mothers’ employment by 3.7 percent[5], and in the US, subsidizing childcare for single mothers expanded their employment by at least 8.4 percent[6]. Research conducted on data in Israel found a strong effect of a full subsidy for public preschool on the employment of Arab mothers.[7] A simulation carried out with regard to all mothers of young children found that a universal subsidy of 50 percent of the family expenditure on childcare facilities for children up to age 4 would increase the employment rate among mothers of children this age by about 4 percentage points. In such a case, the overall cost of increasing the subsidy would total about NIS 3 billion per year and contribute to about 22,000 women joining the labor force[8], in parallel with increasing the disposable income of about 350,000 additional families.
In Israel, care for children in the pre-primary education ages is subsidized in two main types of frameworks: daycare facilities and home-based prenursery facilities, intended for children up to age 3, and public preschool caring for children aged 3–4. In 2011, the Trajtenberg Committee recommended fully subsidizing public preschools nationwide, and today public preschool education facilities are subsidized 100 percent by the government. In contrast, the monthly cost for daycare facilities and home-based prenursery facilities is relatively high, at about 40 percent of the median wage for women.[9] However, low-income families who meet employment tests can receive a partial subsidy of the expenditure. In order to register a child for subsidized daycare facilities and home-based prenursery facilities, both parents are to be employed. The eligibility also applies when a parent is unemployed and receiving unemployment benefits, in order to make it easier for the parent to look for work and to return to employment. The subsidy is also provided to students (studying at least 24 hours weekly), as studies develop parents’ human capital, thus increasing their earning capacity. With that, the subsidy is also provided when the parent is studying subjects that are not relevant to the labor market (such as studies at religious studies institutions) and the subsidy is not limited in time.
The amount of the subsidy is determined by family per capita labor income. Table 1 presents the size of the subsidy in accordance with various income levels. For a family with income of up to 35 percent of the average per capita income in a wage-earning family, the government subsidizes 66 percent of the monthly cost of daycare facilities. The amount of the subsidy declines as income rises, and reaches zero at income levels close to the average per capita income in the economy. Among families that received the benefit, the average subsidy was about 45 percent of the full monthly payment, but in actuality only some of those eligible receive the benefit because of lack of slots in the daycare facilities. The calculation of the ratio between the number of people potentially eligible to register in supervised facilities in which it is possible to receive the subsidy and the number of slots in such facilities indicates that those facilities only have slots for about one-quarter of those eligible to register, and that the excess demand for supervised facilities is a phenomenon that has existed for many years.[10]
A section from the upcoming Bank of Israel Annual Report for 2015: The Effect of Subsidized Child Care on Maternal Employment
 The effect of subsidized childcare facilities on maternal earnings
To date, research on the subsidies focused on examining the effect of the subsidy on the probability of the mother to work. However, the subsidy has another effect on mothers’ employment, given that they return to work. Some mothers who combine work and childcare adjust their terms of employment in order to reduce childcare expenses. There are two methods of this adjustment: reducing work hours and/or choosing a “mother-friendly job”. A “mother-friendly job” allows occupational flexibility, which is characterized by work hours and work days that parallel the hours of activity in the childcare facility, flexible work hours, proximity to a childcare facility, no work-related travel or meetings late in the day, the possibility for frequent absences, etc. The employment terms in mother-friendly jobs do contribute to reduced payments for childcare, but generally such positions pay a lower wage, and are less able to allow the mother to reach her professional potential (a negative impact on matching). Whether the mother chooses, due to expected childcare expenses, to reduce her hours of work or to switch to a “mother-friendly job”, her wage is expected to be adversely impacted for several years until the child is older. Given the high fertility rate in Israel, the period of adverse impact on mothers’ wages can last for several years. Even if this phenomenon is transitory, and passes as the child grows up, the reduction of hours of work or the choice of a job in which the mother does not reach her full professional potential can lead to a loss of labor productivity and a negative impact on earnings, which is reflected as well in an increase in gender wage-gaps, which in Israel are among the highest in OECD countries, and in the incidence of poverty.
A new analysis conducted on Israeli data examines the effect of the subsidy on the development of earnings of women who returned to work after giving birth and were eligible to receive the subsidy for supervised childcare facilities. The analysis is based on earnings data of a panel reflecting a random sample of 10 percent of total wage-earners in the economy, and their spouses, in 2003–13. The sample was built on the basis of employer reports (Form 126). The form contains information such as wage, months of work, deductions, allowances, etc. It was combined with demographic characteristics of the sample population such as age, place of residence, number and age of children, family status, year of immigration and data on receipt of a subsidized price in supervised daycare facilities (based on data from the Ministry of Economy, which budgets the facilities.)
The study population consists of employed women who gave birth in 2006 and were eligible for a subsidy at the subsidized facilities. The research method was Difference-in-Differences, in which the mothers were divided into two groups: those who received a slot in the subsidized system and received the subsidy (treatment group) and those who were eligible for the subsidy but did not take up their eligibility (control group), assuming that the main reason for not receiving the subsidy is a shortage of slots in the subsidized system. The probability of receiving a slot in the subsidized system depends on the observed characteristics of the mothers, as the Ministry of Economy defined rules for prioritizing acceptance into the childcare facilities, based on characteristics such as scope of employment and family status (single mothers are given priority). When all else is equal, priority is given in actuality to families with the larger number of children. The analysis focuses on women above age 23 at the beginning of the study period (2003) and follows the development of the earnings in the two groups for 11 years. At that age, women are in career-building stages, and the period is characterized by a rapid increase in their earnings. Adjusting their employment after giving birth is expected to slow the increase in earnings, and the subsidy is expected to moderate the negative impact of the changes in employment (decline in work hours or a switch to a “mother-friendly” job) on the mothers’ earnings. The analysis indicates that before giving birth, the two groups were similar (the coefficient of the dummy variable of receiving treatment is not statistically significant), and in the three years before giving birth there was a common trend in the development of their earnings. This finding bolsters the claim that the changes in development of earnings between the two groups after intervention should represent only the effect of the subsidy.
Several methodological questions were examined in the research in order to ensure that the results are not biased. First, the possible correlation between geographic dispersion of the childcare facilities and the womens’ characteristics were examined. Although the geographic dispersion of the childcare facilities mainly reflects urban development and is not correlated with demand[11], in order to verify that the results are not affected by differences between localities in terms of availability of the subsidized facilities, we control for the observed characteristics of the localities (such as population size, average wage, unemployment rate) as well as for unobserved characteristics (by including a fixed effect for each locality in the estimation). The study period is long—that is, 11 years (2003–13)—and in order for the estimation results not to be biased due to change in the composition of the groups over those years, the estimation includes women who persisted in the labor market—those who worked in at least 8 years during the study period.
The findings indicate that the earnings of the women who received the subsidy increased more, by a statistically significant extent, than those who did not take up their eligibility for the subsidy, while controlling for the womens’ characteristics. Compared with their earnings prior to giving birth, the earnings of women who received the subsidy increased more than the earnings of mothers who were eligible for the subsidy but whose children were not in a subsidized facility, by a statistically significant extent—6 percent in the first year, 8 percent in the second year, and 4 percent in the third year. This finding indicates that women for whom the cost of the facility was lower due to the subsidy were required to make fewer changes in their employment after birth (i.e., reducing hours of work or choosing a “mother-friendly” job). These women’s earnings increased more throughout nearly the entire period of the child’s education in the subsidized framework. The total addition to earnings, on average, of all the women comes to about 40 percent of the total cost of the subsidy, but it is important to note that this is an additional effect of the subsidy, above its effect on the mothers’ participation in the labor market, and to increasing the disposable income of low-income working families with young children.
The study follows the women’s earnings until the child reaches age 8, in order to examine whether the adjustments in employment negatively impacted the mother’s accumulation of human capital—which would affect women’s earnings in the long term as well. The study did not find evidence of the effect of the subsidy beyond the period in which the child is in the subsidized framework. With that, given that in Israel a working mother has, on average, 3 children, the effect on earnings is spread out over a very long time, when there are facilities available for all those interested, beginning with the first child.
Subsidy of daycare and home-based prenursery facilities is one of several policy tools that exist in Israel and that support families with young children. The scope of these tools is relatively low compared with OECD countries.[12] Support that is not contingent on an income test—universal support, such as child allowances—improves the economic situation of families with children but can encourage lack of employment. Financial support that is extended only to working parents—such as the Earned Income Tax Credit and income tax credit points in respect of children—improves parents’ economic welfare without negatively impacting the incentive to work, but have not been found to increase mothers’ employment to a statistically significant extent. The advantages of subsidizing daycare facilities are its relatively low cost, as it is only provided to working families with relatively low income (in contrast to child allowances and credit points), and its efficiency in increasing employment of women. The government recognized the importance of subsidizing the facilities for children up to age 3, and therefore decided in 2012 to build 400 new daycare facilities within 5 years (2013–17), which would be an increase of about 20 percent. However, construction of the facilities remains slow due to the existing bureaucracy in the process of budgeting and due to problems in allocating land. In 2014, the process was simplified, but as of today only about 10 percent of the planned daycare facilities have been built, and in many regions the shortage remains, particularly in the Arab sector.[13] Understanding the obstacles to implementing the government’s decisions in this issue, and more dedicated handling to removing those obstacles, will contribute to expanding the subsidized facilities for children up to age 3, and thus to increasing the employment rate of women, to reducing gender wage gaps, to increasing labor productivity and to reducing poverty among families with children.

[1] Shachar, E. (2012), “The Effect of Childcare Cost on the Labor Supply of Mothers with Young Children”, Bank of Israel Discussion Paper Series, 2012.12 
[2] Brender A., Strawczynski M. (2015) "Government Support for Young Families in Israel", Israel Economic Review Vol. 12, No. 2, 1–49.
[3] Lefebvre P., Merrigan P. (2008), "Child-Care Policy and the Labor Supply of Mothers with Young Childe: A Natural Experiment from Canada", Journal of Labor Economics, 26/3, 519–548.
[4] Nollenberg N., Rodrigues-Planas N. (2011), "Child Care, Maternal Employment and Persistence: A Natural Experiment from Spain"", IZA DP No. 5888.
[5] Bauernschuster S., Schlotter M. (2015), "Public Child Care and Mothers’ Labor Supply – Evidence from two Quasi-Experiments", Journal of Public Economics, 123, 1–16.
[6] Berger M., Black D. (1992), "Child Care Subsidies, Quality of Care, and the Labor Supply of Low-Income, Single Mothers", The Review of Economics and Statistics, Vol. 74, No. 4, pp. 635–642.
[7] Schlosser A. (2007), "Public preschool and labor supply of Arab Mothers: Evidence from a National Experiment", University of Jerusalem, mimeo.
[8] For the source, see the Bank of Israel Annual Report for 2011, Box 5.3 (Bank of Israel, 2012).
[9] In the 2015/16 school year, the monthly cost of daycare for children up to age 2 was NIS 2,365, and for a child older than that, NIS 1,799.
[10] For the source, see footnote 1.
[11] In most cases, subsidized daycare facilities are built with a marked lag relative to demand: most of the construction takes place when new neighborhoods are built, according to a standard based on the number of housing units in the neighborhood. Constructing the daycare facilities in existing neighborhoods involves a complex bureaucratic process, which includes problems of financing and of allocating land, and is therefore spread out over many years, so that there is a significant lag relative to demand.
[12] Brender A., Strawczynski M. (2015) "Government Support for Young Families in Israel", Israel Economic Review Vol. 12, No. 2, 1–49.
[13] After simplifying the budgeting and land-allocation processes in August 2014, the amounts transferred by the government to building daycare facilities increased markedly, but this process has not yet been reflected in the opening of new daycare facilities.