A groundbreaking study published in The Japanese Economic Review reveals that public daycare services deliver stronger economic benefits than cash allowances in addressing Japan's declining birth rates, though a combination of both approaches yields the best results.
The research, conducted by Waseda University's Reona Hagiwara, analyzed how different family support policies funded by a 1% consumption tax increase would impact birth rates and broader economic indicators.
Public daycare emerged as the frontrunner, pushing birth rates to 2.17 children per family compared to 2.16 with cash benefits—both up from the baseline of 2.03. The daycare approach also drove a substantial 3.8% increase in female employment, dramatically outperforming the 0.7% boost from cash allowances.
"The data shows public daycare creates a powerful economic cycle," notes Hagiwara. "When parents, especially mothers, can remain in the workforce, it generates more tax revenue and reduces the social security burden on everyone."
The research found that social security tax rates could drop from 29.4% to 27.4% under the daycare model, slightly better than the 27.6% achieved through cash benefits.
However, the study highlights that different demographic groups face distinct challenges. College-educated parents primarily struggle with time management, making daycare services particularly valuable. Meanwhile, lower-income families benefit more from direct cash support to handle basic expenses.
Both approaches show promise in growing the working-age population by 0.9% and reducing the proportion of retirees. Male employment increased by 1.7% under both scenarios.
The welfare improvements were notable across the board, with single individuals experiencing a 2.2% gain under the daycare model versus 1.8% with cash benefits. Married couples saw even larger improvements: 4.8% with daycare compared to 4.1% with cash support.
One cautionary note emerged: Parents invested approximately 2.4% less in each child's education when having more children, regardless of the policy implemented.
The research, which projected outcomes over 200 years using 2020 Japanese economic data, considered various factors including education levels, marriage status, and household types. It drew from comprehensive sources including wage surveys, time-use studies, and population forecasts.
The findings suggest Japan's optimal path forward combines expanded public daycare with targeted cash benefits, creating a comprehensive support system that addresses both immediate financial needs and long-term economic sustainability.