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In South Australia, special need loadings are paid to foster carers to compensate them for the additional cost associated with caring for more challenging children. The results showed that loadings are more likely to children who had significant behavioural problems. This situation is discussed in terms of the increasing inelasticity of the labour supply curve applying to foster parents who provide care to children with this characteristic. The magnitude of this effect was estimated using a logistic regression model with loading status as the dependent and conduct disorder as a predictor. It was found that the application of extra loadings (usually a doubling of the payments requested) was over three times higher for children with significant behavioural problems compared with children without these difficulties. This suggests that the baseline analysis of child characteristics may provide quite precise estimates of the potential financial costs of foster-care services.

Although a majority of foster parents report altruistic motivates for providing care, there is convincing evidence that economic incentives can also play a significant role. Foster parents who receive additional support and stipends are more likely to be retained for longer, and also tend to be more satisfied with their role as carers (Chamberlain et al., 1992). Conversely, the inadequacy of foster-care payments has been cited as a major cause of drop-out and frustration among both former and current carers (Dyer and Evans, 1997 and U.S. Department of Health and Human Services, 1989). Such dissatisfaction has been not so much related to the unprofitability of providing care, but the inability of payments to cover basic living expenses, including: food, clothing and rent. A number of broad factors have been identified to account for these problems. Throughout the Westernized world, there has been a dramatic decrease in the availability of suitably trained foster carers. Increases in the cost of living combined with greater numbers of women in the workforce have reduced the number of households able to provide care (Colton and Williams, 1997). At the same time, increased poverty and reported child abuse and the number of children born to single parent families, has increased the demand for placements. Moreover, both of these trends have coincided with reductions in the variability of both placement options and the characteristics of the children requiring placement. Non-family-based placement options have become increasingly rare, particularly in Australia as a result of policy changes (Barber, 2001 and Bath, 1997), and the children requiring placement have become harder to place in family arrangements because of their greater behavioural and psychological needs. One short-term solution to overcoming these problems, particularly in Australia, has been to increase the payments to existing foster carers. Rather than create new placement options or train new foster carers (which is usually a longer term strategy), existing foster carers are offered greater financial incentives to take on more difficult children. This takes the form of a loading based upon the standard payment rate. For example, a parent might be paid 1.5 times (50%) or twice (100%) the usual rate. The advantage of this method is that the government is spared the cost of recruiting and training new carers. At the same time, from the foster carer’s perspective, being able to take on more children at a higher rate allows fixed costs (e.g. rent, council rates, phone rental, etc.) to be spread over a larger revenue base. The more children a carer can take, the lower the fixed cost per child, assuming that the additional payment is enough to cover the variable costs of the extra child. These processes are illustrated in Fig. 1, which shows the hypothetical demand and supply for foster-care services in relation to varying payment rates.The demand (D) for foster-care services is created by the state government, which offers payments of a specified amount are offered to attract foster carers willing to provide their services. The demand curve is downward sloping because the government would, given its budgetary restraints, demand more foster-care placements if the payment required per placement were to decrease. The supply of foster-care services is provided by foster carers, who are willing to offer their services based upon the level of support provided. The more money which is offered, the more attractive or feasible 1 it is for them to provide services, so their labour supply curve is upwardly sloping. As indicated in Fig. 1, it is possible to consider an initial equilibrium point at which foster carers are willing to provide a quantity of services (Q0) at payment level (P0) which is just sufficient to satisfy demand. However, as also indicated, this initial equilibrium point would unlikely to be maintained if foster caring were to become more demanding, as might be so if foster carers were asked to care for more challenging children. If the task of foster caring became more difficult or expensive from the foster carers’ perspective, they would demand a higher payment to compensate them for the extra time and effort required. In Fig. 1, this change is represented by a backward shift in the labour supply curve. Although this backward shift could take the form of a parallel shift to represent the greater costs of foster care, a more likely scenario is depicted in Fig. 1, namely a change in the slope of the supply curve. This represents the fact that foster carers do not typically reduce their labour output uniformly across a range of outputs as might be the case for a company producing regular services under conditions of increased cost. As foster carers are usually registered with agencies on the understanding that they will provide rooms and beds whenever the need for a placement arises, the critical issue is not so much the provision of a placement per se, but to whom to placement is provided. Specifically, if the additional child has challenging behaviours, higher payments would have to be made to obtain the extra placement. In other words, the labour supply function for foster-care services would become more inelastic with greater price increases required to obtain per unit increases in labour. As indicated, this change would be indicated by a backward shift in the supply curve (S) to S′. At the current payment level (P0), foster carers would now only be able, or willing, to supply services in the quantity (Q1). Thus, there would be a shortage of placements equal to Q0−Q1. In order to remove this shortage, the government would be faced with one of two possible options. One option would be to recruit additional foster carers using, for example, a media campaign. If this were successful, it might be possible to shift the supply curve S′ outwards so that the original equilibrium point is re-established. However, this option may not be available in the short-term. For this reason, the use of loadings, i.e. an increase in short-term payment rates, would allow the original equilibrium point to be maintained, but at a higher rate of payment. In doing this, additional costs in the amount of (Q0P0+loading)−(Q0P0) are incurred. The fundamental logic underlying this analysis of labour supply is the notion of compensating differentials. This concept or axiom dates back to the writings of Adam Smith’s The Wealth of Nations, and has remained a core assumption of basic micro-economic theory ever since. In essence, Smith argued that workers need to be paid greater amounts in order to encourage them to provide labour for work that possesses undesirable features. As discussed above, this notion would appear to apply in the context of Australian foster care because of the increasing difficulty associated with caring for children with significant behavioural and emotional problems. Although this issue has been raised in a number of international studies (e.g. Butler and Charles, 1999, Campbell and Downs, 1987 and Chamberlain et al., 1992; Plotnick & Deppman, 1999), there has, to date, been very little research that has attempted to identify and quantify this relationship using data derived from foster-care services. Consequently, the aim of this paper is to summarise a series of analyses derived from a research project that provided the opportunity to examine the relationship between foster-care payments and child characteristics. In our study, demographic and behavioural assessment data were obtained for 235 children referred for new foster-care placements in 1998–1999. At the same time, and with the assistance of the administrative authorities for foster care in the state of South Australia (The Department of Human Services), we obtained data that summarised the payments made to foster parents for these newly established placements. Using this database, it was possible to determine whether foster parents were receiving a normal rate of payment, or a loading (e.g. 50% extra, 100 or 200% extra), for each child. If a relationship could be established between the application of loadings and specific child characteristics, this would have important implications for social policy. First, it would show that the application of loadings is not a capricious process and that extra payments are indeed applied based upon the child’s needs rather than other considerations. Second, it would provide quantitative evidence that payment differentials are systematically related to child characteristics thought to increase the difficulty of providing care. Third, in identifying the critical child characteristics associated with extra payments, it would allow better anticipation of future costs based upon the baseline assessment of children coming into care.

The results of this study clearly show that conduct disorder imposes a measurable cost upon foster-care systems. Despite case worker concerns that extra loadings are often applied in a capricious fashion, it was found that children who are receiving the loadings are genuinely more difficult to manage than those who do not receive this extra support. As indicated in Fig. 4, the probability of loading being applied was almost a linear function of the level of behavioural disturbance. The results also showed that hypothesised variations in the elasticity of supply for foster-care services could be estimated using the data provided, and that this form of micro-economic analysis can be used to obtain a clearer conceptual understanding of the problems in Australian foster care. In particular, the study showed how an increasing representation of challenging children in Australia foster care appears to have made the supply of foster-care services substantially more inelastic, so that the government will now have to pay more to obtain the same number of placements. Indeed, it was found that the estimated supply elasticity for children with loadings was approximately 20% lower than for other children, indicating a substantial reduction in the responsiveness of supply to variations in payment levels. Although the current analysis must, of course, be treated with some caution because it is based upon inferences derived from static figures, it nonetheless suggests that analyses of supply changes in relation to actual payment variations would be feasible in future research projects. For example, it would be possible to investigate the changes in the supply of foster-care services that result from advertised increases in foster-care payments. Alternatively, it would be possible to survey foster carers to ascertain the amount they would have to be paid in order to provide placements for children with specified profiles. Although the current study was undertaken in South Australia, a relatively small state of Australia in terms of total population (1.5 million), the situation described is nonetheless relevant to other jurisdictions around Australia, and in North America. For example, according to the Child Welfare League of America (1999), it is common for American state jurisdictions to provide vary payment levels based upon child characteristics. In some American states, the situation in much the same as in South Australia, with payment rates subject to negotiation between foster carers and the government. However, in others (e.g. Arkansas), government agencies undertake formal assessment procedures prior to placement to determine the suitable payment level. In other words, children’s characteristics are systematically assessed as they come into care, so that the level of special needs can be identified. In Arkansas, for example, the Department of Human Services determines the appropriate payment level based upon a points system. For each of three domains, children’s problems are rated on a five-point scale ranging from A to E, with E representing the severe problems, and A denoting minimal problems. Children who are rated level D or E in more than one domain would usually obtain a very high points total, and so payments for very challenging children could be in the order of 9–10 times higher than for those without significant problems. This strategy appears, in principle, to be a very sensible one and provides evidence that governments are sensitive to the variability in the children in care, and that compensatory payments are necessary to match the level of care with the level of need. In this way, the government effectively creates its own market with different supply functions for each segment, as based upon their knowledge of the resources and labour input required to look after children with different characteristics. Optimism about this strategy is, however, tempered by several considerations. A potential danger of using loadings is that they could become an end in their own right rather than as merely a means to maintain difficult placements. For example, in South Australia, there have been anecdotal reports that loadings could be used as a ‘bargaining tool’ by foster carers. That is, foster carers may increasingly demand loadings in order to provide the same service, or to maintain a given placement that might have survived without the loading. Alternatively, carers who are unsuitable to take on difficult children may choose these children only because of the financial incentives involved. Such carers may have less motivation to ensure that these problems are removed, because, in effect, the alleviation of problems could reduce their future capacity to obtain future payments. Although this attitude does not appear to be very common amongst South Australian foster carers (Delfabbro et al., 2002), there are nevertheless reports of carers asking for medical and psychiatric assessments to confirm the presence of disorders such as Attention Deficit Hyperactivity Disorder (ADHD). A diagnosis of this nature would considerably strengthen their request to obtain higher payments, even though there has been considerable controversy concerning the over-diagnosis of this disorder and over-prescription of medications to treat it. Perhaps the most serious criticism of the use of loadings is that they may artificially support placement arrangements that are unsuitable for the children concerned. Rather than seeking alternative arrangements, the expenditure on loadings may, ironically, serve to perpetuate the problems described above. By keeping many challenging children in family foster care, the government may be unwittingly making foster care a less attractive occupation for current and potential foster carers. As indicated above, the more unattractive the occupation, the more inelastic the supply curve, and therefore the greater the compensatory differential required to attract the necessary labour. Thus, it is possible that the use of loadings to maintain challenging children in care may serve to create a vicious circle, in which increasing amounts must in paid in the short-term to maintain a situation which, arguably, could be the source of the problem itself. For these reasons, Barber and Gilbertson (2001), in a very extensive review of the literature, argue that alternative solutions such as treatment foster care should be considered. In such schemes, children with significant needs are removed from the mainstream foster-care system and looked after by professionally trained carers with greater resources and supports. Current research undertaken by the authors is examining the value of such schemes in addressing the considerable instability and mounting costs of traditional family foster-care placements in Australia.