Why is Childcare so Expensive in America?
Growing childcare costs have been a major concern for parents nationwide. As you can see based on the chart above, costs vary heavily nationwide.
States with lower costs for childcare might not be better off, because median incomes for those states often are lower. So a better comparison would be childcare costs as a percentage of median income in each state.
Thankfully, an unlikely hero, Freddie Mac, came to the rescue with this great chart, comparing average childcare costs to family median income in each state:
The major reason for the heavy fluctuations from state to state is due to state-level regulation of childcare centers.
Staff-child ratios are essentially the ratio between caretakers and children in the childcare center. The intent of the policy was apparently to correct the ‘market failure’ of parents being unable to seek the highest quality of care available to them.
This is false. Parents can evaluate quality of childcare centers because unlike some other sectors of the economy, transactions involving childcare do not suffer from asymmetric information.
Instead, staff-child ratios lead to substantially higher costs with little to no improvement in quality.
The majority of empirical research on the topic shows a causal relationship between childcare regulation and higher costs. A study from the RAND Corporation, titled The Effects of State Regulations on Childcare Prices and Choices looks into the child-to-staff ratios on prices of care.
We find that childcare regulation, in particular the maximum child-teacher ratio, has a statistically significant and economically large impact on the market for childcare.
The table above shows the impact of the tightening of ratios on labor force participation. A tightening of regulation by 2 children per teacher would decrease labor-force participation by 1.4% and center usage by 8.5%.
One interesting aspect of this study is that regulation might increase quality for *some* children, but other children from low income families will have to shift to lower quality facilities due to increased prices.
Similar results can be seen in Hotz and Xiao 2011, which was published in the American Economic Review. The study looks into the effects of state child care regulations on the supply and quality of care. The study concludes that there are clear tradeoffs
. . . we find that the imposition of input regulations in the center-based sector of the child care market significantly reduces the number of operating child care centers, especially in lower-income markets.
Revenues for each center go up substantially, because a similar amount of children are going to few centers. But this isn’t a good thing, because crowded centers can have adverse effects for the children’s development because the staff has to take care of larger groups of children, meaning each child receives less attention and care.
Another study authored by Diana Thomas and Devon Gorry look into the effects of staff-child ratios as well as other regulatory standards on childcare prices. They find significant effects of regulations on cost of care.
The coefficients for child–staff ratios and lead staff education requirements are both economically meaningful and statistically significant across the different specifications and after controlling for income. A one-infant increase in the child–staff ratio requirement for infants is associated with a decrease in the cost of care of between 9 percent and 20 percent, 6 which translates into a reduction in the annual cost of child care of between $850 and $1,890 for the average cost of care across states.
So relaxing staff-child ratio by one infant can lead to significant savings across the country.
The paper also looked into education requirements for teachers and their cost effects.
Similarly, requiring lead teachers to have a high school diploma is associated with an approximate increase in the cost of child care of between 25 percent and 46 percent, which translates into an approximate increase in the cost of care of between $2,370 and $4,350 per year.
On page 12, the study then conducts a short review of existing literature on the effects of these regulations on quality. They conclude that the relationship is weak and that other factors are more important to the quality of each center.
Another paper looks into the complexity of the zoning approval process in Philadelphia.
They find significant and unnecessary delays within the system, which lead to high costs for opening a new facility.
On average the Zoning Board added $4,140 to costs of opening a group child care facility. The annual salary of group child care providers is about $17,000. These costs, which are almost 25% of a child care provider’s annual salary, significantly affect a provider’s viability and ability to offer quality care.
Zoning laws, along with staff-child ratios and education requirements increase the price of childcare centers. They also increase costs, often leading to a decrease in the supply of high quality centers.
What about Universal Childcare?
A common response by those on the left to rising childcare costs is to make childcare universal, meaning to make the government pay for costs so that it is ‘free’ to families.
Problem is that this policy doesn’t actually address to rising costs. It just shifts the burden onto the taxpayer.
Elizabeth Warren’s plan for universal childcare when she ran for president is estimated to cost around $70 billion annually. The plan specifically is funded by a wealth tax, which has it’s own separate problems that warrant another post.
Other estimates for other plans put the number to about $140 billion.
Outside of just cost of the program, there is real world evidence to look at when it comes to Universal Childcare, or highly subsidized childcare.
In Quebec, a series of family policy reforms were implemented on 1997, one of them being universal childcare for 0–4 year olds. The policy has been well researched for it’s effects on child outcomes.
A study from the American Economic Journal looks precisely into this program. It seeks to determine the long-run effects of the Quebec childcare program on noncognitive and cognitive outcomes.
The table above shows the regression results from the study on various noncognitive outcomes for ages 5–9.
Underneath the ‘Exposure’ column you find the standard deviation of each of the outcomes (standard deviation is essentially the measure of how spread out or dispersed the data set is). For Hyperactivity, children who participated in the Quebec childcare program saw an increase of 13% of a standard deviation. For Anxiety, it was approximately 28% increase. Social behavior barely moved, and was close to 0. Showing that there was very little positive effect on social behavior.
The authors conclude this section by stating:
Taken together, the negative impact of the Quebec program on the noncognitive outcomes of young children appears to persist and in some cases increases as they reach school ages. The impact is stronger on those who already had elevated noncognitive scores and for boys.
The study also looks into the programs effects on crime. Table 5 below shows the study’s results:
The table shows that participation in the Quebec program led to higher rates of crime. The first row looks at all crime counts and finds that there is a 27% increase on the overall mean of 1,872 accusations per 100,000. The authors also explain the other results:
The impact of exposure to the Quebec program is largest for property crime; the estimates from the richest specification show an increase in accusations of these crimes of 602 per 100,000 children, or 19 percent of the mean, and for convictions for these crimes of 342 per 100,000, or about 25 percent of the mean. The estimated impacts on other criminal code violations are almost as large. Slightly smaller are the estimated impacts on crimes against persons, at 16 percent of the mean for both accusations and convictions. Finally, the impact for drug crimes is 14 percent of the mean for accusations but over 23 percent of the mean for convictions.
Overall, the authors conclude by summarizing the study:
We find the Quebec policy had a lasting negative impact on noncognitive skills. At older ages, program exposure is associated with worsened health and life satisfaction, and increased rates of criminal activity. Increases in aggression and hyperactivity are concentrated in boys, as is the rise in the crime rates. In contrast, we find no consistent impact on their cognitive skills.
In America, there have been examples where states create childcare programs which are usually targeted for low-income children.
Tennessee has this kind of program called the voluntary prekindergarten program. It started in 2005 with the state legislature passing the Voluntary Pre-K for Tennessee Act of 2005. The program was initially funded with $25 million of excess lottery dollars. The program was further expanded upon in the following years.
So what are the effects of this program? One study, from the Early Childhood Research Quarterly journal looks into the effects using a randomized controlled trial (RCT). The study has a sample size of 3,131 children who were all randomly selected.
The study initially finds positive effects on child achievement in the short term. But the effects dissipated once the children entered elementary school. Once the children entered third grade, the effects became negative.
At the end of pre-k, pre-k participants in the consented subsample performed better than control children on a battery of achievement tests, with non-native English speakers and children scoring lowest at base-line showing the greatest gains. During the kindergarten year and thereafter, the control children caught up with the pre-k participants on those tests and generally surpassed them. Similar results appeared on the 3rd grade state achievement tests for the full randomized sample — pre-k participants did not perform as well as the control children.
The National Institute of Child Health and Human Development (NICHD) conducts a study of children in childcare when they of 4.5 years of age. The study looks into a group of 1,364 children from birth and continue to examine behavioral effects as they grow.
This chart comes from Institute of Family Studies, which compiles data from the NICHD study mentioned above. The longer children are in childcare centers per week, there is a larger chance the children exhibit behavioral problems.
Another study from the Review of Economics of the Household looks into the effects of childcare subsidies on childhood obesity. They find generally there is a increase in the BMI for children who enter childcare centers, although the the effects are more profound for children from higher income households.
Our findings suggest that child care subsidy receipt is associated with increases in BMI as well as increases in the likelihood of being overweight and obese. We also find initial support for the claim that the estimated subsidy effects operate through children’s participation in non-parental child care settings. Specifically, our results point to enrollments in center-based care as the primary mechanism through which the subsidy effects operate. Children in this type of arrangement have substantially higher BMIs and experience a significantly greater likelihood of being overweight and obese.
There seems to be a general trend that government involvement in the childcare sector has substantial negative outcomes on the development of children, in the short term as well as in the long run. A better policy choice would be to relax staff-child ratios, which would reduce prices significantly, as well as maybe providing some sort of child allowance for families.
