The crazy economics of childcare costs in America

She’ll figure it out soon enough.
She’ll figure it out soon enough.
Image: AP Photo/Eric Gay
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As the conventional wisdom goes, rising childcare costs has put a financial squeeze on US families. More than 60% of parents across all income brackets in a 2015 Pew Research Center survey said it was difficult to find affordable, high-quality childcare in their community.

A closer look at the data, however, reveals a more complicated story.

Rising inequality has changed the economics of childcare spending for families across the income spectrum, but in very different ways. Low- and middle-income earners are paying only slightly more than they did two decades ago, but the highest earners are paying astonishingly more. Yet in the absence of quality, affordable care, low-income families are increasingly relying on relatives or caregivers without licenses.

“The factor driving inequality of childcare costs is income inequality,” wrote So Kubota, an assistant professor in the University of Tokyo’s Graduate School of Public Policy, in a 2017 paper on US childcare costs.

The US Census 2013 report “Who’s Minding the Kids?” showed that weekly childcare costs for a family with an employed mother rose by about 70% from 1985 to 2011, the last year in which the census collected childcare cost data. Over the same period, median weekly wages barely grew.

Arizona State University public policy professor Chris Herbst, who studies family welfare issues, thinks the census numbers don’t tell the whole story. While spending on childcare has risen tremendously, it’s driven primarily by well-to-do parents investing in expensive child care services—what Herbst called “the Cadillac of child care” in an interview with the website FiveThirtyEight.

According to Herbst (pdf), from 1990 to 2011, weekly expenditures only went up by 3.3% for families in the bottom income quartile who had a child under five years old, from about $80 to $83 (in 2016, the bottom quartile of households had income of $27,500 or less).

But average weekly child care spending went up by 50% for those in the top quartile of earners from about $125 to $186 (in 2016, the top quartile had incomes of $102,500 or more.)

Herbst’s assertions are controversial. A 2017 paper (pdf) by Kubota, using the same data but a different methodology, finds that childcare spending is on the rise for everyone. Using the same data as Herbst, Kubota finds that the fraction of family income spent on childcare has risen significantly regardless of income level. For example, the share of spending on childcare for families in the middle 50% in income grew from about 7% of income in 1985 to 9% in 2011—a nearly 30% relative  increase.

Kubota identifies two likely culprits.

One is increased regulation of private childcare providers. Over the last several decades, the number of states requiring licenses for home daycare has increased. Licensing may improve quality, but it also decreases supply by raising the barriers to enter the industry—thus, increasing cost.

Second, the creation of government programs offering nearly free childcare to the poorest households, mostly introduced from 1990 to 2010, may have led to a decline in the supply of childcare workers. Running a home-based childcare center used to be an attractive work option for low-income mothers, who charged lower fees (and earned a lower wage) in exchange for being able to work with their children at home and save on childcare costs themselves.

With the arrival of subsidies, many of these mothers placed their children in affordable daycare and sought higher-paying work elsewhere. In that sense, the subsidies worked exactly as designed, freeing up poor families to earn more money.

But as the supply of home-based care centers dried up, families who earned too much money to qualify for subsidized care were forced to find help elsewhere.

Of low-income families whose children were cared for by someone other than a parent during the day, 50% used family members as caregivers, according to a 2007 US Department of Health and Human Services survey. By 2015, 57% of parents earning less than $30,000 told Pew Research Center that they relied on care by family members.

Family care, of course, is available only to people living near relatives willing and able to care for their kids. Those who don’t have few choices. Nearly 80% of parents who described their household finances as “not strong” said they had “just a few” or “only one” childcare option, compared with 63% of those with strong finances, according to a 2016 poll by NPR, the Robert Wood Johnson Foundation and the Harvard T.H. Chan School of Public Health. Poorer families were also less satisfied with the quality of their child’s daycare than better-off parents.

Well-off families, on the other hand, have increasingly opted for private centers and caregivers that accommodate parents’ work schedules and give children educational and developmental advantages—at a price. Increased spending on childcare by the wealthy is part of a larger trend of richer Americans investing more in their children’s development. The share of spending on education among the rich has risen faster than the less well-to-do.

Quality early childhood education helps children get ahead. It helps their parents get ahead, too. But in the US, it’s very hard to access without a high income.

“We’ve known for decades now that there are so many positive outcomes for high quality childcare for children,” said Joya Misra, a professor of sociology and public policy at the University of Massachusetts Amherst. “In a country that makes available high quality childcare, you see much better employment for parents, you see higher wages for parents, and you see an enormous reduction in poverty.”