Is there a market failure in child care?
Applying economics
Many parents are not able to find child care at a desirable cost. But of course, just because something costs more than you would like does not mean that there is a market failure.
NPR’s Planet Money had a story on the excess demand for child care, with waiting lists everywhere. I give the correspondents credit for repeatedly asking the question “Why don’t day care centers just raise prices?” But they do not get an answer that I find satisfying. In the end, we are left with a puzzle that the headline of the story calls a market failure. In fact, I am sympathetic to the view that waiting lists are a market failure, and I will offer a solution. But first I want to explain the economics of child care using simple arithmetic.
Let us assume that the parents get neither utility nor disutility from spending time with their infants. When it comes to making the decision to use child care, all they care about is the price of day care relative to the salary of the lowest-earning parent in the couple. Call this the parent salary.
Labor costs are 70 percent of the cost of a day care center, according to the NPR story. But I am not sure that they are taking into account the opportunity cost of the entrepreneur/manager. So let us say that labor cost is 2/3 (it is probably somewhat lower, but I want to keep the arithmetic simple). The overall cost per worker is 3/2. The story indicates that the child care center needs one worker for every four children. So the cost of caring for one child is (daycare salary/4)(3/2) = 3/8 of the cost of a child care worker. Suppose that the amount of child care is 48 hours a week, allowing the child to be dropped off about half an hour before the parent is at work and picked up about half an hour after work. Multiplying 48 by 3/8 gives a cost per child per week of 18 times the cost of a child care worker. If the child care worker costs $15 an hour, then the day care center will charge $270 per week per child.
Suppose that the parents have two children who need child care. That is $540 per week. The parent salary has to be at least $540 per week to make the choice of child care economical. But that does not take into account taxes.
The parent will pay taxes on market work, but not if he/she stays home to take care of the children. If the overall tax rate, including payroll taxes as well as income taxes, is 40 percent, then the parent needs to earn $900 per week to have an after-tax income of $540 per week. If the parent works 40 hours a week, that is an hourly pay of $22.50.
In this example, a parent has to earn 50 percent more per hour than a child care worker in order for child care to be “affordable.” The factors that account for this are, in order of magnitude: the tax wedge; the overhead costs of the child care center; and the extra time that a child spends in day care after getting dropped off before work and picked up afterward.
In theory, the child care center is twice as efficient as home child care, since the child care center uses one adult for four children and one parent stays home with two children. But these efficiency gains are more than wiped out by the tax wedge and other factors.
Solving the Waiting-List Problem
The NPR story raises the question of why parents face waiting lists for child care and have to put a lot of time into trying to find child care. This does sound to me like a market failure.
The way I see it, it does not pay any individual day care center to help solve the parents’ problem by having vacancies available on demand. If I provide vacancies on demand, I do not think that I can charge parents for the full value of the ease of mind and time savings that I am giving them. For me as an individual day care center, it is better to keep a waiting list.
But although keeping a waiting list may seem optimal for one day care center, it is not optimal that every day care center keeps a waiting list. In theory, it seems to me that there is room in this market for a “day care broker” who charges parents a fee for handling the problem of finding a day care provider.
In the absence of a broker, each day care center has to keep a waiting list. With a broker in the market, a day care center would not keep a waiting list. Instead, it would take children off of the broker’s waiting list, which is one waiting list for the whole market. Parents would experience a much shorter waiting period.
One problem with the broker scenario is that parents could “free ride.” With day care centers no longer keeping waiting lists, parents could get child care quickly, without using the broker. So the broker would have to “lock up” the local day care centers by insisting that they not take any children except through the broker.
Presumably, an online broker, like the airbnb for child care, would be most efficient. The broker would have to put together data on the features of day care centers that parents care about, including location, rules, staff qualifications, and so on. Videos of the day care centers would be very good to have.
This seems like a project an entrepreneur ought to try and take on. At first, though, you probably have to pay the day care centers a bonus for accepting children from your online brokerage service. You need to wean them away from waiting lists.
Our daycare charges $350/week. I have no particular reason to believe it is more expensive than an average daycare, and some expensive cities may be worse.
We could save a few bucks if the daycare was some Hispanic lady with a bunch of kids in her townhomes basement, but for a normal daycare you would actually want to send your kid to this seems normal.
My daycare also only takes kids age 2+, which has less regulations and lower teacher/student ratio.
So that is $18,200 a year per kid. Via the tax wedge (ours is probably more like 50% but we will use 40%) that's approximately $30k per year per kid.
According to this CNBC article from 2020 the average 30 year old woman earns $45,084 annually. So daycare for a single child would eat 2/3rd of her earnings. Two kids would mean that working cost money rather than made money. Forget three.
I would also add that there are inconveniences to daycare. The kids need to be there are a certain time. The daycare is itself a commute which eats time. Daycares, like schools, close often for all sorts of reasons, so you have to take off work to watch the kids.
I think the bottom line is that at least 80% of women shouldn't be sending their kids to daycare. It's sheer irrationality.
The #1 reason given for doing this is that stepping off the career ladder for five years or so will irreparably damage long term career prospects. While there is some truth to this, I think the fear is overemphasized. And certainly the lower the earnings of the woman the more she has a job and not a career anyway.
The best way to make the math work with multiple kids if you aren't going to stay home is with an Au Pair. The tax wedge (at least on the workers side) goes away. You mostly pay them in food and shelter that is zero marginal cost to your household. There is the awkwardness of sharing a house with a stranger, but people with big houses and designated guest living space makes this easier.
As to market failure, I believe the market failure is that liberals assert that having a career is a human right necessary for a woman to be a complete person, and its a market failure that this can't be done economically. No different from any other "market failure" that doesn't solve supply/demand equilibriums that liberals just don't like.
Re: Market Failure or Barriers to Entry in Daycare
The cost of space and or zoning restrictions may restrict entry of new daycares. Typical zoning laws in most communities limit residential daycare to a maximum of 8 to 10 children. One would expect that in-home daycares would save on the cost of space but compensating two adults one of whom would typically be the entrepreneur creates a pretty low upside ceiling. However, using your home might not save all that much in those jurisdictions that heavily regulate homebased daycare. In Virginia, for example, home daycares were required to install fire sprinkler systems. And some jurisdictions have minimum credential requirements even for assistant in-home care providers. For example in D.C., “Associate Home Caregivers are required to have a Child Development Associate (CDA) credential by December 2023.” Of course the ed industry in DC is expecting increased cash flow out of this extortion, however, one must really doubt whether any credential related to providing daycare provides any benefit at all, much less sufficient benefit to balance the cost.
One must consider too that daycares can’t simply just raise prices. They do face competition in the form of au pairs, nannies, coops, and more informal work arounds. The monthly average cost per family for an au pair is (per quick google search) $1,689.50, or $8.66 per hour (at 45 hours per week). Au pair agencies operate similar to the broker model that you offer. Live-in nanny rates are about twice that: https://www.care.com/c/what-does-a-live-in-nanny-cost/ And consider too the rise of informal home-schooling pods during The Great Shut Down. Many of these endure. The same model has been adopted by some families for pre-school child care. However, there do not appear to be many statistics available. When considering the fact of waiting lists, one should also consider how those waiting are getting by. I would not be surprised to learn that daycares with waiting lists find that they have to go through several names on the list before they find someone who still wants to fill the vacancy. Preserving the liberty of people to find work-arounds to government corrupted markets is perhaps the most important priority addressing this situation.