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.
When considering ‘market failure’, isn’t the start point... Government intervention in the market? In the UK ‘background checks’ supposedly to ensure people with criminal records are not let loose on ‘vulnerable’ people, has reduced the number of people available because the individual has to pay for a background check report and many cannot afford to or don’t want it. Secondly, minimum wage increases has boosted costs to providers who simply cannot afford enough staff.
Day cares face a lot of red tape, including degree requirements, zoning restrictions and child-staff ratios. You’d think day care would be a fairly cheap good time provide, given widespread parenting expertise and low capital requirements (day care can just take place at someone’s house). Yet because of regulation, day cares are scarce in poorer and rural areas. So subsidizing this government failure is the wrong way to go. Entrepreneurship will flourish when restrictions are reduced. Although there are arguments for consumer protection laws in certain industries, in day cares id say parents know best.
Nice analysis. A complication is that parents want protection against bad events. There's a principal agent problem since some childcare providers will be abusive or negligent, and ex post remedies are typically deemed unacceptable, so a screening and bonding mechanism is demanded. This drives up costs, and also may supply a signaling rationale for many, e.g., queues.
I don't think the waiting list is a market failure. The cost of taking on a new child/parent who is a poor fit will be high for a childcare provider. Most will not use "brokers" for the same reason most small employers don't use headhunters to find new employees (adverse selection). For this reason, a waiting list is often the most efficient solution
The question I would ask is, if waitlists are so long, why aren’t entrepreneurs opening more daycare centers and finding ways to innovate and compete on price and quality?
I agree with others that it is likely the regulatory burden that has more explanatory power as to why daycare prices are high in some areas. My hunch is that zoning laws play a large role in restricting supply. I’ve looked at the zoning maps for Philadelphia, the city in which I currently live, and there are large swatch’s of the city where you couldn’t open a daycare center or in home daycare if you wanted to.
Professional licensing is another big barrier. Institute for justice ranks preschool teacher and child care provider 1st and 27th occupations, respectively, in their rankings of breadth and burden of licensing.
Also, i do appreciate your emphasis on taxes in the calculation of daycare costs. It’s a huge cost that many who cover the issue don’t explicitly consider.
There can be no true "market failure" in the market for a product or service that you need a license or permit to produce. I'll confidently bet that in the cities profiled in the article, the supply of either day care itself, or some required input to it such as day care staff, is being limited by a licensing authority that is either unwilling or unable to meet demand. I'd call that a regulation failure except that most of the time it's a success -- the real purpose of enacting pretty much all regulations is to stifle competition.
The $540 per week that you quote might make sense for the suburbs, but Manhattan child care is closer to $1000 per week. Regulations play a role, not just those specific to child care, but everything that raises the costs of land/property and wages.
In competitive child care, “Good” daycare (or “early learning”) operations are run by people with strong tendencies for control, organization, and process. Waiting lists and parent selection will not readily relinquish to a marketplace (it’s more about the parents anyway, not the kid).
The real question is why are so many people using professional daycare? Between stay at home parents, grandparents, retired and semi retired seniors etc there are large numbers of potentially willing people to care for your kids with little to no overhead.
Consistent with Arnold’s emphasis on the importance of take home pay, I’ve long wondered what role 1960s tax cuts played in the decades long sustained increase in the percentage of women working. Starting in 1964 the top tax on marginal income was, I believe, reduced from 91% to 65%, with more cuts subsequently.
Between 1950 and 2000, labor rate participation by women almost doubled, from 34% to 60%. The generally accepted explanation, I think, is a combination of the pill and more education for women.
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.
When considering ‘market failure’, isn’t the start point... Government intervention in the market? In the UK ‘background checks’ supposedly to ensure people with criminal records are not let loose on ‘vulnerable’ people, has reduced the number of people available because the individual has to pay for a background check report and many cannot afford to or don’t want it. Secondly, minimum wage increases has boosted costs to providers who simply cannot afford enough staff.
Day cares face a lot of red tape, including degree requirements, zoning restrictions and child-staff ratios. You’d think day care would be a fairly cheap good time provide, given widespread parenting expertise and low capital requirements (day care can just take place at someone’s house). Yet because of regulation, day cares are scarce in poorer and rural areas. So subsidizing this government failure is the wrong way to go. Entrepreneurship will flourish when restrictions are reduced. Although there are arguments for consumer protection laws in certain industries, in day cares id say parents know best.
https://www.cato.org/regulation/fall-2018/regressive-effects-child-care-regulations#why-is-child-care-so-expensive
Nice analysis. A complication is that parents want protection against bad events. There's a principal agent problem since some childcare providers will be abusive or negligent, and ex post remedies are typically deemed unacceptable, so a screening and bonding mechanism is demanded. This drives up costs, and also may supply a signaling rationale for many, e.g., queues.
I don't think the waiting list is a market failure. The cost of taking on a new child/parent who is a poor fit will be high for a childcare provider. Most will not use "brokers" for the same reason most small employers don't use headhunters to find new employees (adverse selection). For this reason, a waiting list is often the most efficient solution
The question I would ask is, if waitlists are so long, why aren’t entrepreneurs opening more daycare centers and finding ways to innovate and compete on price and quality?
I agree with others that it is likely the regulatory burden that has more explanatory power as to why daycare prices are high in some areas. My hunch is that zoning laws play a large role in restricting supply. I’ve looked at the zoning maps for Philadelphia, the city in which I currently live, and there are large swatch’s of the city where you couldn’t open a daycare center or in home daycare if you wanted to.
Professional licensing is another big barrier. Institute for justice ranks preschool teacher and child care provider 1st and 27th occupations, respectively, in their rankings of breadth and burden of licensing.
Also, i do appreciate your emphasis on taxes in the calculation of daycare costs. It’s a huge cost that many who cover the issue don’t explicitly consider.
There can be no true "market failure" in the market for a product or service that you need a license or permit to produce. I'll confidently bet that in the cities profiled in the article, the supply of either day care itself, or some required input to it such as day care staff, is being limited by a licensing authority that is either unwilling or unable to meet demand. I'd call that a regulation failure except that most of the time it's a success -- the real purpose of enacting pretty much all regulations is to stifle competition.
The $540 per week that you quote might make sense for the suburbs, but Manhattan child care is closer to $1000 per week. Regulations play a role, not just those specific to child care, but everything that raises the costs of land/property and wages.
Isn't more entry into the market a more obvious solution than brokers?
Agree with Jon Bowman that without barriers to entry (typically due to government intervention) there are typically few market failures.
In competitive child care, “Good” daycare (or “early learning”) operations are run by people with strong tendencies for control, organization, and process. Waiting lists and parent selection will not readily relinquish to a marketplace (it’s more about the parents anyway, not the kid).
The real question is why are so many people using professional daycare? Between stay at home parents, grandparents, retired and semi retired seniors etc there are large numbers of potentially willing people to care for your kids with little to no overhead.
There's a supply component, as well. Childcare workers haven't come back to their pre-pandemic levels (likely drawn to other higher paying service industries in hospitality, etc.), so we're short ~60K people. https://system2randomwalk.substack.com/i/102079777/where-did-all-the-childcare-go
daycare isn't a standardised good easily moved into brokerage.
parents like certain providers they know personally. & location limits the market. also with 2 kids you are locked into using the same one.
friction abounds, in other words
That just adds yet another layer of cost to the day care center, to be passed on to the already financially burdened parent.
Consistent with Arnold’s emphasis on the importance of take home pay, I’ve long wondered what role 1960s tax cuts played in the decades long sustained increase in the percentage of women working. Starting in 1964 the top tax on marginal income was, I believe, reduced from 91% to 65%, with more cuts subsequently.
Between 1950 and 2000, labor rate participation by women almost doubled, from 34% to 60%. The generally accepted explanation, I think, is a combination of the pill and more education for women.
Perhaps a smaller tax wedge was also a factor.
"The story indicates that the child care center needs one worker for every four children."
Well, there's your problem right there.