The Economics of Childcare

I recently came across a post from a thirty-something FIRE blogger about how the childcare system in the US is extremely flawed.  They recently had a child, have a great income, and were able to find childcare for their baby, but felt that the system could be greatly improved.  They also were able to cover the costs, thanks to the great income they both make, but were worried about wage workers and single mothers.  I’m always interested in hearing about solutions for various problems we have as a society.  Childcare is flawed?  Let’s hear about it and see what can be done.

They started with a quote from a podcast on the topic that cited some research on the effect of early childhood environment and future achievement:

“The care a child receives in the first few years has long term impacts.”

I couldn’t agree with this more.  The post cited a study from the podcast showing that achievement throughout childhood and right into college was greatly affected by the presence or the lack of presence of “high quality care experiences” during early stages of life.  In fact, the economic background of the child’s family seemed to matter less than the environment the child had from age 0 to 3.  What exactly constituted high quality care experiences was not given, but one can assume they were referring to having a caring adult actually interacting, showing love, and trying to teach things to the child.  It wasn’t specified, but you’d assume that most of the time this would be a full-time parent who spent a good deal of time interacting with the child, as opposed to a safe but crowded childcare center where the kids were parked in cribs or in front of a TV watching Sponge Bob videos.

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And then there came the central issue:

How can young parents both work to put a roof over the family while providing the quality child care experiences needed to aid development?

The post seemed to miss that a full-time parent is working and providing both the childcare and the support work that allows the other parent to accel in a career and bring back more money for the family than he or she could without support.  Analyses to quantify the value of the work that a full-time parents provides if it were necessary to hire out all of the work instead often result in six-figure estimates.  Not to mention that this extra “income” is tax-free.

The post went on and raised issues for two-income families galore:

Childcare is needed when couples were young and just starting jobs, but resources are tight at that point.

Wealthier couples are able to pay for childcare, but what about poorer families?

If one parent stays home, usually the woman, she’ll hurt not only her immediate income but her income throughout her career.

The gender pay gap will mean that single mothers not only needs to bear all of the costs, but deal with lower pay, making it harder to bear the costs.

The high cost of childcare of $10,000+ per year was then cited.  This is, of course, for standard childcare where your child is competing with several other children for the care of just a few adults.  Here we are probably mainly warehousing the kids instead of providing the “quality care experiences” the study cited.  To get one-on-one or even one-on-two attention would cost even more, which is a burden few families could manage.  Obviously we need to fix childcare in the US.  The solution:  Universal childcare, where the government would pay for high quality care, starting from or near birth up through age 5 when childcare could be provided by the standard k-12 education system.

The post even said that we’re investing at exactly the wrong time, paying for childcare for k-12 when 0 – 5 is most important and has the most impact.  I had never thought of school as “childcare.” but then again, after seeing how a child in home school can complete more work and learn a lot more in a couple of hours than a child in public school does between 8 and 3:30, perhaps public school really is childcare disguised as education.

Well, that sounds great!  I mean, why wouldn’t we want to invest in early childhood development, the time when it matters most?  Obviously the cost for high quality care experiences would be more than most families can shoulder.  Having someone stay home to raise the child damages her career and puts an especially large burden on women.  The government has lots of money, so they can just take care of things?

How do the economics work?

Unfortunately, once you start looking at the economics, you see that just having a universal childcare system won’t necessarily provide the results you want.  Let’s see why:

1.  How many childcare attendants would you need?

While many teachers would like to have classes limited to 10-15 students, it is possible, particularly if you’re just providing safety and security and not really trying to teach anything, for one adult to handle 20-30 students.  Young children require even more attention.  From a pure safety and care standpoint, one adult can probably monitor about five children.  To provide high quality care experiences, however, requires significantly more focused attention.

For older preschool children, you can get away with an adult every 5 to 10 children and provide some quality instruction.  This is not true for babies and toddlers.  Even to just keep them safe takes more supervision.  Actually interacting with them and giving the kind of quality care that leads to good results takes focus.

Most families have one or two children and the parents will tell that just taking care of them is a challenge.  While there are some families who have five or more children, only one is typically a baby or a toddler at a time.  A person watching five babies would just be changing diapers and feeding them, not rocking, cuddling, playing, and teaching.  Even when people have quintuplets they tend to have friends and neighbors around all of the time to help them while the kids are babies.  To ask one person to give quality care experiences to more than one or two children would be too much to ask.  We can therefore assume that you’d need one adult per one or two children.

2.  What would it cost?

As far as salary goes, something on the order of $30,000 per adult per year would be needed.  Is some tight labor markets, this might go up to $40,000 or even $50,000.  Add on money for supplies, rent, insurance, compliance, and healthcare and this would increase to $40,000 to $60,000 per year.  This means that each child would cost $20,000 to $30,000 per year for childcare.  Parents today bristle at $10,000 per child, but here we’re talking about high quality teaching and interaction, not just warehousing.  A family with two children might therefore be paying $60,000 per year in childcare.

3.  How would parents pay for this?

The cost would be paid for with taxes, which would fund subsidies.  For families who made less than $30,000 per year, who pay no taxes now, the costs would probably be fully subsidized.  (See Who Pays Income Taxes for a breakdown of who pays what in taxes now.)  Those making between $30,000 and $40,000 pay about 3% of the total taxes, so you would expect most of their cost to be born as well.  One would expect demand for childcare to increase among this group once univsrsal care is implemented since the costs are fully paid, making it less attractive to be full time parents.  Having children would also become less of a burden since their care was taken care of for 8 to 10 hours each day, so the number of children needing childcare would probably increase.

For those making between about $40,000 and $150,000, there would likely be a decreasing subsidy with those making over $150,000 per year paying the full cost.  A family of four with a baby and a toddler making $80,000, for example, might be paying $20,000 to $30,000 per year for daycare with the taxpayer making up the rest.  Note that this is about what they’re paying now for childcare if not a little more, but it would be better quality care.

4.  How would the subsidies be paid for?

Many higher earning families, those making more than $150,000 per year, for example, might say that they have no issue paying $60,000 per year for quality care.  The salaries they make allow them to cover the cost and their future salary is worth the investment.  The issue, however, is that they would not be just be paying for their own children.  They would be covering the lion’s share of the subsidies through higher taxes as well, meaning that they would be covering several other children as well.

Currently the top 5% of earners,  who make about $200,000 per year or more, pay about 60% of taxes.  You could assume that they would also pay 60% of the subsidies, but you would probably be wrong.  Working-class families are already tapped out and that middle-class families are close to using up all of their disposable income and the increase in their childcare costs would absorb most of the rest.  One would expect higher-earners to pick up an even greater share of this additional tax, maybe 80%.

According to the census, there are about 20.4 million children under 5 in the US right now.  Assuming that they are evenly distributed among ages, this means there are about 12 million kids two and under.  Multiplying this by our cost of $20,000 per child, we find the cost would be $240 B per year.  High-earners have about 5% of the children, so they would pay for their kids directly.  This would reduce the tax burden by about 600,000 kids, reducing the cost by $12B to $228B.  Middle class earners would pay for about half of the cost of their kids, amounting to about 2.4 million kids and $48B of the total, making the subsidized amount about $180B.

Assume that the top 5% of earners pays 50% of this and the middle-earners ($80,000 to $200,000 per year) pay 50%.  Given that about are 130 million households, that would mean that there are 6.5 million households in the top 5% and 26 million households in the middle class (between $80,000 and $200,000 in earnings per year).  Those in the middle-class would pay an average of around $3500 per family per year in additional taxes.  Those in the top 5% would pay an average of around $14,000 per family per year.

5.  Where would all of these workers come from?

If you now have 12 million infants in childcare, this would require just under 6 million childcare workers.  Given that those in the low income brackets would now have free childcare, you would assume that a good percentage of them would take on jobs.  (Perhaps a requirement to receive childcare would be to work.)  They might well fill a lot of these childcare roles, meaning they would be making $30,000 per year.  If this were a household, they might raise their income up to $60,000 per year.  At some point this would bring them into the middle-earning level, where they would need to start paying something for childcare.

And this is the part that is kind of humorous.  Currently, a lot of poor women, unable to afford childcare and who receive welfare benefits, don’t work and take care of their own infants.  Under this new system, would they leave their children with somebody else and watch someone else’s child, now getting paid $30,000 to $50,000 per year to do so?  Would they just keep watching their own children but be paid by the government now?  Is this any different than just having them watch their own children while not working and sending them a welfare check?  And the real question, if exceptional care experiences provide a leg up in a child’s advancement, why don’t children of parents who receive welfare while they stay home and raise their infant children naturally excel and move out of poverty within one generation?  Would things be any different if these parents were now watching someone else’s kids and being paid, or being paid to watch their own kids?

Another issue is that, just because people may be available to work, doesn’t mean that they would be good people to provide childcare.  Working with babies takes a great deal of patience and self-sacrifice.  It also takes a great deal of care.  Just hiring anyone off of the street may not be a good idea, as it could not create the quality care experiences we are looking for.  In worst cases it could lead to neglect and abuse.  There is also something different about caring for someone else’s children and caring for your own.  Even with a business, an employee never does as good a job as the owner in running the business.  Here we’re giving something even more precious to a stranger – our children – and expecting them to treat them like their own.  This may be a bridge too far.

Net results

So, for poor Americans, this system would provide infant care, freeing them up to work.  Because there would be a lot of childcare jobs, however, and because these would be good paying jobs for this segment of society, many of them would end up watching children for a living.  Whether this would make sense and whether the outcome for the children were better under this arrangement is questionable.  If care were given under a supervised setting, where the caregivers were monitored to ensure that they were engaged with the children rather than just leaving the children largely unattended while they did other things, and if they were given good training in early childhood development as a result of the system, maybe it would have good results.  If welfare benefits were reduced because the parents were now working, this would be the equivalent of requiring welfare recipients to take classes on parenting and care for their children in a setting where they were monitored.  Such requirements could just be added to traditional welfare programs.

For middle-class Americans, on average they would now be paying $20,000 to $30,000 per year per child, plus an extra $3500 in taxes throughout their working lives.  This would mean that parents of two children who are now paying around $100,000 in childcare for their children before they get to kindergarten would pay $200,000 to $300,000, plus $156,000 over a working lifetime, for a total cost of about $350,000 more than they are now.  Middle-class parents who are looking at universal care as a way to get free or lower cost childcare would be sadly disappointed.  They would be getting better care, however, assuming the care were given in a supervised setting by trained caregivers.

High-earning parents, like the ones who made the post, with two children would be paying the same $200,000 to $300,000 as the middle-earning parents, plus an extra $630,000 over a working lifetime.  Obviously they would be getting a far worse deal than they are now.

Final notes

I was actually surprised at the results of this analysis.  I had thought that it would be unaffordable to go to such a system and that the costs for middle and high earners would be astronomical.  While they would definitely take a good bite out of a middle-earner’s income, it is something that could be done if they were willing to give up cable, a car, or something else like a vacation each year.  This would largely be a benefit for the poor, however, and not the middle-class.  Middle-earners would be better off if they just paid more for childcare themselves andfhired someone who would provide the one-on-one, meaningful care needed or if a parent simply does as has been done traditionally and take a break from work during the most important times in their children’s lives.  As with any social program, the high-earners would end of freighting most of the bill and probably end up hiring out other childcare services anyway or choosing to have a parent become fultime.

That said, it appears that the real advantage is the improvement in childcare provided to the children of poor and working-class families.  Because much of the care would be provided by these same families, and much of it to their own children, however, the real advantage is that childcare would become a defined job.  The oversight and expectation of a certain level of effort that would come because it was now a job is what would make the difference.  It would require them to focus their attention on caring for children and providing high-quality care.

One would wonder, however, if this same goal could be accomplished using money that is already allocated to welfare by changing from a system where a check is sent each month regardless to one where parents were simply hired to provide childcare.  Some additional funds would be needed to hire individuals to provide oversight (who could come from the ranks of the workers, providing advancement opportunities) and for the renting of buildings to be childcare centers.  If this truly presents a benefit to society, however, it may be worth the additional cost.

Want to learn how to invest and become financially independent? Pick up a copy of the SmallIvy Book of Investing: Book 1: Investing to Become Wealthy.  Dave Ramsey also does a great job of explaining how to make good financial choices on a simpler level in his book,The Total Money Makeover.

Also check out FIREd by Fifty: How to Create the Cash Flow You Need to Retire Early
.  This book gives a strategy for building a cash flow plan and freeing up money to build wealth.

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