Child care problems are vexing, costly

Michael Hicks, Ball State University

For most families, using paid childcare services in Indiana doesn’t make sense. It costs more than parents can earn by working.

Indiana’s legislature has grappled hard with childcare issues. Doing something meaningful with legislation and spending is shockingly expensive. I have no silver bullet remedies to offer in the short run, and only one long-term policy suggestion.

Indiana has both childcare and pre-kindergarten programs available to low-income households. These are the Child Care Development Fund Voucher Program and On My Way Pre-K. There are roughly 1.3 million Hoosiers under age 14 and over 60,000 who are eligible for these programs, which have low participation rates – there are only 7,000 students in the pre-K program.

Statewide, there is only room for 183,000 children in licensed daycare facilities. There’s no way of knowing how many of the 1.3 million kids under 14 are cared for by family. But at least one survey found that childcare costs absorbed about 10 percent of a family budget across 1 in 3 Indiana counties.

Engineering lower-cost childcare is the great challenge.

Indiana licenses childcare programs and establishes staffing regulations. I’ve heard complaints about the costliness of these regulations, and I tend to be friendly to criticisms of regulatory costs. However, the most expensive childcare rules address staffing requirements.

I’m not an expert on childcare settings, other than an unmemorable stint as a Sunday school teacher. Indiana allows one caregiver to supervise up to four infants or five toddlers. That seems to be near the ceiling – and well outside my skill level.

The problem isn’t really regulation, but plain old supply and demand.

Last month, two colleagues and I published a study of childcare supply and demand in Indiana (see https://projects.cberdata.org/197/childcare). The work, with Dr. Dagney Faulk and Madelyn Ponsier, a recent Ball State graduate, took the better part of a year. Our findings will surprise many observers of the issue.

We conducted a statistical test that measured the effect of changes in childcare employment on the labor force participation of women. Our model found that boosting childcare employment by 10% would increase the labor force participation rate of women aged 25-34 outside the childcare sector by 0.4 percent. That same increase in childcare workers had a roughly two and a half times larger effect on women aged 35-44.

Of course, some men provide stay-at-home childcare, but this is primarily an issue about women’s labor market experience.

One interesting feature of our findings is how closely the results match staffing ratios of childcare programs. Mothers between age 25 and 34 are more likely to have younger kids who require more oversight. Their older sisters, aged 35-44, are more likely to have older children who require less supervision.

So, adding childcare workers has a much bigger effect on labor force participation of those aged 35 to 44 than the 25-to-34-year-old crowd.

This part of our work is usefully thought of as a measure of the supply of childcare services. To expand on that question, we dig deeper into the effect of wages on the willingness of people to work in childcare. We found that to boost childcare employment by 10% would require a roughly 8% across-the-board pay raise for childcare workers. Economists call this the elasticity of supply of labor.

This industry is unusual in the size of the pay increase needed to boost employment. That makes sense when you compare the wages of childcare workers to other sectors with similar educational requirements.

In 2022, the last full year for which we had data, the median childcare worker earned $13.20 per hour. That same year, the median retail worker earned $5.10 per hour more and the average worker in transportation and warehousing earned more than twice that of childcare workers.

The typical childcare worker has an abundance of labor market options available that pay much better for similar skills. Any increase in availability of childcare facilities will need more people, and the only way to do that is through substantially higher wages.

There’s no evidence that Indiana has an inadequate number of training programs for childcare providers or too few people willing to do this work. There is clear evidence that wages are too low to expand childcare.

It is always good to be reminded that wages bring together supply and demand for labor.

We also looked at the demand for childcare services. This part of our study was a simple accounting exercise of a family’s financial decision regarding childcare. Our example was a family of four, with one spouse earning $57,000 a year, which is just outside the highest threshold for support for childcare. The question: How does a decision to work pay off for that family?

Childcare costs were $5.28 per hour, per kid – the average of our three surveyed cities. We then wanted to illustrate the hourly take-home pay a spouse might earn when we subtract income and payroll taxes and childcare costs. The results are shocking and clarifying.

For hourly wages below $15 an hour, this family loses money with a second spouse working. As wages rise to $21 dollars an hour, which is roughly the median wage of working women in Indiana, take-home pay rises to just over $3 an hour.

For this mom to take home $7.25 an hour – the minimum wage – she’d need to earn almost $27 an hour, or more than her husband.

No wonder so many families choose not to use paid childcare services.

That doesn’t mean there aren’t policy options. They just aren’t directly childcare policies. If Hoosier workers were better paid, the childcare issue would resolve itself. More affluent families could pay higher childcare costs and that would boost the salaries of childcare workers.

Direct subsidies seem impractical in a legislature that is consistently cutting, not raising, education spending. My back-of-the-envelope calculation is that childcare subsidies will cost about half a billion dollars per age cohort under five, and half that much for the 5-to-14-year olds. So, as high as $4.5 billion per year if every child participated.

The real, lasting remedy for our childcare woes is a long-term effort to better educate workers, who can then command a higher salary. Indiana’s childcare problem is really an educational attainment problem, and nothing more or less.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.