Universal Child Care: Real Problem, Wrong Solution

Commentary

New Mexico Gov. Michelle Lujan Grisham announced in September that New Mexico will become the first state in the nation to guarantee free child care for its residents beginning on Nov. 1. While the governor’s intentions may be admirable, her approach misdiagnoses the cause of rising child care costs and other child care-related challenges facing American families. Rather than serving as a model for other states or the federal government to follow, New Mexico’s plan is a trial run in the wrong direction.

Rising child care costs are a real and pressing problem for American families. Over the past four years, formal child care costs have risen by 29 percent across the nation—far outpacing the general rate of inflation and placing an increasingly heavy burden on working parents. In response, more parents are likely to leave the workforce, postpone career advancement, or decline to have additional children. Aside from New Mexico’s bold strategy, is there any way to address the child care burden on families?

Understanding Baumol’s Cost Disease

First, it is important to take a step back to better understand why costs are rising. Much like education and health care, child care is an inherently labor-intensive service that cannot easily benefit from productivity improvements through automation or productivity-enhancing technologies.

This phenomenon is best explained through what economists call Baumol’s cost disease, named after economist William Baumol (1922—2017). His theory explains why certain sectors of the economy, particularly those that rely on human interaction and care, experience cost increases that outpace inflation and wage growth in other sectors.

In many other industries, technological advances allow workers to produce more output with the same amount of labor, driving down per-unit costs. Baumol’s cost disease helps explain why service sectors such as child care, education, and health care appear slow to adapt to and benefit from technological changes. A teacher can only effectively instruct so many students, and a doctor can only see so many patients a day while maintaining quality interactions.

As wages rise in the broader economy, these labor-intensive sectors must compete for workers by raising wages, but they do not experience the same productivity gains that offset higher wages. The result is that costs in these sectors rise faster than the general price level, which is exactly what we are seeing in the child care market today.

Lessons From Universal Health Care and Education

The similarities between child care and other labor-intensive sectors allow us to make some pattern predictions about New Mexico’s approach. Consider, for example, proposals to establish universal health care and universal higher education in the United States.

Medical for All proposals have been estimated to cost between $28 trillion and $32 trillion over 10 years, depending on the specific plan. More modest universal health care proposals have price tags in the tens of trillions. Similarly, plans for universal higher education—such as making all public colleges and universities tuition-free—have been estimated to cost the federal government between $28 billion and $75 billion annually.

The enormous cost estimates reflect not only the inherent labor-intensive expense of these services, but also the additional demand that universal access would create among people who do not currently purchase these services. New Mexico’s child care proposal faces the same economic pressures.

The Supply Problem

New Mexico’s own estimates reveal a huge supply-side problem. The state’s announcement of the new program acknowledges it will need approximately 5,000 additional child care professionals to accommodate the increased demand that free child care will generate. This is a massive expansion of physical infrastructure and child care workers that cannot be achieved overnight, if at all.

The state’s proposal also includes a plan to address quality concerns by incentivizing providers to pay higher wages—they will offer higher rates to providers who pay at least $18 per hour to entry-level staff. This raises the question of whether New Mexico will have enough qualified providers to meet the surge in demand, especially if parents aren’t paying higher wages than can be found in other sectors. Currently, New Mexico requires that all child care workers first receive training in 11 topic areas and maintain 24 hours of additional training each year.

Looking to health care policy is particularly instructive here. In higher education, increased availability through government subsidies is causing many students and families to rethink the value of a college degree. Demand for higher education has begun to decrease in many segments, providing some natural correction.

The health care scene more closely mirrors what we expect from universal child care policy. Despite rising costs, demand for health care services continues to expand from government-sponsored insurance coverage for select age and income groups. The result has been persistent supply shortages and long waiting lists, especially for specialists and for all different kinds of health care services in rural areas.

Much like child care, health care suffers from regulatory constraints that limit supply expansion. Licensing requirements, facility regulations, certificate-of-need laws, and professional credentialing create barriers to entry from responding efficiently to increased demand. Government measures are simultaneously increasing demand while keeping a cap on supply.

Regulation and Child Care Costs

Despite the inherent labor-intensive features of child care services, regulation also plays a major role in determining the cost of care. This becomes clear when examining cost variation at the state level. For example, Massachusetts, with some of the most stringent child care regulations in the nation, sees average annual child care costs exceeding $25,000 per infant per year—nearly double the national average. While often well-intentioned, regulations on child-to-staff ratios, maximum group size, and education and training requirements create substantial barriers to entry for potential providers and drive up operating costs for existing centers.

The contrast between states with heavy regulatory burdens and those with relatively less oversight demonstrates that policy choices significantly affect both cost and availability of child care services.

A wider range of child care options would better serve families. Parents are uniquely positioned to understand their children’s needs and developmental requirements, as well as their family’s schedule. They benefit from access to a diverse array of child care options, including home-based alternatives that can be more flexible and cost-effective than traditional center-based care.

Current regulations often create unnecessary barriers to these alternatives. Many states require child care center directors to have college degrees, despite limited evidence that formal credentials correlate with better care or child outcomes. Instead of making child care more uniform, states should create pathways for entrepreneurs who have gained expertise working in child care to open their own centers on the basis of practical experience.

A More Sustainable Model

New Mexico’s “model for the nation” fails because it ignores fundamental economic principles. In making child care “free” to all residents while failing to address inherent supply constraints, New Mexico is likely to create persistent shortages and frustrating waiting lists. The state’s Early Childhood Education and Care Department will have to respond with costly expansion projects currently estimated at about $20 million per year. This funding will go toward building up infrastructure that was formerly sponsored by business owners, and it ultimately passes the tab along to taxpayers.

A more sustainable model for child care reform involves reducing burdensome regulations that prevent new, diverse facilities from opening; creating more career progression opportunities for non-degree holders; and allowing parents to make informed choices about their children’s care. Solutions that increase competition will prove far more effective at lowering costs and improving access than creating a free-for-all over a limited number of “free” child care services.

From the American Institute for Economic Research

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.