The Many Pitfalls of Regulating and Subsidizing Child Care

By Jack Salmon

Governments tend to create problems and then make them worse when they try to fix them. Now Washington is trying to fix child care—again.

For decades, state and local officials have been piling on regulations and licensing requirements that end up discouraging child care providers from opening or expanding day care centers. Many of these rules don’t appear to improve the quality of care while at the same time they limit the supply of care and drive up costs.

So, politicians now want Washington to spend billions to cover much of the cost. But their plan to come to the rescue of working parents would vastly increase demand without doing anything to reduce the legal restraints that keep down the supply of care. What’s more, greater subsidies for child care will most likely inflate child care costs even more rapidly.

The $1.8 trillion American Families Plan, which has passed its first hurdles in Congress as part of a large budget package, would spend an additional $225 billion on child care and preschool subsidies over 15 years. The federal government will completely cover the child care costs for families making less than 1.5 times their state’s median income, and it will subsidize costs above 7% of the income of families making more.

Too Expensive

The problem that legislators are tackling is obvious: The average cost of full-time care for an infant is now $11,241 a year, up by more than 40% since 2011, according to calculations by the Mercatus Center. In Washington, D.C., it’s $20,913, and in Massachusetts it costs $16,945. Child care eats up 23% of the average income for a family with two toddlers. This helps explain why 1 in 4 unemployed Americans not seeking work lists family care needs as the main reason for staying on the sidelines of the labor force.

The U.S. has the ninth-most-expensive child care among the 38 countries in the Organisation for Economic Co-operation and Development. Some OECD nations provide free or subsidized child care: New Zealand offers 20 hours a week of free care for 95% of its toddlers. The U.K. supplies up to 30 hours of free care to working families. Ireland subsidizes care for children under age 3. Australia subsidizes up to 85% of the cost of care. But government programs to help pay for care make it more expensive: The total cost of care in each of those countries is higher than in the U.S.

Despite the cost and the regulations, the number of children in the U.S. receiving care outside their homes is growing. In 2016, 36% of children under age 6 and not yet in kindergarten spent at least 30 hours a week in day care centers and preschool programs. That’s up from 34% in 2011, but even more parents would be enrolling their children if child care bills weren’t rising along with the ever-increasing red tape.

For example, child care costs are significantly higher in cities and states that mandate low child-to-staff ratios. Care in places that require a ratio of no more than three infants for each staff member costs on average $13,279 a year, while allowing six infants brings the cost down to an average of $7,938 a year, according to a Mercatus analysis. Adding an infant to the ratio lowers the average annual cost by $1,250 to $3,571. A 2015 Mercatus study using 2012 data found similar results: a reduction of up to 20% for each extra infant.

In addition, governments set a maximum number of children that a child care center can enroll. Care in states that cap this number at fewer than nine children costs an average of $12,666 a year, while care in states that allow between nine and 20 children at a center costs on average $10,113, according to the Mercatus analysis.

Barriers to Entry

Licensing burdens also play a big role in limiting the supply of care and driving up costs. The Institute for Justice studied the amount of time and money it takes to run a day care business from home. Some 44 states require a license to start the business, and 24 states require staff to hold a high school diploma. Some states charge up to $300 in licensing fees and it can take a year or longer to get a license.

Now cities and states are starting to mandate college degrees for child care workers. Washington, D.C., has introduced a rule requiring at least an associate degree for workers, a change that would cut less-educated staff out of the profession. Merely saying staff must have a high school diploma increases the cost of care by $2,370 to $4,350, according to the Mercatus study.

Looking at the level of overall regulation in each state, economist Max Gulker found that the cost of child care is several thousand dollars a year higher in the most-regulated states versus the least-regulated ones. A similar study found that regulations reduce the number of providers, especially in low-income areas.

The regulations are aimed at raising the quality of child care, and while some do that by protecting the safety and well-being of children, much of the red tape hasn’t seemed to work. A 2017 study found only a very weak association between the education level of the staff and the children’s language skills, and no association was found for mathematics skills. Another study, published in 2019, cast doubt on mandating child-teacher ratios and limits on enrollment. It concluded that the results “raise questions about whether the current recommendations for ratio and (enrollment) size may be unduly stringent.”

Government policy has a long history of making child care more expensive and harder to find. In 1962, Washington started sending money to state governments to spend on care if they forced facilities to get a state license. The costs of licensing and compliance led to a nationwide decline in the availability of child care. This was followed in 1968 by the Federal Interagency Day Care Requirements, which included rules for room sizes, outdoor play areas and other features of the centers, as well as rules on the education level of the employees and child-staff ratios. Those regulations also restrained the supply of care.

Today, sending billions of federal dollars to the states will expand the demand and make child care more costly for most Americans. Maybe child care was one thing governments didn’t need to fix.