February 28, 2019 Reading Time: 3 minutes

In the discussion of the nation’s problem with child care costs, a crucial factor has gone mostly unmentioned. This is one of the most regulated industries. These regulations are driving up costs. Adding more government control of the industry risks making a bad situation even worse.

To be sure, costs vary by state. So too do the relevant regulatory regimes. According to data from Child Care Aware, child care for a toddler in a Massachusetts center costs on average a whopping $18,845, or 65 percent on the average single-parent family’s income in the state. Low-cost Mississippi, on the other hand, is $4,670, less than 25 percent of the average single-parent family’s income.

Why does child care in Massachusetts cost four times what it does in Mississippi? Indices estimate that the ratio of overall cost of living between the two states is about 1.5, suggesting factors specific to child care account for part of the wide gap.

Massachusetts mandates that child-care centers must have one staff member on hand for every three infants. In Mississippi, that staff member can care for five. Massachusetts requires a staff member for every ten preschool-age children. In Mississippi, that number is fourteen. Staff in Massachusetts must complete at least a two-year vocational child care course. Mississippi has no such requirement.

These are just two of dozens or even hundreds of categories in which states make different rules. In addition to child-to-staff ratio and overall group size, regulators can stipulate the education of staff, numerous health and safety codes, and requirements for continuing staff education, children’s immunizations, and square footage.

Mandating that states regulate a service like child care while giving each of the 50 state governments broad flexibility can lead to quirky results. For example, Idaho, unlike the other 49 states, does not impose a fixed ceiling on child-to-staff ratios but uses a point system based on various criteria to calculate the limit. In another example, the Denver Fire Department recently mandated that any facility caring for more than five children purchase a $30,000 sprinkler system.

The purpose of regulating child care is to increase the probability of high-quality outcomes: children kept safe and healthy who enjoy and grow from their experience. But a centralized regulatory body, even in one of the smaller states, cannot possibly monitor these factors closely for every child. These measures are likely no substitute for the intuitive sense of quality held by parents, friends, and neighbors who as a group observe a provider far more closely.

To discern the regulatory contribution to costs, in a deeper study published by AIER, I start with the Cato Institute’s Freedom in the Fifty States project, which provides an index and rankings for each state on several margins. The regulatory part of the index measures each state’s land-use, insurance, labor-market, and many other regulations.

If you combine Cato’s data on each state’s overall regulatory burden with the data on the average cost of center-based care for a four-year-old in each state, you can generate an overall regulatory propensity for each state as a proxy for the propensity to regulate child care.

More-regulated states, all else equal, offer child care services that are thousands of dollars more expensive. This correlation does not imply causation, and one important factor working the other way is that more-regulated states usually have higher incomes. But the correlation proved to be statistically robust when I replaced dollar cost with cost as a percentage of median income.

A careful look at these data shows that child care in the United States bears the tell-tale signs of an industry with barriers to entry. A limited number of incumbents charge prices that put the service out of reach for all but higher-income families. Meanwhile, people complain of shortages, especially in lower-income areas. Regulations that add to a business’s labor and capital costs form barriers to entry, leading to high prices and low availability.

Reducing regulations intended to protect the well-being and safety of children is not a comfortable topic, nor should it be. But given the number of children and families struggling under the status quo, deregulation could reduce costs while on balance improving well-being and safety. The high cost of child care is far from inevitable. The solution, however, is not national; it falls to the states to fix how this industry is regulated.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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