The price of anything depends on both supply and demand. A recent national report on child care noted that the cost of such care in Minnesota is high relative to incomes.
The report received a lot of local press. Most of it focused on the supply side: Why do child-care providers charge so much? But no one focused on the demand side: Why are Minnesota families willing to pay as much as they do?
Parents with children in day care may bristle at the very idea of a high willingness to pay. Most purchasers of day care feel that they have little choice. Providers set fees. Parents can pay, go elsewhere or do without. But such individual buyers don’t feel they have any influence on price.
Individually, they may not. But the aggregate willingness of parents to pay does influence market prices for child care just as it affects the price of carrots or tennis shoes.
The British economist Alfred Marshall famously compared supply and demand to a scissors. Can you tell which blade of a scissors is actually cutting the cloth? It is similarly difficult to separate the influence of supply and demand without much study.
One demand-side factor is that earnings for single-parent and two-parent households in Minnesota are among the highest in the nation. Such higher incomes generally increase willingness to pay.
Many households have monthly fixed costs for staple foods, clothing and transportation. Once over that hurdle of basic necessities, a given increase in income might result in a proportionately larger increase in the ability to pay for child care.
Yes, the families involved may not see this as a discretionary choice. They are just trying to get by on a month-to-month basis. But single-parent households in Minnesota, where median incomes are more than $28,000, can pay more for child care than their counterparts in Arkansas, where the median is barely $15,000.
Looking at the demand side of things does not mean supply is irrelevant. There are at least two supply-side reasons why costs might be higher here than elsewhere.
Minnesota’s day-care licensing requirements are more stringent than in many other states. This is true for licensed in-home providers as well as for day-care centers. These regulations may increase quality of care and safeguard children. But they also increase costs.
The average fees cited for infant care in Minnesota were more than twice as high as those for South Dakota or North Dakota and three times as high as Alabama’s. Minnesota’s higher standards could account for some of this disparity.
Higher labor costs also are a factor. The salaries that day-care centers must pay for qualified providers depend greatly on opportunity cost. In other words, what could potential day-care workers earn in alternative occupations?
Economist Bill Baumol noted that productivity increases in one sector of the economy drive up compensation in that sector. But higher pay in a sector with growing productivity also increases the opportunity cost of continuing to work in jobs with stagnant productivity.
Companies like Medtronic or Secure Computing render greater productivity increases than day-care centers or barbershops. But as wages rise in such high-tech businesses, earnings for day-care workers or barbers must rise also — although not in exactly the same proportion. If they don’t, workers will migrate out of occupations where productivity has flattened and turn to more-dynamic sectors.
Of course, day-care professionals cannot necessarily switch to being heart valve technicians overnight. And yes, many people continue to work in child care even when they could earn considerably more in other occupations. But at the margins, people do shift back and forth between career alternatives. And that shifts earnings for different jobs.
When reading such reports on child-care costs, you might wonder how low-income households manage to pay for such expensive care. The answer is that many don’t. The study examined fees for licensed care centers and for licensed in-home care providers. It did not look at unlicensed paid providers or care by other family members. These are common options for the many families who cannot afford the fees for licensed care.
The report also comments on government subsidies for day care. As with many other government initiatives, disproportionate shares of benefits go to higher-income families than lower-income ones. Child-care tax credits or benefits from pre-tax dollar reimbursement accounts flow to those with enough income to owe taxes. Many low-income workers pay considerable Social Security and Medicare taxes but little in income tax.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.