Planet Money - Baby's first market failure

Episode Date: February 3, 2023

Anyone who has tried shopping for day care knows that it is tough out there.For one, it is hard even to get your hands on information about costs, either online or over the phone – day cares will often only share their prices after you have taken a tour of their facilities. Even once you find a place you like, many day cares have waitlists stretching 6 months, 9 months, a year.Waitlists are a classic economic sign that something isn't right, that prices are too low. But ask any parent and they will tell you that prices for day cares are actually too high. According to a recent report from the U.S. Treasury, more than 60% of families can't afford the full cost of high quality day care. Meanwhile, day care owners can barely afford to stay open. No one is happy.On today's show, we get into the very weird, very broken market for day care. We will try to understand how this market can simultaneously strain parents' budgets and underpay its workers. And we will look at a few possible solutions.This show was produced by Sam Yellowhorse Kesler. Emma Peaslee helped book the show. It was mastered by Gilly Moon. Keith Romer edited this episode. Jess Jiang is our acting Executive Producer. Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. For months, Wesley Wade and his wife Giovanni ended their days the same way. Coming together at the end of the night and just being like, how? How is this so hard? 100% almost every day, and it was mind-boggling. This is Wesley. We had an Excel spreadsheet because I like using the Excel spreadsheet, but my wife likes using a piece of paper.

So we had two different things. We're keeping a list of all these things, right? The thing that they're trying to figure out is daycare for their two kids, Helena and Ella. Both my kids are very fiery. It's a very fiery home that we're in. Ella is the baby. She is a very defiant child, which we love over here. Oh, I love defiant girls.

It's very fun. It's very fun. Wesley is a mental health counselor and he's getting his PhD. And his wife is an attorney. They are both pretty good at researching. And they just keep thinking, how do other people do this? Yeah, I don't know how other people figured this out. I was amazed at how complicated it was. Actually, I think my dissertation research might have been a little easier, to be honest with you. Like, I'm not even, that's not hyperbole.

And this family is not in some small town. They're not in a daycare desert. They're in Durham, North Carolina. It's a big university town, a lot of jobs, a lot of people. It's just daycare information is really hard to come by. It is actually like a real flaw of the daycare market because if you don't have perfect information, you cannot make optimal decisions. And just generally, it is very costly just in terms of time to find out where daycares are around you and if they even have a spot for your kid. So we're Googling, we're on wait lists at multiple places. My wife and I are divvying up our area geographically. We're coming back after dinner to say, ooh, what about this planet?

And we're spending all this extra time when we still have to cook dinner, maintain the house, give our kids love, spend time for ourselves. Some daycares do have actual websites and they're inquiring there too, but they kind of know those are all going to be a wash. Most of those places are all going to be full, right? Because those are easily findable. Easily findable. Easily findable daycares are not going to have a spot for your kid. You got to look for the hidden ones, you know, the ones with names that don't even sound like they could be daycares, like Jay's Jungle and the Blooming Room. Those kind of hidden daycares, those are the ones that will also not have a spot for your kid because there are no more spots anywhere. There were places that we never considered for our first child or that we visited

and we said, never are we going to do that. Especially when it's your first child, you're like, oh no, my baby is going to be in the most pristine care, right? And so there was places that we never would have went to when Helena was that age that we said, okay, if they're able, if they're open, if they can work, because your options are limited. Even the places they definitely did not want to send their kids to were full. Everyone had a wait list, six months, nine months, a whole year. So I actually ended up leaving my full-time job just so I could be the flexible parent that can stay home. Because you guys could not find childcare in time? Yeah, I mean, I will say I was going to leave my full-time job anyway.

But I definitely left it about a year earlier than I had planned, right? A year earlier? A year, a year earlier than I had planned, right? A year earlier? A year. A year earlier. Yeah. So I'm thinking about all the stress. Wesley's plan was just to leave his job for a different job once he finished his PhD. His plan was not to leave the labor force altogether.

Wesley and his wife, they like to work. They want to work. We just, we're working people. We enjoy our jobs. Our jobs have an impact on the people that we serve. So like, I want to be doing that work. So that's the hard part. Now, usually in a heterosexual parenting situation, the person who ends up leaving the labor force to care for the kids is the woman, right? But it was not going to go down like that in his home. Oh my gosh, you know it. Come on. Come on now. Okay, think about what happened here. We're talking about a person who has the money, who wants to pay for a service, but can't. All over the country, there are tons of people willing to pay for daycare

and not getting it. They are being put on waitlists. And waitlists are a classic sign that something isn't right. In traditional economics, waitlists mean prices are too low. Hello and welcome to Planet Money. I'm Sarah Gonzalez. And I'm Jeff Glo. What the heck is going on with the daycare market? Daycare is so scarce for parents. The pay for daycare workers is low.

And daycare owners can barely stay open. Today on the show, no one's happy. The math isn't working out for anyone. They are all trapped in this very weird, very broken market. If you ever shop around for daycare, at one point you will probably think, I should really open up a daycare. They are charging parents so much money per kid. The median price in the U.S. is $17,000 a year for an infant in a large county. in the U.S. is $17,000 a year for an infant in a large county. The Treasury Department says 60% of families can't even afford daycare. So daycares must be making bank, right? Well,

they are not making bank. The at-home daycares, the big early childhood education centers, this is not like a big money-making industry. Take any spot, like this one in Iowa. So we call ourselves Bluffs Little Thinkers. Bluffs. What's the deal with Bluffs? Yep, like Sergeant Bluff. Who's Sergeant Bluff? So Sergeant Bluff is our town, like the suburb, yep. Sergeant Bluff, Iowa, near Sioux City. So we call it Bluffs Little Thinkers, yep. But a lot of people just call us BLT for short. Kelsey Anderson is the director of BLT, Bluffs Little Thinkers, yep. But a lot of people just call us BLT for short. Kelsey Anderson is the director of BLT, Bluffs Little Thinkers.

That's so cool. They have babies from six weeks old to five years old. Yep, the six weeks old is the youngest that they can come, for sure. No, no, no, no, no. And infant classes, like this one, for the baby babies. And infant classes like this one for the baby babies. This is where things are the most broken in the daycare market. The on-ramp.

Getting those chubby little baby feet in the door. Childcare for infants is the most expensive for parents and for daycares. Okay, let's talk about your books. What are your profits look like and your costs? Yes. So I do have a printout here of the books where I could look. So like anywhere between $40,000 to $55,000 for a deposit, like for the month. Oh, deposits are what parents pay you?

Yes. Yep. And then can you give me like a ballpark? Like how much money do you pay in payroll or in labor? Our payrolls monthly would definitely be over $30,000. In a month where they're bringing in like $40,000, $33,000 is going to payroll. Our salaries are 83% of our budget per month. That is absolutely insane.

All the other bills at Bluff's Little Thinkers are kind of peanuts in comparison. 5% goes to their loan payment. 4% is operating expenses, cleaning supplies, snow removal, play kitchens, things like that. 3% is utilities. Another 3% goes to groceries. They do lunch for kids, milk, snacks. And 2% is for their insurance and their building insurance and workers comp. And again, 83% goes to labor. And that's 100%. Kelsey says they spend almost everything they bring in. Always, always. And a lot of times we won't have anything left over. And this is pretty

representative of the country. And if you're thinking, well, at least daycare workers are getting paid well, right? Because most of the money is going to salaries. Well, they are not paid well. Kelsey pays $12 to $15 an hour. And then what do you think of that pay? I mean, is that enough to really get by in Sargent Bluff? It's not a livable wage. It's absolutely not a livable wage in any way, shape, or form. In Sergeant Bluff, Iowa, or in Durham, North Carolina, or Los Angeles, California, you can make more money being a parking attendant, being a dog walker, working in retail. Yep, yep. So Starbucks, Target, any fast food, Chick-fil-A, Best Buy, Marshalls, I mean, just anything that we have in our... They all pay more? Oh, absolutely. Substantially more.

Yep. Like I saw a Chick-fil-A sign the other day that said starting at $16.75. And some of those jobs come with benefits. But Kelsey says she can't pay as much as those stores because she has more people to pay than they do. For Kelsey's 72 kids, she needs 25 people on staff. This is one of the things that makes the daycare market so tricky. Daycares have to hire way more people than other low-wage industries, like fast food. In fast food, labor is 25% of the total costs. Estimates for daycare, it's like more than 70% of total costs. You need one teacher for every four infants, at least. That's what the federal government recommends based on what child care experts recommend. The safety of kids and the

quality of care get a little more dicey if you have more than four infants to one teacher. So you just need a lot of grownups to take care of babies and even toddlers. Except recently, some states like Michigan and Iowa have said, you know, maybe we don't need that many grownups. Yeah, yeah. And maybe they don't even need to be grownups at all. Iowa has decided that 16-year-olds can now be left alone to take care of 15 5-year-olds, like for after school care. And Kelsey does have some 16 year olds on staff. They come in, they're full of energy, they're sitting down on the floor, they're playing Legos, they're singing songs. And that is great. But

we wouldn't leave 16 year olds alone. In fact, we don't really leave anyone alone. Iowa also decided that classes can now have more toddlers for every one teacher too, you know, so more parents can get a spot. But Kelsey says she won't be doing that either. Sure. Could we maybe take some more kids? Yeah. But are our staff going to have even more on their plate in a low-paying job? Yes. Kelsey says she just cannot make it harder to be a teacher because retention's already a problem in daycare.

There's a lot of turnover nationally. It's really hard to fill vacancies. really hard to fill vacancies. Something that keeps me up at night is watching a good quality employee that I have walk out the door for no other reason besides the fact that they strictly can not live on what we're paying them. And I can't fault them for when they leave because of that reason. Okay, normally when you're having a hard time keeping workers, you just increase their pay and pass the cost on to the consumer, right? You'd increase tuition for parents. Problem solved. But you can't do that that easily in this market, says Jessica Brown.

She's an economics professor at the University of South Carolina's business school, and she's a mom. She just had a baby. Yeah, the baby's three weeks old. Wait, he's three weeks old? Mm-hmm. I feel like I should not be talking to you. You're like a childcare economist. Yeah.

You of all people should be like, no, you're drawing a line. I'm not good about that. Uh-huh. I understand completely. This is your second? Fourth. Fourth. I have to keep up with the latest in the child care market.

You know, if I keep having kids, I keep in touch with the market. Jessica decided to study the child care market when she was getting her Ph.D. in economics at Princeton while looking for child care and not finding any. She was just like, what is going on with the supply? If we had perfect markets, then the what is going on with the supply? If we had perfect markets, then the markets should have done and the supply should come up. But it's not. Theoretically, the supply problem should kind of solve itself. Daycares could just charge more to take care of each kid and then more daycares would open up. But that's not happening. And so there's something else going on,

which is part of why I find it so interesting. Here's what Jessica found out. We'll start with why it's so hard to raise wages to attract workers. You know how daycares have to have a certain number of teachers in each classroom? These are like laws. They have to hire a lot of people. There's no way around it. So if they raise wages just a little bit for all those employees, consumers would really feel it a lot more than in other industries. So if you raise wages from, say, $10 to $12 an hour in the fast food industry, if a hamburger was originally $2, then maybe it would go up to $2.10.

Oh, so like nothing. Yeah, it'd be very small. Whereas with child care, if you raise the wages from $10 an hour to $12 an hour, if you were originally paying $2,000 a month for care, that would raise prices by probably about $250 a month. And like, so what? What if you do pay an extra $200 a month for care? I mean, like, obviously it's expensive, but like, why don't daycare centers just say like, yeah, we have to pay teachers more to keep them and to attract more teachers. So it's going to increase the cost of tuition. Well, if you raise prices by so much, you know, that's going to mean that some parents are going to not going to be able to afford care anymore.

In cold, hard econ land, you would say, oh, well, some people won't be able to afford child care. Sorry, they'll have to quit their jobs and become a stay at home parent. Tough. Yeah. If daycares were acting like giant corporations in any other industry, they would just ditch the lower income customers who couldn't afford daycare. But daycares can't actually raise prices by too, too much because it would drive away like a big chunk of their market. Yeah. If the price of daycare goes past a certain point, some families will say, well, no, I'm not going to quit my job, so I'll just have to find a cheaper option,

like my neighbor who might just plot my kid in front of a TV all day. And other families will say, yeah, at these prices, I think I'm going to just hire a nanny instead of paying for daycare. You know, someone who will come to my house. So convenient. And this threat, this threat of outside options, the threat of nannies, keeps a ceiling on what daycares can charge. Nannies, man. Mary Poppins. Who knows what's in that bag? And remember those wait lists everyone is put on, those lines that signal to us that something in this market isn't working?

Jessica says it's because of these large staffs and the fact that daycares can't really raise prices. If prices were higher, there would be no wait list. They'd be like, no, I'm not going to wait in line for this thing that's way too expensive. But here is the interesting part. Because daycares can't raise prices, the waitlist has kind of become a necessity for them because daycares cannot afford to have any vacancies. If a parent gets a job out of town and they pull their kids from the center, the child care facility needs to be able to fill those spots basically right away because they don't have the profit margin in order to be able to absorb that loss of revenue from that open spot. So they just need someone like always there. Like, OK, pull from the wait list. Now we have no vacancies again.

Exactly. Profit margins for daycares are typically less than 1%. So without waitlists, they wouldn't be able to stay in business. And there's another weird feature of the daycare market. If you look at how much daycares charge, they usually don't charge that much more for the youngest kids, for the baby babies, as they do for the toddlers, which doesn't really make any sense, right? Because infants require so much more attention. And teachers, you have to feed them, change their diapers. So, like, let's say you're paying $1,700 a month for a toddler

and you're paying $2,000 a month for an infant. Jessica says you are getting a deal on that baby. If we had what we would call perfect competition, you would expect that care for the infants would actually cost something more like $3,600 a month, but it only costs $2,000. That like doesn't make any sense, right? Daycare is undercharging parents, but there's a reason why they do this. The infants are what we would call loss leaders. They kind of get you in the door and then you stick around. The babies are loss leaders? Yeah. No. The loss leader model is like when you get an introductory price for your cell phone or your

cable. They don't make money off of you on the introductory price, but they do later because in child care, even though you are probably underpaying for infant care, you are also probably overpaying as your kid gets older. Child care centers are making the most profit off of those oldest kids. And so they're essentially using the older kids to cross-subsidize the younger kids so they can afford to have both. So yeah, daycares are just kind of boxed in on what they can do. So, um, is the daycare market just doomed? Economists say there are some fixes that we can borrow from how we pay for college. We're talking loans for babies. Depressing. That is after the break.

I'm sticking around. I'm sticking around. That is not good for the economy as a whole. We want everybody who wants to work to be able to work. And when women have to take years off of work, they lose out on future earnings. And society loses out on their contributions. And it's not just about the women workers and society. It's also about the kids, right? Jessica Brown, the child care economist, says all of society benefits when really young kids get quality care. Quality care

early on affects you throughout your life. So higher quality care leads to people who have higher earnings later on. We also see that they have less health problems, which I think is really fascinating that this higher quality care when you're in preschool can affect your health outcomes later on. Society gets all these benefits, what economists call positive externalities. And while there is a little bit of government assistance for child care, for the most part, society, people without children and people who don't use child care, they don't pay for the benefits they get. This is a real market failure.

So society is basically getting something for free if the kids are in higher quality care. And actually, technically, we do end up paying when we don't provide good child care, just on the back end, when the kids grow up. They're making less money, they're paying less in taxes, they need more government assistance, more health care. So society pays at some point. Yes. Yeah, unfortunately, right. The key here is quality care, right?

This is what leads to all of the benefits to society. But you can't always choose the highest quality care for your kid. You choose the highest quality care that you can afford. And this brings us to another big market failure in the child care industry. When parents have kids, they are often young. They're early in their careers. This is the time when they have the lowest income coming in. You're basically at your poorest when you have to pay for child care.

And yet you're kind of stuck paying what you can afford right now when you're the poorest. And so it might be that it would have been worthwhile to spend more on child care than you could actually afford at the time. Meaning like loans for child care? Like loans for college but for child care? Yes. But there isn't an actual market for daycare loans. No, that's part of the market failure is that you wouldn't be able to get a loan even if it were beneficial. The Treasury Department put out this big child care report where they mentioned the possibility of loans. Loans for child care. That is like kind of the most American thing, right? Other wealthy countries, they're like, we're just going to subsidize the heck out of child care.

Make it really cheap and affordable for everybody. They have very, very good public facilities with great ratios and guaranteed slots. For infants? Pre-preschool? So the infant care problem is one that's more unique to the United States because we don't have as long maternity and paternity leave. Oh, my goodness. So like other countries are like, no, when they're infants. They stay home. Parents stay home and take care of them.

Oh, gosh. Cool. Cool, cool. Oof. Parental leave. That's a whole nother show by the way wesley who you know quit his job he did eventually get his youngest daughter into daycare it's a huge sigh of relief it's like oh we got her in somewhere but he does still see signs that things are not okay in this

market like there are obvious staffing shortages. When we get there to drop Ella off, if we get there like a little bit later, they'll say, oh, we're full. Hold on. Let's call the front desk to see if Ella can go back into the infant room for now until someone else comes and we do something. That's why I'm always also trying to drop her off earlier so I don't have to like chop her around to the other rooms and stuff too. Yep. But I try not to judge it that much because the people there are nice. I know they're not getting paid as much as they should. Yeah.

In the U.S., you just kind of have to make your peace with the daycare you can get. Today's show was produced by Sam Yellow Horse Kessler. Emma Peasley helped book the show. It was mastered by Gilly Moon. Keith Romer edited this episode. And Jess Chang is our acting executive producer. Special thanks also to Rashid Malik and Haley Gibbs at the Center for American Progress for helping us understand this very weird market. I'm Jeff Glo.

And I'm Sarah Gonzalez. This is NPR. Thanks for listening.