Childcare is expensive

... and will never cease becoming more expensive

Every semester I take a new group of arts management students through the theory of cost disease. In a nutshell, as labor productivity rises over time, average wages also rise - it is why we are paid better than our grandparents were, regardless of our occupation. But different sectors of the economy experience productivity growth in different ways. In some sectors - manufacturing, agriculture, transportation, communications and data processing - labor-saving technological change is key: we need far fewer people to produce a ton of rolled steel, or a thousand bushels of corn, or to unload a freighter, than in days past. But other sectors, while they might have technological change that improves the quality of product, cannot do much in the way of reducing the amount of labor necessary for the task: machines cannot replace humans. This is true of education, personal services, much of health care (hospital wards are full of wondrous technology, but you still need nurses), and, relevant to my classes, the live performing arts. These sectors face a challenge - wages are rising, but you cannot economize on the number of workers you need. They face “cost disease”, although it is an odd phrase to use, since it is an issue that only arises because, in general, we are getting richer.

What we expect to happen, and what does happen, is that products that have had lots of labor-saving technology will have prices that fall in relative terms to products that have not had much labor-saving technology. Your great-grandfather says you had better end this long-distance call, it must be costing you a fortune, after just telling you he can’t believe how much he just had to pay for a haircut.

Caring for children is a cost disease sector. There’s not much one can do in the way of reducing the carer-to-child ratio. The New York Times has a story today about the cost pressures facing childcare centers. So … what are we to do?

Here is my two cents: for a start, it would be great if more people understood the nature of cost disease. It is not that some sectors are inefficient, or lazy, or unimaginative. It is just that certain jobs require in-person human beings, and that wages are going to (I hope!) continue to rise. If everyone were on the same page with this, then there would be an understanding that over time how our budgets are allocated will shift, as we pay less for some things and more for others. And that this is okay.

The second thing I would say is that the question is not about whether it would be better for children to be cared for during the day at home by one of the parents, because that doesn’t escape the cost disease issue: the parent’s wage is rising as well, so the opportunity cost of staying at home to care for children is rising just as surely as costs are rising at childcare centers. Caring for little children is going to keep getting more expensive regardless of who does the caring.

And that brings us to policy. If there are people who think it would be a bad thing if birth rates fell (and I’m not arguing that point here one way or the other) then there needs to be a serious discussion of how to pay for that, because the expense is going to continue to rise, and some incentives will be needed. Increased refundable child tax credits have the advantage of not favoring one method of caring for children over another; it just gives parents more income to help defray the cost, whether the cost of being out of the labor force or the cost of paying for care. Or we could have a more complex system of subsidy. But something is needed, and if the political choice is “let parents deal with the cost themselves”, I know what the outcome will be.