Sunday, July 30, 2006

Child care's broken economics

This is a tale of two families.

Some friends of ours have three children, ages 1 to 8. The husband works, the wife stays home with the kids. They're making ends meet, but it's tough. And the wife is starting to go a little stir-crazy from being at home.

So she decided to go back to work. Or try to.

The problem is, the entry-level jobs she can get after nearly a decade out of the work force pay little more than $10 an hour -- pretax.

They don't have any relatives in town to help with the child care, so if she wants to work she has to hire someone. And with three kids, the costs add up rapidly. Child care for infants is hideously expensive: $1,000 a month or more. Full-time care for older children isn't much cheaper: $800 or so. After-school care is the most affordable: About $200 per month per child.

For our friends that works out to $2,000 a month just in child-care costs. They'd need to earn an extra $11.50 an hour after taxes just to cover that bill.

Even the cheapest option -- an inexpensive nanny -- would cost at least $10 an hour. Assuming they could find one.

My wife recently went back to work, so we're in the same boat. But our circumstances are different. My salary is high enough that we don't depend on her income to pay the bills, and my schedule is flexible enough that we were able to put her through a one-year college program without having to pay for child care. Upon graduation, she found a job paying $15 an hour. And we have only two children, the oldest of whom is entering first grade, so our costs are lower.

Both women can expect the low pay to be temporary -- their salary should climb fairly quickly in the first couple of years, eventually alleviating the financial crunch. But our friends cannot afford the low pay in the mean time.

This leads to an ironic and unwanted result: the people who really need the money from a second job can't afford to get one until the kids are all in school and child care much cheaper.

The side effects are large. For one, you have the psychological effects on the wife of being "trapped" in the home and the family pressures that stem from financial difficulties. Economically, the poorer family falls further behind the economic curve: they spend several more years on one income, which delays the growth of their earning potential, which translates into fewer years of maximum earnings over the course of a lifetime. The poor get (relatively) poorer.

The bottom line: the lack of affordable child care helps keep families poor and serves to widen the wealth gap.

The issue isn't purely economic. I believe, all things being equal, that being raised by a stay-at-home parent is better than being plunked in child care; that's why my wife and I have rearranged our schedules to minimize the time our children will spend in child care. But child care is better than being raised by a parent who is forced to stay home thanks to economics or societal expectation. And having a stable child-care arrangement is better than the stress and uncertaintly of arranging an ad hoc patchwork of friends and relatives to look after children.

There are elements of personal choice here: number of kids, education decisions. But whatever one thinks of a family's own culpability in such a plight (and I can think of plenty of examples where such culpability is limited: an unintended pregnancy, the death of one parent, single parenthood in general), there are two social effects that we as a society might wish to avoid: the effects on children of being raised by stressed parents who feel trapped in their roles, and the effect on social stability of having yet one more way to limit the economic prospects of people that aren't at the top of the ladder already.

Subsidized child care -- the subsidy reasonable and based on income -- thus strikes me as a worthwhile investment. Especially if part of the subsidy buys flexibility. It's very hard right now to find reliable part-time child care. So parents are faced with the choice of paying for full-time care or trying to cobble together a patchwork of relatives and friends.

Making part-time day care a viable option would not only be cheaper; it would let families maximize the time they spend together, rather than being forced by economics to plunk their kids into full-time care and then work full time to pay for it. That would be better for the kids and for society.

The details of the subsidy would need to be worked out. A direct subsidy of child-care establishments would engender a huge bureaucracy to handle the money and monitor the quality of the providers. A simple tax break would provide the largest benefits to those who least need it. Perhaps a tax credit for child-care costs is the answer -- minimal bureaucracy, maximum targeted effect.

But the current situation strikes me as untenable. In an era where both parents increasingly need to work in order to maintain their standard of living; in an era when families are spread across the country as jobs and temperament dictate; in an era when the gap between rich and poor is growing ever wider, providing affordable options for working parents would boost productivity and improve family outcomes.

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Blogger Dyre42 said...

One also has to consider the sheer number of single parents in the USA.

When my son was a toddler I was making 36K a year gross. Of that federal and state taxes combined with the costs of providing us both with health insurance accounted for 22% of my gross income making my net income 28,080.

Daycare costs within the upscale suburb of Atlanta that I resided and worked in were higher than average si I was paying 145$ a week at the time which works out to 7,540$ a year or 26.8% of my net income.

GA already had subsidized daycare at that point however at my income bracket at the time I failed to qualify.

Now the IRS allows up to 3,000$ tax credit per child deduction for daycare (to a max of 6,000) that doesn't make the first year a child goes into daycare any easier.

What might ultimately make the transition easier without hard federal subsidation of daycares is a simple change to the number of dependents one claims thereby reducing the amount of federal income tax paid per paycheck during the first year a child is in daycare per parent and legal guardian.
That credit paycheck tax reduction would vary based on the amount of the paycheck in question.

Those that fall beneath a predetermined financial level would receive an advanced earned income credit thereby increasing the amount of their paycheck for the first year and what remained of childcare costs would be tax deductible thereby allowing state subsidation (if appicable) to negate some of the direct costs to the federal government.

My plan isn't perfect yet but it seems that a soft subsidy would work out better than a hard subsidy as it increases the amount of money available to the parents/guardians rather than potentially decreasing the amount of competition/quality of care between daycares.

Its just a pet theory of mine.

7/31/2006 2:23 AM  
Blogger Sean Aqui said...

Excellent point on the single parents.

Hard subsidy vs. soft subsidy could be an interesting debate. In theory I prefer a direct subsidy of day care because there are already plenty of general tax breaks for parents, and such tax breaks most benefit people with higher incomes. Your tax credit idea handles part of that, though. And your approach would involve less bureaucracy.

7/31/2006 7:20 AM  
Blogger Dyre42 said...

LOL, No matter how imperfect my ideas may be they all decrease bureaucracy.

However one thing I have noticed is that its much easier to sell soft subsidies to Republicans than it is hard subsidies particularly when it comes to social issues.

8/01/2006 4:06 AM  
Anonymous Anonymous said...

After seeing this website about the negative side of daycare, I'm not so sure that's something we should encourage with subsidies...

8/03/2006 4:43 PM  
Blogger Sean Aqui said...

Not the most objective site....

Daycare is a reality. In many cases it's a necessity; in others it's better than the alternative.

Are there problem daycares? Of course. Are there excellent daycares? Of course. It's up to parents to find one they can entrust their kids to.

The matter is not improved by making it unaffordable to those who need it most.

8/03/2006 5:01 PM  
Anonymous Anonymous said...

At the present time, the majority of young moms either have to work to make their living or want do build a career and need someone to take care of their children. As a rule, they hire nannies. However, it is so hard these days to find good nannies. Proper child care is a must but so hard to find. On this great site you will find lots of complaints concerning the issue.

10/13/2008 9:31 AM  

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