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How rising wages are driving child care costs higher [1]

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Date: 2023-09

The cost of child care rose by 6% according to the July CPI report, which is double the overall inflation number. University of Notre Dame Economist Chloe Gibbs notes the increased pressure of inflation, noting “many families are feeling that pinch.” Gibbs attributes rising costs to a tight labor market which has created an environment where “staff has more outside options, they can command higher wages.” This has led childcare providers having to raise prices in order to both keep staff and stay in business.

Video Transcript

- While economists and investors cheer slowing inflation, it's not all a rosy picture. The cost of child care in July CPI report rising 6% last month. That's double the overall reading. And the effect of these higher costs could ripple through the rest of the economy.

Joining us now to talk a little bit more about that, we want to bring in University of Notre Dame Economist, Chloe Gibbs. Chloe, it's good to see you. So speaking from personal experience, I'm a mom of two boys. I pay a heck of a lot per month in child care. Many Americans are having a tough time given the fact that it's rising at least so much quicker here than that overall inflation number. Why is that the case?

CHLOE GIBBS: That's right. And I want to also just back up even that this was an issue prior to the pandemic. And so even in the three decades preceding the chart that you just showed, we experienced this issue of child care prices growing faster than overall prices and growing faster than the median income. And so many families are feeling that pinch that you described.

I'm a mom of four. I also know that pain. And there's a variety of reasons that we think that this is occurring. But I think the one that I'd like to emphasize is that the child care industry is a labor intensive industry.

Obviously, it's really important that we have caregivers taking care of kids. It's not something that can be automated. And because of the tight labor markets that we've been experiencing over the past several months, couple of years, child care workers, staff in child care establishments have more outside options. They can command higher wages. And so one thing that we've seen is a lot of exit from child care employment.

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It also makes it hard on the providers who really only have two options to raise profits, which is to either increase prices that families face or to decrease the wages that they pay, which really isn't an option given the state of the labor market right now. So we see this feature of the child care market playing out. That is a persistent gap between the cost of providing high quality care and the prices that families can afford.

- And Chloe, I want to ask you about are there any solutions to this problem on the horizon. I'm also a mom. I don't-- I just have one. Hat's off to you, both of you.

I got to ask, what are the solutions that can come into play because child care does take a big chunk of your budget. I mean, the average that I'm seeing is it's more than 10%. In a lot of cases, it's more than that.

Some people are paying 30% of their budget, what you should be allocating for housing. Some people are paying more for child care than they are for their shelter. What are the solutions that we're hearing out there or what is a potential solution to this problem?

CHLOE GIBBS: Yeah. It's a great point. And you mentioned how this burden is differentiable across the income distribution. So lower income families are feeling this bite much more in that, often, a quarter of their income is allocated to child care costs.

And I'll also just mention that this hits a lot of families. So 60% of children under the age of six are in some form of non-parental care on a regular basis. And that's not even looking at school age kids who might require before care or after care around the school day and in the summers. And so this is hitting a lot of families.

And some of the solutions, I think, there are some that will naturally occur as we see inflation decelerating. That does lower the costs that providers face in terms of their utilities, their rent, some of the other expenses that they have in addition to labor. So we might see that child care prices that slow down in there, in that growth, might continue to slow as we see that happening with overall inflation.

And I think there's also some important investments we can make. We help families, particularly lower income families, afford this big cost. Because it often hits families when they are at the lower part of their lifetime earnings trajectory, right? They're early in their careers because they're relatively young when they have young children. And so we have subsidy programs and subsidized care that help to smooth that for families.

I think one thing we could consider is sort of looking further up the income distribution because families further up the income distribution are experiencing the burden of childcare costs. And then I think we really also have to think about the supply side. So that is the child care providers.

The federal government invested a fair amount in providers via the ARP Child Care Stabilization funds. Those funds are going to expire pretty soon. Most of them have been spent. And so that was intended to help child care providers weather some of these economic challenges present. And we know that they are less buffered from economic headwinds than other industries.

And so we might consider what are the other sorts of incentives we can invest in the system to keep providers in the market, to keep them provide riding high quality care for families. Because it has real economic implications that ripple throughout our economy.

- And what does that look like, Chloe? Because we talked a lot about the fact that so many Americans simply can't afford child care. And we've seen more and more women drop out of the workforce as a result.

CHLOE GIBBS: That's right. And I think we have a lot of evidence that suggests that when we subsidize child care, when we make it more accessible, more affordable to families, we see women enter the labor market. And so we know that women's participation in the labor market over the last many decades has contributed to GDP.

I think we should be worried about whether we are really capitalizing on labor supply and getting all parents who would like to be working while also caring for children into the labor market because they can find the kind of care and afford the kind of care that would facilitate that.

- Such an important issue. Chloe Gibbs, thanks so much for taking the time to join us.

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[1] Url: https://finance.yahoo.com/video/rising-wages-driving-child-care-203113655.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACVs5f5uaqzxfpSjeANKwYoLLZVJv0XWGunEmU24BUIchTKdPQRKKgW553wxTty-Nz1T48wwAYPcS5RZCi6X-t5nwcJzrs0f0vOXzyliM1RwxhHKeZOiXMYKQys7qwwuRzfVw9KxA-6WvpvjSoFVa0VaLy6427JzNDgfxxBbXkBP

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