The Economics of Childcare

Why childcare is so expensive even though childcare workers are poorly paid, and how public support changes the picture.

For many families, childcare is one of the biggest monthly bills, sometimes as large as rent. Yet childcare workers are among the lower-paid workers in many countries. How can a service be expensive for parents and poorly paid for staff at the same time?

Why it costs so much

The main reason is labour. Young children need close supervision, so rules set staff-to-child ratios. For babies, one adult might care for only three or four children. The cost of each worker is shared among very few families. Rent, food, insurance and training add to the bill.

Unlike many industries, childcare cannot easily become more productive. A factory can make more goods per worker with better machines, but one adult cannot safely look after twice as many toddlers. Economists call this pattern cost disease, an idea from William Baumol: in services where productivity barely grows, costs rise as wages elsewhere in the economy rise.

Why it matters for the economy

Affordable childcare affects whether parents, especially mothers, can work. When childcare costs nearly as much as a parent earns, it may make more financial sense for that parent to stay home, even if it harms their long-term career.

Several places have introduced large childcare subsidies. The Canadian province of Quebec introduced low-fee childcare in 1997. Studies found it substantially increased the number of mothers in paid work. Canada later began a national plan aiming for an average fee of 10 dollars a day.

Doing the family maths

A parent earns 2,500 dollars a month after tax. Full-time care for an infant costs 1,800 dollars a month. Working brings in only 700 dollars extra, before commuting costs. The family may decide the parent should stay home. If a subsidy cut the fee to 400 dollars, working would bring in 2,100 dollars, and the choice would look very different.

Early education as an investment

Economists such as James Heckman have argued that high-quality early childhood programmes can pay off for society through better school results, higher earnings and lower crime later in life. Quality matters: the evidence for large returns comes mainly from well-run programmes.

Comparing childcare only to a parent's current salary

Families often compare the cost of childcare with one parent's current pay. But leaving work also costs future pay rises, skills and pension contributions. Looking only at this year's numbers can understate how much staying in work is worth.

Key takeaways

Childcare is expensive mainly because young children need low staff-to-child ratios.
Childcare suffers from cost disease: productivity barely rises while wages elsewhere do.
Affordable childcare can raise parents' employment, as Quebec's programme showed.
High-quality early education can bring long-term benefits for children and society.