Baby's first market failure
SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
(SOUNDBITE OF COIN SPINNING)
SARAH GONZALEZ, HOST:
For months, Wesley Wade and his wife, Giovonni, ended their days the same way - coming together at the end of the night and just being like, how? How is this so hard?
WESLEY WADE: One hundred percent, almost every day, and it was mind-boggling.
GONZALEZ: This is Wesley.
WADE: 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?
JEFF GUO, HOST:
The thing that they're trying to figure out is day care for their two kids, Helena and Ella.
WADE: Both my kids are very fiery. It's a very fiery home that we're in.
GONZALEZ: Ella is the baby.
WADE: She is a very defiant child, which we love over here.
GONZALEZ: Oh, I love defying girls.
WADE: It's very fun. It's very fun.
GONZALEZ: Wesley is a mental health counselor, and he's getting his Ph.D. And his wife is an attorney. They are both pretty good at researching. And they just keep thinking, how do other people do this?
WADE: Yeah, I don't know how other people figure 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.
GUO: And this family is not in some small town. They're not in a day care desert. They're in Durham, N.C. It's a big university town - a lot of jobs, a lot of people.
GONZALEZ: It's just day care information is really hard to come by. It is actually, like, a real flaw of the day care 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 day cares are around you and if they even have a spot for your kid.
WADE: So we're Googling. We're on waitlists 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 plan? And we're spending all this extra time when we, you know, still have to cook dinner, maintain the house, you know, give our kids love, spend time for ourselves.
GUO: Some day cares do have actual websites, and they're inquiring there, too. But they kind of know those are all going to be a wash.
WADE: Most of those places are all going to be full - right? - 'cause those are easily findable.
GONZALEZ: Easily findable. Easily findable day cares 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 day cares like Jay's (ph) Jungle and the Blooming Room, those kind of hidden day cares. Those are the ones that will also not have a spot for your kid because there are no more spots anywhere.
WADE: 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, OK, if they're able, if they're open, if they can work - because your options are limited.
GUO: Even the places they definitely did not want to send their kids to were full. Everyone had a waitlist - six months, nine months, a whole year.
WADE: So I actually ended up leaving my full-time job just so I could be the flexible parent that can stay home.
GONZALEZ: Because you guys could not find child care in time?
WADE: 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? And I was...
GONZALEZ: A year earlier?
WADE: A year. A year earlier, yeah. So (laughter) think about all the stress.
GONZALEZ: Wesley's plan was just to leave his job for a different job once he finished his Ph.D. His plan was not to leave the labor force altogether. Wesley and his wife, they like to work. They want to work.
WADE: 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.
GONZALEZ: 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 this home.
WADE: Oh, my guys, you know it. Come on. Come on, now (laughter).
GUO: OK. 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.
GONZALEZ: All over the country, there are tons of people willing to pay for day care 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.
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GONZALEZ: Hello, and welcome to PLANET MONEY. I'm Sarah Gonzalez.
GUO: And I'm Jeff Guo. What the heck is going on with the day care market? Day care is so scarce for parents. The pay for day care workers is low. And day care owners can barely stay open.
GONZALEZ: 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.
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GONZALEZ: If you ever shop around for day care, at one point you will probably think, I should really open up a day care. 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. The Treasury Department says 60% of families can't even afford day care. So day cares must be making bank, right? Well, they are not making bank. The at-home day cares, the big early childhood education centers - this is not, like, a big money-making industry. Take any spot like this one in Iowa.
KELSEY ANDERSEN: So we call ourselves Bluff's Little Thinkers.
GONZALEZ: Bluff's. What's the deal with Bluff's?
ANDERSEN: Yep. Like Sergeant Bluff.
GONZALEZ: Who's Sergeant Bluff?
ANDERSEN: So Sergeant Bluff is our town, like, this suburb. Yep.
GONZALEZ: Sergeant Bluff, Iowa, near Sioux City.
ANDERSEN: So we call it Bluff's Little Thinkers, yeah. But a lot of people just call us BLT for short.
GUO: Kelsey Andersen is the director of BLT, Bluff's Little Thinkers.
GONZALEZ: They have babies from 6 weeks old to 5 years old.
ANDERSEN: Yep, the 6 months old is the youngest that they can come for sure.
UNIDENTIFIED PERSON: No, no, no, no, no.
GONZALEZ: And infant classes, like this one, for the baby babies - this is where things are the most broken in the day care market, the on ramp, getting those chubby little baby feet in the door.
GUO: Child care for infants is the most expensive for parents and for day cares.
GONZALEZ: OK, let's talk about your books. What do your profits look like and your costs?
ANDERSEN: Yes. So I do have a print-out here...
GONZALEZ: Oh, OK.
ANDERSEN: ...Of the books where I could look. So, like, anywhere between 40 to 55,000 for a deposit, like, for the month.
GONZALEZ: Oh, deposits are what parents pay you.
ANDERSEN: Yes. Yep.
GONZALEZ: And then can you give me, like, a ballpark? Like, how much money do you pay in payroll or in labor?
ANDERSEN: Our payrolls monthly would definitely be over 30,000.
GUO: In a month where they're bringing in, like, $40,000, $33,000 is going to payroll.
ANDERSEN: Our salaries are 83% of our budget per month. That is absolutely insane.
GUO: All the other bills at Bluff's Little Thinkers are kind of peanuts in comparison.
GONZALEZ: Five percent goes to their loan payment. 4% is operating expenses, cleaning supplies, snow removal, play kitchens, things like that. Three percent 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 worker's comp. And again, 83% goes to labor.
GUO: And that's 100%. Kelsey says they spend almost everything they bring in.
ANDERSEN: Always, always. And a lot of times, we won't have anything left over.
GUO: And this is pretty representative of the country. And for thinking, well, at least day care 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.
GONZALEZ: And then what do you think of that pay? I mean, is that enough to, you know, really get by in Sergeant Bluff?
ANDERSEN: It's not a livable wage. It's absolutely not a livable wage in any way, shape or form.
GONZALEZ: In Sergeant Bluff, Iowa, or in Durham, N.C., or Los Angeles, Calif., you can make more money being a parking attendant, being a dog walker, working in retail.
ANDERSEN: Yep. Yep. So Starbucks, Target, any fast food - Chick-Fil-A, Best Buy, Marshalls. I mean, just anything that we have in our...
GONZALEZ: They all pay more?
ANDERSEN: Oh, absolutely, substantially more.
ANDERSEN: Yeah. Like, I saw a Chick-fil-A sign the other day that said, starting at 16.75.
GUO: 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 day care market so tricky. Day cares 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 day care - it's, like, more than 70% of total costs.
GONZALEZ: 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 grown-ups to take care of babies and even toddlers.
GUO: Except recently, some states, like Michigan and Iowa, have said, you know, maybe we don't need that many grown-ups.
GONZALEZ: Yeah. Yeah. And maybe they don't even need to be grown-ups at all. Iowa has decided that 16-year-olds can now be left alone to take care of 15 5-year-olds, like, for afterschool care. And Kelsey does have some 16-year-olds on staff.
ANDERSEN: 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.
GUO: 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.
ANDERSEN: 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.
GUO: Kelsey says she just cannot make it harder to be a teacher because retention is already a problem in day care. There's a lot of turnover nationally. It's really hard to fill vacancies.
ANDERSEN: 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 cannot live on what we're paying them. And I can't fault them for when they leave because of that reason.
GONZALEZ: OK. Normally, when you're having a hard time keeping workers, you just increase their pay and pass the costs 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.
JESSICA BROWN: Yeah, the baby's 3 weeks old.
GONZALEZ: Wait. He's 3 weeks old?
GONZALEZ: I feel like I should not be talking to you.
GONZALEZ: You're, like, a child care economist.
GONZALEZ: You, of all people, should be like, no, I'm drawing a line.
BROWN: (Laughter) I'm not good about that (laughter).
GONZALEZ: Uh-huh. I understand completely. This is your second?
BROWN: 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.
GONZALEZ: 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?
BROWN: If we had, you know, perfect markets, then the market should adjust and the supply should come off. But it's not.
GUO: Theoretically, the supply problem should kind of solve itself. Day cares could just charge more to take care of each kid, and then, more day cares would open up. But that's not happening.
BROWN: And so there's something else going on, which is part of why I find it so interesting.
GUO: Here's what Jessica found out. We'll start with why it's so hard to raise wages to attract workers. You know how day cares 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.
BROWN: 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.
GONZALEZ: Oh, so, like, nothing.
BROWN: Yeah, it'd be very small. Whereas with childcare, 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.
GONZALEZ: 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 day care 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?
BROWN: 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.
GONZALEZ: 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.
GUO: Yeah. If day cares were acting like giant corporations in any other industry, they would just ditch the lower-income customers who couldn't afford day care.
GONZALEZ: But day cares can't actually raise prices by too, too much because it would drive away, like, a big chunk of their market.
GUO: Yeah. If the price of day care 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 plop my kid in front of a TV all day.
GONZALEZ: And other families will say, yeah, at these prices, I think I'm going to just hire a nanny instead of paying for day care, you know, someone who will come to my house - so convenient.
GUO: And this threat, this threat of outside options, the threat of nannies, keeps a ceiling on what day cares can charge.
GONZALEZ: Nannies, man.
GUO: Mary Poppins. Who knows what's in that bag?
GONZALEZ: And remember those waitlists 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 day cares can't really raise prices. If prices were higher, there would be no waitlist. It'd be like, no, I'm not going to wait in line for this thing that's way too expensive.
GUO: But here is the interesting part. Because day cares can't raise prices, the waitlist has kind of become a necessity for them because day cares cannot afford to have any vacancies.
BROWN: If a parent gets a job out of town and they pull their kids from the center, the child care facilities need 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.
GONZALEZ: So they just need someone, like, always there. Like, OK, pull from the waitlist. Now we have no vacancies again.
GUO: Profit margins for day cares are typically less than 1%. So without waitlists, they wouldn't be able to stay in business.
GONZALEZ: And there's another weird feature of the day care market. If you look at how much day cares 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.
BROWN: 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.
GUO: That, like, doesn't make any sense - right? - day cares undercharging parents. But there's a reason why they do this.
BROWN: The infants are what we would call loss leaders. They kind of get you in the door, and then, you stick around.
GONZALEZ: The babies are loss leaders?
GONZALEZ: 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.
BROWN: 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 that they can afford to have both.
GONZALEZ: So, yeah, day cares are just kind of boxed in on what they can do.
GUO: So is the day care market just doomed? Economists say there are some fixes that we can borrow from how we pay for college.
GONZALEZ: We're talking loans for babies - depressing.
GUO: That is after the break.
GONZALEZ: I'm sticking around.
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GUO: All right. So we tend to see child care as this private problem, right? If parents can't afford it, that's their problem. But if parents, usually the women, have to leave their jobs because they can't find or afford daycare, 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.
GONZALEZ: 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.
BROWN: 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.
GONZALEZ: 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.
BROWN: So society is basically getting something for free if the kids are in higher-quality care.
GUO: 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.
GONZALEZ: So society pays at some point.
BROWN: Yes. Yeah, unfortunately, right?
GONZALEZ: 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.
BROWN: When parents have kids, they are often young. They're early in their careers. You know, this is the time when they have the lowest income coming in.
GUO: 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.
BROWN: 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.
GONZALEZ: Meaning, like...
BROWN: So maybe...
GONZALEZ: ...Loans for child care? Like, loans for...
GONZALEZ: ...College but for child care?
BROWN: Yes (laughter).
GONZALEZ: But there isn't an actual market for day care loans.
BROWN: No, that's part of the market failure, is that you wouldn't be able to get a loan even if it were beneficial.
GUO: 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.
BROWN: They have very good public facilities with great ratios and guaranteed slots and...
GONZALEZ: For infants?
BROWN: So (laughter)...
GONZALEZ: Like, pre-preschool.
BROWN: 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.
GONZALEZ: Oh, my goodness. So, like, other countries are like, no, when they're infants...
BROWN: They stay home.
GONZALEZ: ...Parents stay home and take care of them. Oh, gosh (laughter). Cool. Cool, cool.
GUO: Oof, parental leave - that's a whole nother show.
GONZALEZ: (Laughter) By the way, Wesley, who, you know, quit his job - he did eventually get his youngest daughter into day care.
WADE: It's a huge sigh of relief. It's like, oh, we got her in somewhere.
GONZALEZ: But he does still see signs that things are not OK in this market. Like, there are obvious staffing shortages.
WADE: 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, shop her around to the other rooms and stuff, too. Yup. But I try not to judge it that much because the people there are nice, and I know they're not getting paid as much as they should, so.
GONZALEZ: Yeah. In the U.S., you just kind of have to make your peace with the day care you can get.
Today's show was produced by Sam Yellowhorse Kesler. Emma Peaslee helped book the show. It was mastered by Gilly Moon.
GUO: Keith Romer edited this episode. And Jess Jiang is our acting executive producer.
GONZALEZ: Special thanks also to Rasheed Malik and Hailey Gibbs at the Center for American Progress for helping us understand this very weird market.
GUO: I'm Jeff Guo.
GONZALEZ: And I'm Sarah Gonzalez. This is NPR. Thanks for listening.
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