Child care tax credits are intended to relieve the financial burden of child care expenses for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit and multiple datasets in both difference-in-difference and instrumental variable frameworks, I find evidence of substantial pass-through: between $0.73 – $0.90 of every dollar is passed through to providers in the form of higher prices and wages. Robustness checks confirm the pattern that the bulk of credits are crowded out by increased prices. Furthermore, the relative inelasticity of child care suppliers implies that increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, though the magnitude of this conclusion is tempered by heterogeneous pass-through rates.
Pointer from James Pethokoukis.
I am surprised by the claim that supply is relatively inelastic. I wonder if that is true in the long run and, if so, why. Again, I do not think of the child care industry as politically powerful, so even though this perfectly illustrates my view that the public-choice outcome is subsidized demand and restricted supply, I want to be cautious about this one.
It’s the moms who are politically powerful. They worry about their kids and think that tight regulation of childcare will make their kids safer.
How does one reconcile lots of people out of the workforce with high price inelasticity of labor supply for a low-skill job? If true, then, ZMP workers and higher leisure utility are both theories that deserve an upgrade in esteem.
It isn’t the individual worker(s) that are the problem, it is the organization of the workers.
There are a few issues at play. The first is zoning laws prevent small scale but functional childcare. The options are either an illegal arrangement with a neighbor who is then stuck with the kids for the full work day (plus transportation so 9-10 hours frequently), or a scaled up operation with multiple employees in a non residential neighborhood. This causes a lot of problems.
1. Transportation. Pick up and drop off times are right at rush hour, so even being a few miles out of the way can turn into an extra half hour or hour to the commute each day easily. The ideal is right next to your work or home and since the latter is out thanks to zoning and the real estate is expensive in commercial areas which drives up the cost.
2. Scaling doesn’t work to well with child care. Minor issues cause major issues in large groups. With 5 or 6 kids under care it is pretty easy to have a group with no dangerous food allergies. With 100 kids you are going to have a peanut, a wheat and a dairy allergy at least. Either 100 kids eat specialty meals (and don’t have chunks of food on their clothes from breakfast ever) or you need constant vigilance from the staff (plus enough staff!). Behavior issues are a big problem as well. Every kid going into child care has minor behavior problems that the parents either indulged or ignored or just handled since they had a 1:1 or 2:1 ratio. The first thing that most day care will do is potty and sleep train the kids. No more “Billy will use the potty when HE is ready”, or “Susie just doesn’t need/like/want a nap”, Billy and Susie will be in line with everyone else in a week (maybe 2), but the day care needs enough staff to integrate new kids like this as people move in and out of neighborhoods/jobs.
There are lots of other minor issues, but in general the best sized day care options (3-4 workers, 20-30 kids) are impractical at a reasonable cost, and the large ones (50+ kids) have lots of overhead (insurance, expensive locations etc).
It always seemed to me that cities and towns spend astounding amounts of money on schools and related overhead.
Expanding on that infrastructure and making that available to private day care providers at a subsidized rate would be the most cost effective way for government to help.
As baconbacon said, day care doesn’t seem to scale well, and isn’t cost effective at workable sizes. Perhaps the only thing that can be done is to scale related overhead, but not the actual care, a little like startup incubators do
Two issues I would have with this. The first is that very young children don’t mix nearly as well as elementary school kids. Put an 8 year old in a class of 10 year olds and the teacher will have to spend some extra time working with that one kid, put a 6 month old in a class of 2 year olds and the worker is really stressed. She has to feed and change the 6 month old, while also getting it 2 or 3 naps a day while managing a bunch of 2 year olds. In the first case you might be able to handle 12-15 kids together, in the 2nd case it is maybe 4 or 5.
Additionally public school is not exactly healthy for 8 year olds, that same structure would be terrible for even younger children.
Regulation makes it difficult to start up a new one. It’s also difficult to hire people, as the stringent background checks you would want often eliminate many of the people that are part of the labor supply surplus.
They are difficult businesses to insure against the various risks.
There are somewhat higher capital costs as well, as parents typically want a variety of playground equipment and what not.
Is the paper claiming that providers actually reap the benefits? Or is it possible that it is primarily captured by the daycare workers?
What I would expect to happen is that middle class people would use the subsidies to buy better care for their children. This would primarily take the form of nicer facilities and higher quality workers.
Lower earning parents don’t use the subsidy to spend more, they still primarily look for the cheapest acceptable option.
This seems to be what the summary implies is happening, with the comment about heterogeneous pass through rates.
This also matches the general pattern in my area. The higher quality care comes primarily in the form of higher quality workers, not facilities, as many more workers are second earners in an affluent family or are high school and college students that are relatively affluent.
Cheaper daycare centers catering to more low income parents are staffed by people that seem to be less polished.