Governor Michelle Lujan Grisham announced in September that New Mexico will become the first state in the nation to guarantee free childcare for its residents beginning November 1. While the governor’s intentions may be admirable, her approach misdiagnoses the cause of rising childcare costs and other childcare-related challenges facing American families. Rather than serving as a model for other states or the federal government to follow, New Mexico’s plan is a trial run in the wrong direction.
Rising childcare costs are a real and pressing problem for American families. Over the last four years, formal childcare costs have risen by 29 percent across the nation—far outpacing the general rate of inflation and placing an increasingly heavy burden on working parents. In response, more parents are likely to leave the workforce, postpone career advancement, or decline to have additional children. Aside from New Mexico’s bold strategy, is there any other way to address the childcare burden on families?
First, it is important to take a step back to better understand why costs are rising. Much like education and healthcare, childcare is an inherently labor-intensive service that cannot easily benefit from productivity improvements through automation or productivity-enhancing technologies.
This phenomenon is best explained through what economists call Baumol’s cost disease, named after economist William Baumol (1922 – 2017). His theory explains why certain sectors of the economy, particularly those that rely on human interaction and care, experience cost increases that outpace inflation and wage growth in other sectors.
In many other industries, technological advances allow workers to produce more output with the same amount of labor, driving down per-unit costs. Baumol’s cost disease helps explain why service sectors like childcare, education, and healthcare appear slow to adapt and benefit from technological changes. A teacher can only effectively instruct so many students, and a doctor can only see so many patients a day while maintaining quality interactions.
As wages rise in the broader economy, these labor-intensive sectors must compete for workers by raising wages, but they do not experience the same productivity gains that offset higher wages. The result is that costs in these sectors rise faster than the general price level, which is exactly what we are seeing in the childcare market today.
Continue reading at The Daily Economy.
Anna Claire Flowers is a family policy fellow at the Archbridge Institute and lead author of the “State Childcare Regulation Index.” She is a Ph.D. candidate in the Department of Economics at George Mason University and an instructor at the Catholic University of America's Busch School of Business. She studies the impact of economic policies on family formation and family decision-making.
Edward Timmons, PhD, is Vice President of Policy at the Archbridge Institute. He leads the institute's economic policy strategy, identifying focus areas and disseminating work to key stakeholders and policymakers. His own research focuses on labor economics and regulatory policy; he is regularly asked to provide expert testimony to U.S. states on occupational licensing reform and the practice authority of nurse practitioners. Dr. Timmons received his Ph.D. in economics from Lehigh University and his B.A. in economics and actuarial science from Lebanon Valley College. He publishes a weekly newsletter on Substack with the latest research and policy insights surrounding occupational licensing.
Economics of Flourishing
Governor Michelle Lujan Grisham announced in September that New Mexico will become the first state in the nation to guarantee free childcare for its residents beginning November 1. While the governor’s intentions may be admirable, her approach misdiagnoses the cause of rising childcare costs and other childcare-related challenges facing American families. Rather than serving as a model for other states or the federal government to follow, New Mexico’s plan is a trial run in the wrong direction.
Rising childcare costs are a real and pressing problem for American families. Over the last four years, formal childcare costs have risen by 29 percent across the nation—far outpacing the general rate of inflation and placing an increasingly heavy burden on working parents. In response, more parents are likely to leave the workforce, postpone career advancement, or decline to have additional children. Aside from New Mexico’s bold strategy, is there any other way to address the childcare burden on families?
First, it is important to take a step back to better understand why costs are rising. Much like education and healthcare, childcare is an inherently labor-intensive service that cannot easily benefit from productivity improvements through automation or productivity-enhancing technologies.
This phenomenon is best explained through what economists call Baumol’s cost disease, named after economist William Baumol (1922 – 2017). His theory explains why certain sectors of the economy, particularly those that rely on human interaction and care, experience cost increases that outpace inflation and wage growth in other sectors.
In many other industries, technological advances allow workers to produce more output with the same amount of labor, driving down per-unit costs. Baumol’s cost disease helps explain why service sectors like childcare, education, and healthcare appear slow to adapt and benefit from technological changes. A teacher can only effectively instruct so many students, and a doctor can only see so many patients a day while maintaining quality interactions.
As wages rise in the broader economy, these labor-intensive sectors must compete for workers by raising wages, but they do not experience the same productivity gains that offset higher wages. The result is that costs in these sectors rise faster than the general price level, which is exactly what we are seeing in the childcare market today.
Continue reading at The Daily Economy.
Anna Claire Flowers
Anna Claire Flowers is a family policy fellow at the Archbridge Institute and lead author of the “State Childcare Regulation Index.” She is a Ph.D. candidate in the Department of Economics at George Mason University and an instructor at the Catholic University of America's Busch School of Business. She studies the impact of economic policies on family formation and family decision-making.
Edward Timmons
Edward Timmons, PhD, is Vice President of Policy at the Archbridge Institute. He leads the institute's economic policy strategy, identifying focus areas and disseminating work to key stakeholders and policymakers. His own research focuses on labor economics and regulatory policy; he is regularly asked to provide expert testimony to U.S. states on occupational licensing reform and the practice authority of nurse practitioners. Dr. Timmons received his Ph.D. in economics from Lehigh University and his B.A. in economics and actuarial science from Lebanon Valley College. He publishes a weekly newsletter on Substack with the latest research and policy insights surrounding occupational licensing.
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