Why childcare costs are high but providers earn so little: The role of regulations

On average, it costs at least $20,000 a year to keep an infant at a licensed childcare center in Minnesota. Childcare for older children, while less expensive, still costs over $10,000. Yet despite daycare costing an arm and a leg, wages for childcare workers are among the lowest in the economy.

According to labor market data, the median wage for a childcare worker in Minnesota was $17.5 in the first Quarter of 2026. The statewide median wage for all jobs was $28 — 60 percent higher.

This paradox makes subsidies appear as a no-brainer. However, understanding why it exists is key to explaining why government intervention not only fails to address high costs and shortages, but oftentimes worsens them.

The economics of childcare, and how regulations drive unaffordability

Potentially due to technological advancements, capital-intensive industries — such as manufacturing —  tend to become more productive over time, leading to lower prices and higher wages. Labor-intensive industries — such as childcare — do not operate in the same way.

Yet even without becoming more productive, childcare centers must raise wages to compete with other more productive industries — a phenomenon known as Baumol’s cost disease. Centers, however, cannot raise costs beyond what parents can afford since that would likely decimate demand for childcare. So, even though rising childcare prices cause parents financial strain, they are insufficient to raise wages to the level seen in other industries.

Unfortunately, state governments compound this by mandating stringent regulations that raise costs for providers and further reduce staff wages.

Strict staff-to-child ratios, for instance, force centers to spread labor costs across a limited number of households, raising the cost of care per child. If parents do not cover the extra cost of maintaining those ratios, staff must pay for the difference through lower wages.

The effects of strict ratios are particularly apparent when comparing center-based care with family childcare.

In Minnesota, a single family childcare provider can have up to 12 children of mixed ages at a time. At a center, one teacher can have up to four infants or seven toddlers. Consequently, family childcare for infants and toddlers costs half as much as center-based care. For 4-year-olds, where the difference in ratios is smaller, the savings are lower, but still substantial.

Analyzing variations across states, researchers have found that states with more relaxed ratios have less expensive center care compared to those with more stringent rules. Indeed, a  2022 analysis by researchers at the Federal Reserve Bank of St. Louis concluded that

There is a negative relationship between child care affordability and the average child-to-staff ratio in each state.

Stringent hiring requirements also exacerbate worker shortages — forcing centers to operate below capacity. This reduces the overall supply of childcare, also contributing to high costs.

Why subsidies do not bring costs down

Subsidies do not change the economics of childcare. They merely shift costs onto taxpayers. Even worse, because subsidies often come with strings attached — such as new rules to control quality— they drive out small, more affordable providers, reducing options for parents. This has already been the case with the family childcare industry in Minnesota.

While rules for family childcare providers have become more complex over time, by comparison, centers still face more burdensome regulations. This should explain, in part, why family childcare is significantly more affordable compared to center-based care. It also strongly suggests that regulatory reform is the only true path to affordability.

Fortunately for parents, the 2026 legislature took steps to address some of the state’s burdensome rules.

As part of the childcare modernization process, legislators relaxed hiring requirements for center staff. This should make it easier for centers to find workers. Legislators also raised capacity limits for family childcare, which could improve childcare supply, particularly in Greater Minnesota, where centers are financially less viable.

But while a step in the right direction, more comprehensive reform is needed to bring Minnesota on par with other less-regulated, relatively more affordable states.