A $15 minimum wage would also raise childcare prices
Despite parents paying high prices, childcare teachers receive low wages. This is not due to greed or exploitation. But rather, the economics of the childcare industry.
Generally, labor-intensive industries suffer from a condition known as Baumol’s cost disease. That is, while most industries get more productive over time due to technological advancements, the same is not true for labor-intensive industries. Still, these industries must raise wages for workers to compete with other industries whose workers are experiencing higher wages due to rising productivity. The result is high and rising prices, but low wages for providers.
Would a minimum wage hike address this issue?
Hiking the minimum wage has been one of the most common proposals to address this conundrum. In fact, the Economic Policy Institute (EPI) recently released a report calling for a $15 minimum wage. The report claims that
if the federal minimum wage is gradually increased from $7.25 per hour to $15 per hour by 2025, roughly 560,000 workers in the child-care sector will benefit.
This, however, assumes that such a wage hike will not have other negative consequences.
In the real world, employers generally respond to minimum wage hikes by reducing worker hours, laying off workers, or reducing future hires. In fact, a recent CBO report estimates that a $15 federal minimum wage would eliminate 1.4 million jobs.
Looking specifically at the childcare industry, a report by the Heritage Foundation found that a $15 minimum wage would increase childcare costs by 21 percent, on average, nationally.
As the report explains,
Mandating that all childcare workers receive at least $15 per hour would result in significant cost increases for childcare providers. With childcare regulations limiting childcare providers’ ability to reduce other expenditures, higher costs would be passed on to families through significant childcare price increases.
The median wage for childcare workers across the U.S. is $11.65 per hour.5
Thus, a $15 minimum wage would require a majority of childcare workers to receive significant wage increases. Using wage distribution data from the Bureau of Labor Statistics’ Occupational Employment Statistics, I estimate that a $15 minimum wage would require an average increase of 29 percent in the wages of childcare workers across the 50 states. This does not include additional Federal Insurance Contribution Act (FICA) taxes and other potential costs that employers would be required to pay along with higher wages.
A breakdown of childcare provider costs from the Center for American Progress estimates that employee costs account for between 60 percent and 80 percent of childcare providers’ operating expenses. Wages likely consume an even higher share of in-home providers’ expenses, and virtually the entirety of nanny care costs. Assuming that wages account for 70 percent of childcare providers’ expenses, the average percentage increase in costs across the states would equal 21 percent. This would bring the average cost of infant care from $11,193 to $13,250, and the average cost of care for a four-year-old from $8,959 to $10,630
For Minnesota, childcare costs would increase by approximately $3,600.
What would this mean?
Childcare providers could close, lay off workers, and worsen childcare shortages. Costs would rise for parents, particularly hurting low- and middle-income families. For publicly funded programs, a $15 minimum wage would raise costs for taxpayers.