How much does a daycare cost in Indiana? Too much for most families.

Michael J. Hicks
| Indianapolis Star

For most families, paying for childcare in Indiana doesn’t make sense. It costs more than parents can earn by working.

The Indiana Legislature has struggled with child care issues. Doing something meaningful with legislation and spending is outrageously expensive. I have no magic remedies to offer in the short term and only one long-term policy suggestion.

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Indiana has child care and preschool programs available for low-income households, including the Child Care Development Fund Voucher Program and On My Way Pre-K. About 1.3 million Indiana residents under the age of 14 and over the age of 60,000 qualify for these programs, which have low participation rates—only 7,000 students attend preschool.

Statewide, there is only room for 183,000 children in licensed day care facilities. There is no way to know how many of the 1.3 million children under 14 are in family care. But at least one study found that child care costs consume about 10% of family budgets in 1 in 3 Indiana counties.

The biggest challenge is creating affordable childcare.

Childcare regulations are not a problem

Indiana licenses child care programs and sets staffing regulations. I have heard complaints about the cost of these regulations and I am generally sympathetic to criticisms of regulatory costs. However, the most expensive child care regulations are those related to staffing requirements.

I am not an expert in child care, except for my time as a Sunday school teacher. Indiana allows one caregiver to supervise up to four infants or five toddlers. That seems almost the ceiling — and far beyond my skill level.

The problem is not regulation, but simply supply and demand.

Last month, two colleagues and I published a study of the supply and demand for child care in Indiana. Working with Dr. Dagney Faulk and Madelyn Ponsier, a recent Ball State graduate, it took the better part of a year. Our findings will surprise many observers.

We conducted a statistical test to measure the impact of changes in childcare employment on women’s labor force participation. Our model showed that a 10% increase in childcare employment would increase the labor force participation rate for women aged 25–34 outside of childcare by 0.4%. The same increase in childcare employment would have about two and a half times greater impact on women aged 35–44.

Of course, some men do childcare at home, but this is primarily an issue related to women’s experience in the labor market.

Childcare workers can earn more money in retail

One interesting feature of our findings is how closely the results correspond to employment rates in child care programs. Mothers aged 25 to 34 are more likely to have younger children who require more supervision. Their older sisters aged 35 to 44 are more likely to have older children who require less supervision.

Thus, the employment of childcare workers has a much greater impact on the labour market participation of people aged 35 to 44 than of people aged 25 to 34.

This part of our work is usefully viewed as a measure of the supply of child care services. To develop this question, we delve into the impact of wages on people’s willingness to work in child care. We find that increasing child care employment by 10% would require an increase in wages for all child care workers of about 8%. Economists call this the elasticity of labor supply.

This industry is unusual in the size of the pay increase needed to increase employment. This makes sense when you compare the wages of childcare workers to other sectors with similar educational requirements.

In 2022, the last full year for which we had data, the median childcare worker earned $13.20 an hour. In the same year, the median retail worker earned $5.10 an hour more, and the average transportation and warehousing worker earned more than twice as much as childcare workers.

The typical childcare worker has a ton of options available in the job market that pay much better for similar skills. Any increase in childcare availability will require more people, and the only way to do that is to pay much higher wages.

There is no evidence that Indiana has too few child care training programs or too few people willing to do the work. There is clear evidence that wages are too low to expand child care.

It is always worth remembering that wages are a factor influencing the demand for and supply of labor.

For many families, day care is not worth the price

We also looked at the demand for child care services. This part of our study was a simple accounting exercise about a family’s financial decisions about child care. Our example involved a family of four, in which one spouse earns $57,000 a year, just outside the highest threshold for child care support.

Question: How will the decision to take up employment affect the family?

Childcare costs were $5.28 per hour per child—the average across the three cities we studied. Then we wanted to illustrate the hourly wage a spouse could earn, net of income and payroll taxes and childcare costs. The results are shocking and clear.

At hourly wages of less than $15 an hour, this family loses money by having a second spouse working. When wages rise to $21 an hour, which is about the average wage for working women in Indiana, the net wage increases to just over $3 an hour.

For this mom to earn $7.25 an hour — the national minimum wage — she would have to earn almost $27 an hour, more than her husband.

It’s no wonder so many families are choosing not to use paid childcare services.

That’s not to say there aren’t policy options. It’s just that they aren’t directly child care policies. If Hoosier workers were paid better, the child care problem would solve itself. More affluent families could pay higher child care costs, which would raise the wages of child care workers.

Direct subsidies seem impractical in a legislature that has consistently cut, not raised, education spending. My best guess is that child care subsidies would cost about half a billion dollars for the under-five age group and half that for children ages 5 to 14. So, as much as $4.5 billion per year if every child participated.

The real, lasting cure for our child care problems is a long-term effort to better educate the workforce, which can then command higher wages. Indiana’s child care problem is really an educational attainment problem, nothing more or less.

Michael J. Hicks is director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University.