Finding quality, affordable child care has long been a nightmare for parents. Unfortunately, market forces alone are unlikely to solve the financial problems that both consumers and businesses face. With razor-thin profit margins, child care facilities cannot afford to lower their prices even though these prices are out of reach for many families. Solutions involve collaboration among parents, employers, child care businesses, and federal and state governments.
Video Spotlight: The Market Controls Child Care Costs in the U.S. Can That Be Changed? (July 12, 2021, PBS NewsHour)
This post is based on the Bloomberg Businessweek article, How Child Care Became the Most Broken Business in America, by C. Suddath, November 18, 2021, and the YouTube video in the Spotlight. Image source: Rawpixel.com/Shutterstock.
1. Why is it difficult to break even when operating a child care facility? What is the impact of increasing capacity by one worker who works 160 hours a week and is paid $15.00 an hour ?
Guidance: To break even, the total revenue must cover both fixed and variable costs. In the child care business, the costs are high, and the prices charged to cover these costs are too high for most parents. The costs include building, utilities, certification, insurance, supplies, food, certifications, office and administration, employee wages and benefits, etc. Because of a stringent child-to-staff ratio, a large workforce relative to the number of children is required. This is why caring for an infant costs about $2,000 a month. Similarly, square footage requirements constrain the number of children who can be enrolled, thereby limiting revenue growth. Increasing capacity by one worker would result in a wage-related cost increase of $2,400 a month. If benefits amount to about a third of workforce expenses, then another $1,200 increase can be expected. Therefore, to cover the cost of one more employee and all other related costs, revenue would have to increase by more than $3,600 a month. Note: develop several scenarios of revenue increase (e.g., 1 infant and 3 toddlers) to show how difficult it is for a business to recapture the cost unless it charges very high prices.
2. Compare parents’ and child care center owners’ perspectives on regulations? Can they be bridged?
Guidance: Parents want high-quality childcare and probably feel that the regulations protect their children. They may thus want them to stay in place. On the other hand, the people operating the child care centers see the regulations as cost burdens and limits to revenue growth. Perhaps some of these regulations could be relaxed on the basis of new studies (evidence-based care) showing that good care can be provided with less stringent constraints. However, in the short run, it seems that loading up on older children is the only way for child care centers to make money while charging “lower” prices. Parents with infants may have no other recourse than using unlicensed and unregulated child care providers, which is the current way of bridging perspectives. Government subsidies provide opportunities to help child care providers cover their costs while maintaining strict regulations, but these subsidies are never permanent and would result in higher taxes in the long run (e.g., European countries), which is a highly politicized issue.
3. If you were the owner of a child care center, what could you do to have more efficient operations while complying with regulations?
Guidance: Although the business owner might not be able to invest in additional training to lower failure costs, training programs targeted at reducing the most frequently occurring problems (Pareto analysis) may prove useful. A thorough analysis of inventory item usage may lead to better ordering policies and lower inventory costs. Pooling purchases with other child care centers increases the likelihood of getting quantity discounts from vendors. Enrolling qualified parents to help apply for grants can also be helpful. Reaching out to business schools to get student teams involved in various projects (e.g., developing a simple inventory system, identifying process and outcome measures to be displayed on a dashboard, analyzing performance data, etc.) could improve operations with a minimal investment. Recruiting volunteers for some maintenance and office work could be cost-effective as well.