Warren and Ocasio-Cortez’s Confused Childcare Economics

Ryan Bourne and Nathan Miller

“It’s basic supply and demand,” Elizabeth Warren said in a recent video as she and Alexandria Ocasio-Cortez revived their latest push for government-subsidized childcare. 

Her argument was an example of what the late British economist David Henderson called “DIY Economics”: a “common sense” appeal to economic reasoning that falls apart when you think through its microeconomics. 

In Warren’s account: Childcare is expensive because there are too few workers, too few workers because pay is too low, and the fix is for the government to subsidize care, raise pay, and draw more workers into the industry. 

But this blurs two very different ambitions: making childcare cheaper to deliver and making someone else pay for it. Warren’s Child Care for Every Community Act is built around a federal guarantee of “high-quality” care, capped family payments, and wages for childcare workers comparable to public school teachers. It is a financing plan, not an answer to making childcare prices lower.

Warren is right about one thing: childcare can be expensive. Child Care Aware says the national average annual price hit $13,128 in 2024, up 29 percent since 2020, outpacing general inflation. In 49 states and Washington, DC, center-based care for two children costs more than the median rent. 

Warren and Ocasio-Cortez’s response is taxpayer-funded subsidies. Families below 75 percent of their state’s median income would be fully subsidized, and everyone else would have costs capped at 1–7 percent of income, based on a sliding scale. The pair of lawmakers says most families would pay no more than $10 a day as a result.

But their bill then also says childcare workers should receive wages and benefits comparable to those of similarly credentialed local public school teachers. That amounts to raising the underlying cost of delivering care before then transferring who pays that higher cost from parents to taxpayers.

Why is childcare expensive? It’s not an absence of government involvement. Primarily, it’s because childcare is a labor-intensive service overseeing something we care very much about. The St. Louis Fed reckons 60 to 70 percent of provider costs are wages and benefits. Combine that with the limit of how many kids most modern parents would tolerate a carer minding, and the “productivity” of childcare workers is relatively low. That explains why the median childcare worker earned only $15.41 an hour in May 2024. 

The deeper force is Baumol’s Cost Disease. As automation raises productivity and wages across other parts of the economy, childcare wage growth must keep up to retain workers. But since it’s difficult to automate childcare or squeeze out greater productivity, relative prices must climb to support rising wages. Add modern, high-income parents’ growing demand for high-quality childcare, and there are good reasons why childcare prices will be relatively high, especially in high-wage major cities.

That is why Warren’s “worker shortage” explanation misses the mark. In an ordinary shortage, higher wages attract more workers, and supply rises—assuming buyers can pay the higher price. But the problem here is that the underlying service is costly, parents are only willing and able to pay so much, and labor is the biggest part of the cost. In a market like that, mandating higher wages cannot possibly make care cheaper. One 2023 economics paper found that even a 10% increase in the minimum wage was associated with 4 to 8 percent higher center-based childcare prices, as providers passed much of the higher labor costs through to families. 

What would actually lower prices? Deregulation, which I doubt Warren would embrace. In an open, pluralistic market, one could imagine all sorts of childcare arrangements at various price-quality bundles, ranging from intensive educational environments to care-sharing arrangements for cash between families. Increasingly, however, government regulations make any lower-cost options unfeasible. Stringent staff-to-child ratios and credential requirements, calibrated to the preferences of affluent parents, constrain supply for the poor in particular and push prices up for everyone. And other options—home daycares, nannies, au pairs, and cash-based sharing arrangements—face supply-restriction regulations too.

The best-known academic study on staff regulation for centers shows that stricter state regulations reduced the number of center-based establishments, especially in lower-income markets, while raising quality mainly in higher-income areas. Regulation to ensure “quality” creates winners and losers: more upscale care in some places and less care altogether in others. 

Even the Center for American Progress concedes that some standards are “not directly tied” to child health and safety, can create unnecessary barriers for providers, and should be pared back; it also explicitly recommends removing zoning red tape and revising burdensome local restrictions on home-based care. When even progressives admit the rulebook is blocking supply, it probably is. 

But there are other deregulations that would help. In Cato’s forthcoming Handbook on Affordability, my colleague Chelsea Follett details reforms beyond ratio relaxation and stripping away credentialism for childcare centers. Federal and state governments could relax the strict criteria for the au pair program, expand the scope of EB‑3 visas for childcare workers, allow nannies to opt for independent contractor status, remove facility mandates requiring a bunch of amenities, and make home-based childcare legal by right, overriding exclusionary zoning. All would increase the supply of childcare while putting downward pressure on market prices.

But Warren isn’t really interested in making childcare cheaper to deliver. She would instead take an already expensive, labor-intensive service, layer on public-school-style compensation and Head Start-style quality expectations, and hand the higher bill to taxpayers. It’s doing for childcare what the government has already done to healthcare.

The political sales pitch is “cheaper childcare.” The economic reality is “higher-cost childcare, financed differently.”

Source: https://www.cato.org/blog/warren-ocasio-cortezs-confused-childcare-economics