We put my daughter on a waitlist for the daycare her siblings attended when she was one month old. Fourteen months later, she is still waiting, and we are looking around for other options. Almost every daycare I contact is full, with many saying their waitlists run into 2025.
This sounds like a classic shortage: demand exceeds supply at prevailing prices. But I am puzzled by such a shortage in the absence of price controls. Why don’t these daycares simply raise prices enough to eliminate their waitlists?
Theories:
- The kind of person who runs a daycare is not inclined to act as a ruthlessly efficient profit maximizer. This probably explains some of it, but some of the daycares are literally publicly traded for-profit corporations, and they still have big waitlists.
- Daycares deliberately underprice infant care as a loss leader to sell care to older kids. Sure, they could raise prices for infants and make more money today, but they want to make sure their preschool stays full down the road, and the easy way to do that is to keep infants as they age.
- This is a temporary dislocation due to Covid. Demand fell off during Covid, some centers closed, then demand came back and the remaining centers are full. Perhaps opening a new center would be a good business, but regulation is slowing this down, or people just haven’t realized the opportunity yet.
I think there is something to each of these, but I still feel puzzled, especially since the most expensive locations seem to have the longest waits (at least here in Rhode Island). I can’t come up with a definite answer without lots more data on prices, waitlist sizes, entry, and exit. But I’d love to hear your theories.
Economist Writing Every Day 
If we’ve both blogged about, then that means it’s a paper waiting to be written: “Good private daycares in desirable urban areas are expensive but have unbelievable waitlists. Donald Shoup advocates that cities should charge more for parking. He reasoned that every city block should have an open parking space. Instead of spending valuable time circling like a vulture, you should just pay a lot of convenient parking or else know you will have to go somewhere else. Would the same logic apply to the good daycares?” https://economistwritingeveryday.com/2022/02/05/day-care-and-new-pre-k-findings/
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The adjustment cost point makes sense
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My experience with infants in PVD from 20011-2016 suggests it was not covid.
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I suspect the price of daycare is capped by the after tax typical wage. If the cost of daycare exceeds some percent of one parent’s wage, then that parent is likely to just stay home. So the demand curve does not taper gently with price increases, it drops suddenly at some threshold.
Hope you are well! Always appreciate your analysis!
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Parents already feel daycare prices are extremely high, so I wonder if raising them further comes with a concern that expectations will be even higher from parents in terms of catering to any specific child’s needs. Whereas a long wait-list is an easier way to signal desirability and replaceability of any one family.
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All of your reasons might have some truth. You missed the classic non-market clearing equilibrium story: efficiency wages. In this case set by the supplier. They keep their price below market clearing in order to avoid costly turnover in children. Childcare is labor-intensive, so keeping the slots full matters a lot for thin margins.
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A lot of daycare is government funded (so they define the payments). In addition, the people who work there don’t make very much. My wife that for a while, it paid around $9/hr. No bennies.
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Yes. And the government is a big one of many demanders. Greater demand puts upward pressure on price. Your story does explain daycares that participate in those benefits, but doesn’t explain daycares that don’t accept those benefits.
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Since we live in a relatively poor rural area and all my kids are college age, I don’t have a good experience with private (non gov funded) daycare costs. Unfortunately they do not typically list rates online.
My wife talks occasionally with the owner of the daycare she used to work for. The rates are set by the government and those that are not government funded, they have not been able to raise the rates for fear of price shocking their customers. The margins are pretty thin, mostly going to labor (which isn’t much in UT). Most of the employees are part-time, or purposely under 40 hours so as not to be required to give benefits. Usually moms or college students looking to pick up some extra funds.
I know some employers have their own daycare systems, like the local big employer in the state, InterMountain Healthcare, provides a subsidized daycare. Other daycares are in-home setups usually in the form of “preschool”. These were fairly reasonable, as of 10 years ago..
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