Governor Michelle Lujan Grisham announced in September that New Mexico will become the first state in the nation to guarantee free childcare for its residents beginning November 1. While the governor’s intentions may be admirable, her approach misdiagnoses the cause of rising childcare costs and other childcare-related challenges facing American families. Rather than serving as a model for other states or the federal government to follow, New Mexico’s plan is a trial run in the wrong direction.
Rising childcare costs are a real and pressing problem for American families. Over the last four years, formal childcare costs have risen by 29 percent across the nation—far outpacing the general rate of inflation and placing an increasingly heavy burden on working parents. In response, more parents are likely to leave the workforce, postpone career advancement, or have additional children. Aside from New Mexico’s bold strategy, is there any other way to address the childcare burden on families?
Understanding Baumol’s Cost Disease
First, it is important to take a step back to better understand why costs are rising. Much like education and healthcare, childcare is an inherently labor-intensive service that cannot easily benefit from productivity improvements through automation or productivity-enhancing technologies.
This phenomenon is best explained through what economists call Baumol’s cost disease, named after economist William Baumol (1922 – 2017). His theory explains why certain sectors of the economy, particularly those that rely on human interaction and care, experience cost increases that outpace inflation and wage growth in other sectors.
In many other industries, technological advances allow workers to produce more output with the same amount of labor, driving down per-unit costs. Baumol’s cost disease helps explain why service sectors like childcare, education, and healthcare appear slow to adapt and benefit from technological changes. A teacher can only effectively instruct so many students, and a doctor can only see so many patients a day while maintaining quality interactions.
As wages rise in the broader economy, these labor-intensive sectors must compete for workers by raising wages, but they do not experience the same productivity gains that offset higher wages. The result is that costs in these sectors rise faster than the general price level, which is exactly what we are seeing in the childcare market today.
Lessons from Universal Healthcare and Education
The similarities between childcare and other labor-intensive sectors allow us to make some pattern predictions about New Mexico’s approach. Consider, for example, proposals to establish universal healthcare and universal higher education in the United States.
Medical for All proposals have been estimated to cost between $28 and $32 trillion over 10 years, depending on the specific plan. More modest universal healthcare proposals have price tags in the tens of trillions. Similarly, plans for universal higher education—such as making all public colleges and universities tuition-free—have been estimated to cost the federal government between $28 and $75 billion annually.
The enormous cost estimates reflect not only the inherent labor-intensive expense of these services, but also the additional demand that universal access would create among people who do not currently purchase these services. New Mexico’s childcare proposal faces the same economic pressures.
The Supply Problem
New Mexico’s own estimates reveal a huge supply-side problem. The state’s announcement of the new program acknowledges it will need approximately 5,000 additional childcare professionals to accommodate the increased demand that free childcare will generate. This is a massive expansion of physical infrastructure and childcare workers that cannot be achieved overnight, if at all.
The state’s proposal also includes a plan to address quality concerns by incentivizing providers to pay higher wages—they will offer higher rates to providers who pay at least $18 per hour to entry-level staff. This raises the question of if New Mexico will have enough qualified providers to meet the surge in demand, especially if parents aren’t paying higher wages than can be found in other sectors. Currently, New Mexico requires that all childcare workers first receive training in 11 topic areas and maintain 24 hours of additional training each year.
Looking to healthcare policy is particularly instructive here. In higher education, increased availability through government subsidies is causing many students and families to rethink the value of a college degree. Demand for higher education has begun to decrease in many segments, providing some natural correction.
The healthcare scene more closely mirrors what we expect from universal childcare policy. Despite rising costs, demand for healthcare services continues to expand from government-sponsored insurance coverage for select age and income groups. The result has been persistent supply shortages and long waiting lists, especially for specialists and for all different kinds of healthcare services in rural areas.
Much like childcare, healthcare suffers from regulatory constraints that limit supply expansion. Licensing requirements, facility regulations, certificate-of-need laws, and professional credentialing create barriers to entry from responding efficiently to increased demand. Government measures are simultaneously increasing demand while keeping a cap on supply.
Regulation and Childcare Costs
Despite the inherent labor-intensive features of childcare services, regulation also plays a major role in determining the cost of care. This becomes clear when examining cost variation at the state level. For example, Massachusetts, with some of the most stringent childcare regulations in the nation, sees average annual childcare costs exceeding $25,000 per infant per year—nearly double the national average. While often well-intentioned, regulations on child-to-staff ratios, maximum group size, and education and training requirements create substantial barriers to entry for potential providers and drive up operating costs for existing centers.
The contrast between states with heavy regulatory burdens and those with relatively less oversight demonstrates that policy choices significantly impact both cost and availability of childcare services.
A wider range of childcare options would better serve families. Parents are uniquely positioned to understand their children’s needs and developmental requirements, as well as their family’s schedule. They benefit from access to a diverse array of childcare options, including home-based alternatives that can be more flexible and cost-effective than traditional center-based care.
Current regulations often create unnecessary barriers to these alternatives. Many states require childcare center directors to have college degrees, despite limited evidence that formal credentials correlate with better care or child outcomes. Instead of making childcare more uniform, states should create pathways for entrepreneurs who have gained expertise working in childcare to open their own centers on the basis of practical experience.
A More Sustainable Model
New Mexico’s “model for the nation” fails because it ignores fundamental economic principles. In making childcare “free” to all residents while failing to address inherent supply constraints, New Mexico is likely to create persistent shortages and frustrating waiting lists. The state’s Early Childhood Education and Care Department will have to respond with costly expansion projects currently estimated at around $20 million per year. This funding will go toward building up infrastructure that was formerly sponsored by business owners, and it ultimately passes the tab along to taxpayers.
A more sustainable model for childcare reform involves reducing burdensome regulations that prevent new, diverse facilities from opening, creating more career progression opportunities for non-degree holders, and allowing parents to make informed choices about their children’s care. Solutions that increase competition will prove far more effective at lowering costs and improving access than creating a free-for-all over a limited number of “free” childcare services.
