Newsletter subscribe

FreeState, Newsletter

Making Childcare Less Affordable for Working Families: Raising the Minimum Wage

Posted: August 10, 2016 at 6:19 pm   /   by   /   comments (0)

Mark UncapherBy Mark Uncapher

In recent weeks, Donald Trump’s campaign clarified his support for raising the Federal minimum wage from $7.25 per hour to $10.   In supporting a hike, he joins Hillary Clinton who supports an increase to $12 per hour.  Both take a more moderate position than Bernie Sanders’ $15 per hour.

In 2013, The Montgomery County Council joined in a regional effort with Prince George’s County and the District of Columbia to raise the minimum wage, which reached $10.75 as of July 1 of this year.  The rate for the rest of Maryland moved to $8.75 at the beginning of July. Five of the Country Council’s nine members are already pushing a further increase in Montgomery’s minimum wage to $15 per hour by 2020.

Raising the minimum wage is certainly a feel-good and even a well-meaning attempt to help workers.  Yet the economic data compellingly demonstrates that these increases come with economic costs, resulting in the least skilled having fewer available jobs and an increased cost of living.  Minimum wage news stories usually focus on the restaurant industry. Some stories suggest, for example, that McDonald’s can cut manpower by using more electronic kiosks to automate the ordering process.

Far less attention is paid to the other collateral damage, such as the impact on child care costs of working families with young children.  Labor costs make up about 80% of child care expenses.  Unlike a fast food restaurant, which can innovate with automation, child care staffing ratios are generally fixed by regulation.  Consequently, a doubling of labor costs produces at least a 60% increase in overall costs.  Since 2009, the cost of child care has increased at a 2.9% annual average, nearly double the overall inflation rate of 1.6%. The child care cost hikes accelerated in 2014 and 2015, coinciding with higher child care wage costs in a number of states.

Marked differences among the states can already be observed as more jurisdictions increase local minimum wage rates.  Two jurisdictions already at or above a $10 per hour minimum wage are Massachusetts and the District of Columbia.  Their average child care costs in a day care center in 2015 are among the highest in the country:

  • DC                           $22,631 Infant        $17,842 for a four year old.
  • Massachusetts      $17,062 Infant        $12,781 four year-old.

Compare these costs with two nearby states that continue to apply the $7.25 Federal minimum wage.

  • Pennsylvania        $10,640 Infant        $8,072 four year-old.
  • Virginia                  $10,458 Infant        $7,957 four year-old.

To put the District’s costs in perspective, the cost for an infant equates to 88% of the income of a single parent at the poverty level.  After considering taxes and work related expenses, not working become an economically attractive option.

As one expect with Maryland’s variable minimum wage rate among its counties, child care costs fall between the jurisdictions at the Federal rate and those with a higher level:

  • MD                      $13,932 Infant            $9,100 four year-old

Hillary Clinton has promised a new spending program to cap all child care costs at 10% of family income. In classic liberal fashion, the response to one set of problems made worse by government is to create or enlarge another government program. (If fully implemented, a DC family making up $400,000 annually, at the top 1% income level nationally, but with two kids in day care would claim a government child care subsidy.)

Not to be outdone, speaking at the Republican National Convention, Ivanka Trump promised that her father would “focus on making quality childcare affordable and accessible for all.”

President Lyndon Johnson launched his “War on Poverty over 50 years ago.” Yet today, the percentage of Americans below the poverty line remains at 15 percent, which is where it was in the 1960s.  To be sure, the composition of the poor has changed.  The percentage of African-Americans, married couples and elderly in poverty has declined sharply since 1964.  However we made our greatest progress in reducing poverty during periods of prosperity, only to see the poverty rate increase again during harder times.  A stronger correlation exists between reductions in poverty rates during periods of low unemployment than with minimum wage increases.

Simply put, having more jobs and better wages does more to reduce poverty.  A productive work force focused on “high value added” activities, and not work that can readily duplicated in lower wage countries, is the best prescription for higher wages.