The Most Broken Business in America
Bloomberg Businessweek|November 22 - 29, 2021
Biden’s Build Back Better plan may make day care more affordable for parents—if the providers don’t go belly up first
By Claire Suddath. Illustration by Jee-ook Chai

Deanna Cohen was 20 years into a career in the music industry when she realized it wasn’t going to work out. On paper she looked like a success: She’d worked her way up from college intern at a record company to vice president of music programming at a national TV network. She’d married, had a daughter, divorced, remarried. Then, in 2008, at age 44, she got pregnant with her second child.

Cohen and her family live in Portland, Ore., where the cost of caring for an infant runs as high as $2,000 a month. Preschool for her older child was cheaper, but not much, and most of the programs Cohen found ended at noon. To cover a regular workday, she’d need to tack on aftercare or a nanny. Cohen and her husband were looking at $45,000 a year or more in child-care costs—a figure they could barely afford. “I’m like, what am I going to do?” she recalls. She had a degree in education and had always loved working with children. “So I thought, ‘You know what? I’ll just open a childcare program myself.’ ”

She started small, in 2009, with one assistant and a license to care for a handful of children in her home. In the U.S., that’s how most child-care providers begin. Although there are national chains—the largest, KinderCare Education, enrolls 200,000 children across the country—they collectively serve only 6% of kids. Instead the industry is overwhelmingly dominated by small businesses owned by women.

Cohen named her place Wow & Flutterville, after an audio term meant to evoke the sound of a record needle finding its groove, and designed a curriculum based on the Waldorf early education philosophy, which focuses on imaginative play. She had craft tables and outdoor gardens. Within a few years she added a second location, then a third, each in a rented home. A few years ago she consolidated them into a proper child-care center. Today she has three spaces that, when fully enrolled, serve 131 kids from 6 weeks to 5 years old. Technically, Wow & Flutterville is a daycare. But it looks and operates more like a school. In the U.S., public education usually starts with kindergarten. Before that, parents are on their own. Child care has become the catch-all term for the daycares, nurseries, preschools, or any other place that looks after, and sometimes educates, young children while their parents are at work.

With expansion, Wow & Flutterville can look after more kids, which means bringing in more money. And yet even after more than a decade, it’s almost impossible to make the math work. “Margins are still thin, even when things are good,” Cohen says.

That’s because child care doesn’t work like a normal business. Looking after young children comes with a litany of regulations to ensure the programs are safe. There are square footage requirements, zoning restrictions, earthquake preparedness plans, fire safety codes, CPR certifications, nutritional guidelines, rules about parking and outdoor space, liability insurance.

The priciest regulation is a child-to-staff ratio requiring one caregiver for every three or four infants, depending on the state. That’s a lot of employees, and it explains why quality care for one baby costs more than many families can afford. Cheaper options are often unlicensed and unregulated, and parents have no guarantee their kids are secure.

Because babies are so expensive, a lot of businesses simply don’t accept them. Others charge less than it costs to look after them and load up on older children. According to child-care availability studies, almost 80% of spots are reserved for kids 3 years and older, because they’re subject to more lenient staffing requirements, making them cheaper to care for.

Cohen accepts infants, charging just below $2,000 a month for babies younger than 2 and $1,500 for older kids. That doesn’t leave her much money to pay employees. Before Covid, Wow & Flutterville assistants started off at $15 an hour, barely above Portland’s minimum wage. Experienced teachers made $17. “That’s not a living wage,” she admits. “You really have to love children to do this. I always tell people, ‘If you are deciding whether to be a barista or do this, you should be a barista.’ ” According to the Center for American Progress, about 60% of child-care center costs go to wages and benefits. When something comes along that upends enrollment—like, say, a pandemic— providers hemorrhage money.

Child care in the U.S. is the rare example of an almost entirely private market in which the service offered is too expensive for both consumers and the businesses that provide it. This reality is reflected in two alarming facts: In most states, putting a baby in a licensed child-care facility costs more than in-state college tuition, yet the people who provide that care make an average of about $24,000 a year, less than a fast-food worker or janitor, even though 87% of them have some form of higher education. Every year a quarter of the industry’s workers leave. All this adds up to an exceptionally precarious business model; according to a recent study by the U.S. Department of the Treasury, the typical child-care center’s profit margin is only 1%.

“The free market works well in many different sectors, but child care is not one of them,” Treasury Secretary Janet Yellen said in September. Louise Stoney, a childcare financial consultant who works with state and local governments, puts it more bluntly: “This is an industry that literally can’t generate enough money to survive.”

None of this is news. Or at least, it shouldn’t be. In 1960 the Department of Labor and what’s now the Department of Health and Human Services concluded that a private child-care market “will never be able to meet the current national need.” But there’s never been enough political will to do anything about it. Sure, there are government subsidy programs, such as the Child Care and Development Fund, but they usually apply only to low-income parents and are so chronically underfunded that just 14% of families who qualify for them actually receive any money.

On top of that, subsidies only partially cover the cost of care. Businesses that accept them lose money, so many don’t. “I wish I could serve parents in my own lower economic demographic,” says Ashley Fleming, who runs an in-home daycare in LA and doesn’t take subsidies. “I’m a struggling single mom. I get it. But I can’t afford to help someone like me.”

Last year, Congress’s various Covid relief bills allocated $52.5 billion to keep the industry afloat. It wasn’t enough. Mandated shutdowns dramatically reduced enrollment. More than half of child-care businesses report they’re losing money, and about a third have closed. And though billions in aid seems like a lot of money, other industries got much more. One out of every 55 working women in the U.S. works in child care or early education, yet the Cares Act gave more to Delta Air Lines Inc. than to all of those women combined.

That’s drastically different from how other governments handled things. Many European countries entered the pandemic offering free public preschool and subsidized infant care. France and Germany also had expansive unemployment programs. When providers closed because of health concerns, workers got paid until they could reopen. Parents still struggled to work from home, but at least their nurseries and preschools were still there when it was safe to return.

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