Above image created with ChatGPT.
I was excited to see Alex Tabarrok devote some space in Marginal Revolution to the possible link of childcare regulation with childcare costs last month.
Although Alex notes that regulation drives up price, he doesn’t think it is the smoking gun. He provides the following graph comparing the cost of child care and pet care over time.
Source: Marginal Revolution July 28, 2025.
Nationally, prices for pet care and child care have both steadily increased. Since regulation is not as stringent for pet care as child care, Alex suggests that Baumol’s cost disease (or effect as he calls it) is the primary driving factor for rising child care costs. More specifically, productivity of childcare and pet care workers is mostly flat, but worker productivity in other sectors has substantially increased. Thus, the price of childcare and pet care has to rise.
I think this analysis, although interesting, masks the possible effect of state-by-state differences in regulation over time. It would be more interesting to produce the same plot for a sample of high childcare regulation states versus low childcare regulation states. Better yet, a simple event study plot of childcare cost for states that make changes to childcare regulation.
Today we see large differences in the cost of childcare across states. The annual cost of childcare ranges from about $8,200 in Mississippi to almost $25,500 in the District of Columbia. Certainly productivity differences cannot explain this discrepancy. And income matters, but it can’t explain all of this difference either. Personal income in DC is roughly twice as high as Mississippi.
To dig a bit deeper, I performed some simple analysis trying to better understand how the cost of childcare relates to childcare regulation. I linked data from Child Aware on the annual cost of full time infant care with data from the Childcare Regulation Index authored by Anna Claire Flowers and her collaborators. The Childcare Regulation Index ranks all states on a scale from 1 to 10 (with 10 being the least restrictive or most free) using group size, staffing ratios, and education/training requirements for staff members.
A simple OLS regression of cost with the index suggests that a one-point increase in childcare freedom is associated with an approximately $806 decrease in annual infant childcare costs. Evaluated at the mean of infant childcare cost nationally, this comes out to be about 5.7%
This simple analysis of course does not control for other factors that might be driving childcare costs. For example, childcare may simply cost more in higher income areas. As an additional test, I also found evidence of a relationship between the share of income that consumers devote to infant childcare and childcare regulation. A one-point increase in childcare freedom is associated with a 0.6 percentage point reduction in the share of income devoted to infant childcare. On average, infant childcare is approximately 21% of personal income.
In short, I think there is more to the story here than productivity differences. Neither my analysis nor the analysis provided in Marginal Revolution tells us all that we need to know about the link between childcare regulation and costs. I would also direct interested readers to two excellent studies by Gorry and Thomas and Ali, Herbst, and Makridis. As data on childcare regulation over time improves, I look forward to more analysis digging into the possible link between rigid regulation and higher prices.
Policymakers in states should not ignore how their childcare regulations are hurting consumers. If states are making it overly difficulty to open or maintain a childcare facility, they are likely to be hurting consumers with less choice and higher prices.