Profits not driving inflation? Better check with parents using childcare

It seems Australia’s for-profit childcare providers — who provide around 70% of childcare centre places, and 70% of all childcare in major cities — didn’t get the Reserve Bank’s memo that profits aren’t driving inflation. That is, at least according to the leftwing firebrands at the Australian Competition and Consumer Commission (ACCC).

The ACCC’s interim report on the childcare sector contains some interesting data on the costs facing the families and carers of the 1.275 million under-five Australians in childcare. It shows that for-profit childcare providers charge more than non-profit providers across all types of care: childcare centres, family day care and outside-school-hours care. It also shows that for-profit childcare centres have increased fees by 20% since 2018 — outstripping both the wage price index (10%) and the consumer price index (15%).

Why might that be the case? “For-profit providers may also seek to maintain profitability and consider the profit level when setting fees,” the ACCC suggests.

The commission says that parents and carers have at least been getting a little bit more for their money. “The share of childcare services with an ACECQA rating that are meeting or exceeding the National Quality Standard has risen from about 78% in September 2018 to 89% in December 2022. On average, National Quality Standard ratings are significantly higher for centre-based day care and outside school hours care services than for family day care…”

And to complicate the profits-driving-inflation narrative, even though for-profits dominate the childcare centre sector, non-profit childcare centres have increased their fees by almost as much in the same period — 19%, bearing in mind that their fees are lower to start with.

Things get even more complicated when you try to apply standard economic assumptions to childcare. Those of us who spruik greater competition as a tool to reduce profit-gouging by corporations might have to eat their words: the ACCC report shows that greater competition does nothing to reduce childcare fees — “the average daily fee for centre-based day care services is higher in areas with more services within a two-kilometre radius of the service” (emphasis added).

That may be because those kinds of childcare centres are likely to be in more affluent urban areas — with higher land costs, and with poorer access to childcare workers who are less likely to be able to afford to live nearby. But, the ACCC says, they also “may be more likely to operate in more advantaged areas and charge higher fees, as they expect households have a higher willingness or capacity to pay”.

Even so, for-profit providers charge higher fees than non-profits no matter where they are — major cities, regional centres, or remote locations (although for-profits are less likely to operate in remote areas).

And the argument that bigger means more efficient doesn’t apply in childcare either — at least not in a way that parents and carers can see. Large providers always charge more than medium-sized providers, which charge more than small providers, no matter where the service is located. And that applies to non-profits as well.

This is only an interim report. Some of the issues raised about pricing profits will be further explored. But it seems parents and carers wondering why they’re paying so much more for childcare are unlikely to get much help from standard economics.