As fees keep climbing, this is why competition isn’t enough to deliver cheaper childcare

Danielle Wood, Grattan Institute

The Australian consumer watchdog is halfway through an inquiry into childcare prices.

The Australian Competition and Consumer Commission’s interim report was released on Wednesday. It comes just days after the federal government’s increased childcare subsidies kicked in on July 1.

This is one of two major inquiries the federal government has commissioned on childcare. The Productivity Commission is also looking at how early education is set up in Australia.

After six months on the job, the ACCC report is full of facts and figures but short on conclusions.

However, reading between the lines of the 146 pages, the implication is competition alone is probably not enough to deliver high-quality and affordable childcare for Australian families.

Childcare markets are highly localised

The first reason for this is choice is much more limited than it may appear. Childcare markets are highly localised. Centres only really compete within a 2-3km radius, because most parents are not willing to travel more than 15 minutes for care.

The ACCC’s survey of parents suggests location and availability are the two most important factors in informing where parents chose to send their child. That’s understandable – if you can’t find a convenient place on the days you need, most other considerations are moot. But that dynamic softens the degree of competition between centres.

The ACCC finds that affordability of care – the out-of-pocket costs parents face – is most important for determining how much care parents use. But crucially, once the decision has been made to use a certain amount of care, price appears less important than other factors. Indeed, price is only fifth on the list of the things parents consider when choosing between centres.

The implication here is price competition is weak. Indeed, fees are actually higher in local markets with more childcare services. This is likely due to a larger number of services in wealthier areas where parents can afford to pay more.

Switching is costly

The second factor that softens competition is parents rarely switch providers.

The ACCC found 65% of parents they surveyed had not switched provider since 2020. One in five of this group said the reason they did not switch was that they didn’t want to disrupt their children. Moving into a new environment and building new relationships with educators is a barrier to moving to a better-quality or lower-priced centre.

Quality is hard to judge

The third reason is it is hard for parents to judge the “quality” of childcare services.

Of course parents want to put their children in high-quality care, but they find it difficult to measure key dimensions of quality, such as the standard of the educators.

The government has tried to fill some of the information gaps by introducing National Quality Standards, but the ACCC found parents do not place emphasis on these – probably because many are unaware of them.

Fees have risen

One trigger for this ACCC inquiry was the increases in childcare centres’ fees – something that has been costly not only for parents and but also governments (who pick up an average of 60% of the fee for centre-based care via the childcare subsidy).

The ACCC shows between 2018 and 2022 childcare fees – the total amount charged – increased across childcare service types by between 20% and 32%. Government subsidises have reduced the impact of these rises on parents, with out-of-pocket expenses for childcare growing at a slower rate.

It is not surprising childcare costs tend to grow faster than inflation. That’s because childcare is highly labour intensive with limited scope for productivity gains. But the ACCC’s analysis show fees have also grown faster than wages over the past five years.

These high fees hurt everyone, but particularly low-income households. The ACCC’s analysis shows out-of-pocket expenses as a share of disposable income were higher on average for households in the bottom 10% of income earners, despite the higher subsidy for this group.

Follow the money

The interim report flags the most important part of the ACCC’s work is yet to come – understanding where the money is going.

The childcare market is highly diverse, with different models of care, and centres run by government, for-profit and not-for-profit providers. Many people struggle to understand how childcare can simultaneously cost so much for governments and parents, while its workers are paid so little.

Some in the industry are making good money. As articles in the financial media regularly remind us, it is a market where private equity and commercial property investors see attractive returns relative to the risks.

In the next phase of its inquiry, the ACCC will examine costs, profits, and quality across the sector. If there are excess profits being made, I’m confident the ACCC will find them.

This next stage of the inquiry will also inform whether the ACCC recommends stronger price regulation for the sector. This interim report is treading softly, but it looks like this is where the ACCC is heading.

The final report is due by December 31.

Danielle Wood, Chief executive officer, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.