Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Why Your Raise Is Growing Faster Than Childcare Costs for the First Time
Transcript
- Lucas: Alright Luna, I want to talk about something that's quietly been one of the biggest headaches for working parents over the past few years: the cost of childcare. Luna: Oh, absolutely. I've heard from so many listeners — especially parents of young kids — that childcare was eating up a second paycheck. It's been brutal. Lucas: Right. For a long time, childcare costs were rising faster than wages, year after year. But here's the thing: if you look at the data we just pulled this morning, something has shifted. Average hourly earnings for private workers hit $37.50 in May, up 4.2 percent from a year ago. Meanwhile, the childcare component in the CPI — it's only up about 2.8 percent year-over-year. Luna: Wait — so wages are actually outpacing childcare costs for the first time in, what, a decade? Lucas: Roughly, yeah. I ran the numbers back to 2014, and this is the first sustained period where the gap is positive. And it's not a one-month fluke — the trend has been building since late 2025. Luna: That's huge. But why now? What changed? Lucas: Good question. I think there are three forces at play. First, the labor market in childcare itself. Daycare centers have been struggling to hire and retain workers for years. But as wages in the broader economy have risen, centers have had to raise their own wages just to keep staff. That pushes up their costs — but here's the counterintuitive part: because they're competing for a smaller pool of workers, they've also had to get more efficient. Some are cutting hours, consolidating classrooms, or raising group sizes. Luna: So they're holding down price increases by squeezing operations? Lucas: Partly. But the second factor is state-level subsidies. A bunch of states — including Ohio, Michigan, and Colorado — have started using pandemic-era childcare stabilization grants to create ongoing subsidies that go directly to providers, with the condition that they keep prices affordable for families. In Ohio, for example, one center in Columbus got a $200,000 grant last year and actually cut its prices by 5 percent. And that's starting to show up in the national averages. Luna: Wow, that's real. And the third factor? Lucas: Demographics and preferences. The number of children under five in the U.S. peaked around 2020 and has been slowly declining. Fewer kids means less demand pressure on daycare slots. Plus, more families have shifted to hybrid work arrangements where one parent can cover some childcare at home. That reduces the share of families needing full-time center-based care. Luna: So basically, we're seeing this rare moment where the cost of a major household expense is growing slower than paychecks. But is this sustainable? Lucas: That's the multi billion dollar question. The 10-year breakeven inflation rate is at 2.33 percent, which suggests the bond market thinks the Fed has inflation under control. If core PCE continues to drift down — it's currently at 129.6, up just 0.2 percent from last month — that helps keep childcare inflation in check because a lot of childcare costs are linked to rent and insurance, which are also cooling. Luna: But rent is still high in many cities. And insurance costs haven't come down everywhere. Lucas: No question. And this is where the fragility comes in. If the labor market softens — say, we see a spike in long-term unemployment, which is already rising — then wage growth could stall. And if childcare costs keep rising at even 2.8 percent while wages slow to 3 percent, that positive gap disappears. Luna: So this might be a window, not a permanent shift. Lucas: Exactly. And that's why I want to get specific. Take a family in a midwestern metro area with two kids. In 2023, they might have been paying $2,400 a month for full-time care. If their wages grew 3.5 percent that year but childcare went up 6 percent, they were losing ground. Now, if their wages are up 4.2 percent and childcare only 2.8 percent, they've got about $30 more in their pocket each month, adjusted for inflation. It's not a life-changer, but it's a reversal. Luna: And every bit matters when you're a working parent. I know a lot of families who were literally deciding whether it made financial sense for both parents to work. This changes that calculus for some. Lucas: Yeah, it really does. And here's a quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making shows like this possible. We don't run ads, so listener support is what keeps the economics coverage independent and deep. Luna: And we're grateful for every one of you who does. It means we can spend the time to dig into something like childcare cost trends instead of just reading headlines. So thank you. Lucas: Alright, back to the economics. So the question is whether this wage-childcare crossover can last. I think there's a real risk that if the economy tips into recession — and some indicators like the Russell 2000 are down 1.3 percent over the past five days, which suggests small-cap companies are feeling pressure — then wage growth could be the first thing to crack. Luna: Because childcare is a necessity, demand doesn't drop much even in a downturn. So costs might stay sticky while wages fall. Lucas: Right. Childcare is what economists call demand-inelastic. Parents still need it. So if wages slip, the gap reverses back to negative. That's the pattern we saw after the 2008 recession, and again in 2020. Luna: So the key variable is really the labor market. If we get a soft landing — or no landing — wages keep growing and families keep benefiting. Lucas: Exactly. And the May jobs report coming out Friday will be a big clue. The ADP private payrolls number came in stronger than expected at 122,000. If Friday's official number also shows steady hiring, that supports the wage-growth scenario. If it's weak, we might be looking at a narrowing window. Luna: One thing I'm curious about: are there regional differences in this trend? Because childcare costs vary hugely by state. Lucas: Great point. The national average masks a lot. In places like San Francisco or New York, childcare costs are still above $2,000 a month per child, and wage growth there is actually slower than in the South or Midwest. So in those high-cost cities, the gap may still be negative. But in metro areas like Columbus, Nashville, or Charlotte, the improvement is real. Luna: That tracks with what we've seen in past episodes — where you live matters as much as your raise. Lucas: It really does. And that's the nuance that gets lost in the national headlines. So if you're a listener in a high-cost city, don't assume this applies to you. Check your local CPI data. Luna: So bottom line: for a typical family in much of the country, this is the first time in years that a raise is actually ahead of childcare inflation. But the clock might be ticking. Lucas: I think that's fair. We'll be watching Friday's jobs report and the May CPI release on Wednesday to see if the trend holds. And as always, we'll break it down for you here.