Childcare costs now rival college tuition in most U.S. states. For millions of families, it is not just expensive, but frustrating in other ways—centers close unexpectedly, waitlists can be months long, and staff turnover is high. Amidst these challenges, policy commentators debate whether regulation has anything to do with the dysfunctions of the industry, or if more subsidies are the only way to expand affordability and access in this labor-intensive sector.
Understanding why regulation matters for childcare affordability, access, and family flourishing calls for a consideration of its seen and unseen impacts. The simple relationship between regulations and cost is observable across states that have relatively more or less childcare freedom. For example, childcare regulatory reform can lower costs for providers by lessening credential requirements or the number of staff in each classroom, and do so without observable differences in quality. But cost savings are not the whole story. What is unseen is much more significant: regulatory barriers to entry discourage entrepreneurship, innovation, and progress.
Economist Israel Kirzner coined a term for what happens when regulations discourage new businesses from entering a market: the “stifled discovery process.” Instead of discovering new solutions to problems and frustrations, entrepreneurs go elsewhere. Innovators who might have brought fresh ideas, lower prices, and better services never emerge because government barriers to entry would make their efforts unprofitable. In a regulated market, we don’t know what possibilities are foregone or never pursued.
Childcare Regulation and Childcare Businesses
Childcare regulations are not neutral. In policymakers’ efforts to establish minimum standards for childcare, they shape the size and scope of the market. Most states have hundreds of distinct requirements, and these represent fixed costs that businesses must pay in order to open their doors. Joseph Hotz and Mo Xiao found that increasing regulation reduces the supply of childcare centers, with more prominent effects in low-income areas.
Larger businesses benefit from economies of scale when adding up the costs of regulation. Smaller businesses, such as family childcare homes, don’t get the same upsides. Many states require center directors to have substantial education credentials such as an associate’s or bachelor’s degree in early childhood education. Regardless of whether a center serves 100 children or 10 children, the director must meet the same requirements. Rural areas often become victims of the economies of scale disadvantage, leading to childcare “deserts” because state regulations are not tailored to regional conditions.
Over 90,000 family childcare homes closed between 2005 and 2017, making up most of the decline in licensed childcare facilities during this period. Insufficient income, zoning restrictions, and increasing regulatory requirements were the top reasons they gave for closing. The regulatory burden appears in the data. Among the states who are in the top quartile in childcare freedom, the average decline was 17 percent, while states who are in the bottom quartile experienced an average decline of 32 percent.
Small family childcare homes are more likely than large centers to provide flexibility and personalization based on families’ needs. Communities feel their absence when families struggle to find a provider that fits their schedule and location—family childcare homes can quite literally operate inside neighborhoods, providing a convenient alternative to center-based care.
Feedback Mechanisms for Improving Childcare
Regulations do more than raise costs. Another unseen effect is how regulations quietly disrupt the communication between parents and providers that is necessary for quality to improve. In a well-functioning market, entrepreneurs learn from their customers. Prices, reviews, and reputations signal what is working and what is not. A day care center that ignores parents’ concerns will lose enrollment; one that earns their trust will grow. These feedback loops are how standards improve spontaneously over time.
In the current regulated childcare landscape, regulations, licensing, and a labyrinth of state funding interrupts the feedback process. Providers are no longer accountable only to the families they serve, but to state licensing inspectors and earned subsidy systems that direct a large share of their attention toward compliance and away from customers. Because low supply and government funding nearly guarantees enrollment will be full, centers are incentivized to respond more thoroughly to bureaucrats’ requests than to parents’ requests.
Accountability is one reason why 57 percent of parents who use informal care arrangements say they would still choose informal care even if licensed center care were free and convenient. Safety, trust, and flexibility—not cost—are the primary reasons they reference. Parents prefer someone they know or can vet themselves. Further, informal care can be tailored to unique schedules for part-time workers, gig workers, and self-employed business owners. Informal arrangements offer the oversight, accountability, and flexibility that are suppressed in the licensed childcare market.
Innovation Outside the Regulated Market
Entrepreneurs have found other avenues to meet families’ care needs. New platforms like Care.com, Wyndy, and Carefully are services designed to help families match with providers or build neighborhood care-sharing networks. The spread of nanny-sharing and care cooperatives is helping parents who need more flexibility than a center can offer and keeps some families from paying full-time fees. Though childcare is inherently a labor-intensive service, these innovations reveal that it is possible to use technology to expand care options and put downward pressure on prices.
Employers are stepping in too. Companies like Bright Horizons built a billion-dollar business by treating employers, rather than parents, as the customer. Employers partner with Bright Horizons to subsidize high-quality childcare as an employee benefit. The model has flourished by aiming well above regulatory minimums and by selling a product that helps companies recruit and retain talent.
There are still more childcare “niches” to be discovered that would benefit families and their diverse array of needs. Montessori schools have private accreditation systems and internal quality standards separate from state regulations. Nature preschools and forest schools, which grew more than 200 percent between 2017 and 2022, offer outdoor-focused environments and employ highly educated staff with special training. Many of these schools cannot obtain traditional licenses because their approach doesn’t fit the regulatory framework—some have insufficient indoor square footage, for instance—yet their growing popularity signals a genuine market demand that the licensed sector is not meeting.
Why Childcare Matters for Human Flourishing
A recent study using the 2026 Childcare Regulations Index shows that having more childcare options is effective at supporting family flourishing. States with more childcare freedom had smaller fertility gaps—the distance between average desired fertility, as expressed by women of childbearing age, and the standard measure of total fertility for each state. States vary greatly in the size of their fertility gaps, and childcare is just one piece of the puzzle. But the insight that less-regulated states are relatively better environments for family formation confirms the hypothesis that parents are looking for innovative and flexible childcare solutions to achieve work-family compatibility in a rapidly changing economy.
While many state policymakers focus on expanding childcare funding and public programs, states have another opportunity to improve quality, affordability, and access. Reforming childcare regulations has the potential to invite new entrepreneurs and new ideas into the childcare industry, improve responsiveness to families, and expand the range of options available to meet families’ unique needs. Childcare regulatory reform is not about making trade-offs between quality and cost, it’s a step towards unleashing the creative potential of entrepreneurs and innovators who can move the needle from scarcity to abundance.
