The other day, a blog reader/podcast listener sent in a version of a question I get asked a lot. Good childcare is expensive. Many women — even those with high salaries — earn less than their male partners do. At some point in new parenthood, families run the numbers and note that, after taxes, Mom isn’t earning a whole lot more than the cost of childcare. Since the family is living on Dad’s income whether she works or not, why would it make sense for her to stay in the workforce?
At first glance, this seems like a good question. But neither income nor childcare costs are static. With economics in general, it’s often wise to run the numbers with a long time horizon, rather than look at a specific point in time.
To show this, let’s consider two hypothetical women, Jane and Sally. They are both high-flyers, earning $100,000 a year at around age 30 when they have their first kids. As high-flyers, both expect to see their salaries go up by about 10 percent per year. Both plan to have 2 kids, approximately 2-3 years apart.
Both are also married to very high-earning men — high enough that neither “has” to work, and high enough that when you consider federal, state, local, and payroll taxes, they, as secondary earners, are basically looking at marginal tax rates around 40 percent.
Let’s say that both plan to hire a nanny because this makes more sense with their and their husbands’ work schedules. With payroll taxes, overtime and the like, childcare could definitely run $50,000 (or more) a year.
So Jane and Sally look at this point in time and see some rather dismal economics. Their take-home pay is (maybe) $60,000, and childcare takes almost all of that.
Jane says “why am I doing this? I don’t have to work — why would I miss my kids’ childhoods to earn less than minimum wage? I’ll stay home for a few years until my kids are in school.”
But someone gives Sally a copy of I Know How She Does It as a baby shower present, and she runs a slightly different calculation. First, just as a mental accounting measure, she notes that she could support her family on her own, albeit at a reduced level from her husband, and so if a parent were to stay home, it would not have to automatically be her. Childcare allows both of them to work, so childcare is a joint expense. Only half needs to be charged against her salary. That makes this point in time look better. Again, this is mostly a mental accounting measure, but sometimes it’s helpful.
This part, however, is less of a mental accounting gimmick: Because Sally stays in the workforce, over time her salary rises and her childcare costs fall. If her salary rises by 10 percent a year during those career-growth years of her 30s, through the miracle of compounding, she will be making approximately $214,000 in 8 years when the two children she plans to have are both in elementary school.
At this point, the family’s childcare costs will likely go down; an after-school sitter is generally cheaper than a full-time nanny. It’s also possible that, after 8 years of gaining seniority, Sally (and her husband!) might have more flexibility in their jobs, which can lower some of those costs too. (Since Sally read I Know How She Does It, she manages her schedule to work from home on Wednesdays. She does an hour of work before the kids get up, so she can be done when they get off the bus in the afternoon. Let’s say her husband does the same thing on Fridays….)
Meanwhile, if Jane does want to re-enter the workforce after 8 years, she will not have any of that compounded income growth. Indeed, she will be quite lucky to land a job paying what she earned when she left — partly because she might find those sorts of jobs challenging to take. Her family has gotten used to her being the solution to all family schedule difficulties. If one of her kids gets sick and needs to be picked up at school on her second day on the job, this is going to be a learning and growing experience for all involved.
But even if Jane does land a $100k job after 8 years out of the workforce, and sees her income rise 10 percent per year (i.e. exactly what she would have expected when she left) if Sally continues to see the same rise, then the gap between them continues to grow. Ten years later, when Jane and Sally’s oldest children are looking to go to college, Jane will be earning about $259,000. Sally will be earning $555,000. That is quite a gap (even if both are very high numbers — we need not weep for Jane to acknowledge this!)
Now obviously, these assumptions are all simplistic. Not everyone’s income goes up by anything close to 10 percent per year every year, and even people who want to stay in the workforce can wind up out at various points because of layoffs, health issues, etc. School is not childcare — as many families are rediscovering this year — which means that childcare costs might linger for longer than families might hope. I know this is also a harder decision if mom’s working “costs” the family money at first (that is, she earns less after taxes than the family pays in childcare costs), even if it’s a “loan” that rising income could eventually pay back.*
The point I’m trying to illustrate is that early years figure disproportionately in compounding, which is why decisions based on income shouldn’t be viewed only at a single point in time.
That’s not to say Jane’s decision is wrong or isn’t “worth it.” I suspect that when high-earning women say they are leaving the workforce because they make very little after childcare expenses the bigger issue is that they would prefer not to be in the workforce when their children are young. That is a perfectly fine preference. I understand it. I know, from the time diaries in I Know How She Does It, that women with big jobs still spend large numbers of hours per week with their children. They are not missing their children’s childhoods. But if people would prefer to stay home with their children, and their partners can support the family financially, that is great. I just think the economics are more complex than people often see in those hard early days of pumping and racing home to put a baby to bed and having seemingly little cash to show for it.
*One case I’ve seen recently with the genders reversed: the family paid a nanny more than the father earned at his residency — but the expectation, and reality, was that his income would quickly rise with the end of training.
Photo: Nothing to do with this post, but I love that my roses are still blooming in November.