Rising Strains in Childcare and Early Education – Econofact

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Labor Markets

By ·March 7, 2024


Prime-Age Women's Labor Force Participation

The Issue:

The systems for providing childcare for infants and toddlers and pre-K education for young children are under strain in the United States. The cost of childcare severely stretches household budgets, especially for poorer families. Furthermore, in many areas commercial childcare options are very limited, or even nonexistent. There are economic arguments in favor of government support of child care since its benefits accrue to society at large and not just to the families using these services. But government support of childcare in the United States is low compared to many other OECD countries and the support that was provided as part of the COVID pandemic response expired last year. Why is childcare absent in many places, and so expensive where it is available? What are the economic and social consequences of the insufficient provision of childcare?  What types of policies would make childcare and pre-K education more affordable, more accessible and more sustainable?

The failure of the childcare and early education business model has serious economic and social consequences.

The Facts:

  • The high costs and limited availability of childcare and pre-K education present a substantial challenge for parents of young children in the United States. More than half of working parents face significant challenges to finding childcare that is affordable and high quality, according to a 2022 survey by Ready Nation. Child Care Aware estimates that the average annual cost of childcare for one child under six was $10,600 in 2021— more than a third of a single parent’s average income. Such costs have risen 220 percent since 1990, well in excess of the 140 percent rise in the general price level. And the cost relative to income is highest for low-income families, many of whom are minorities. The cost of care for two young children absorbed 26 percent of the average income of a white working mother, 42 percent of income for Hispanic mothers and 56 percent for Black mothers in 2017, according to a report cited in the 2023 Kids Count Data Book (see page 7). 
  • There are also areas where childcare is simply not available. A 2017 study that covered 22 states by the Center for American Progress found that more than half of the states’ residents lived in neighborhoods or communities either lacking any childcare options or with so few childcare providers that there were more than three children for every licensed childcare slot. These “childcare deserts” are disproportionately located in low-income urban and rural communities. Working families often have to resort to relying on friends and family. Difficulties in finding available childcare are also particularly acute for those engaged in irregular shift work or who work at night. In addition, an estimated 54 percent of young children do not have access to early childhood education, according to the Annie E. Casey Foundation’s 2023 Kids Count Data Book.
  • The high costs and limited availability of childcare and early education reflect the dependence of these services on a relatively large number of workers per child. Labor costs account for 50 to 60 percent of licensed childcare providers’ costs according to the Center for American Progress. To qualify for government support, childcare centers need at least one qualified care provider for every three children (and must also meet minimum health and safety standards, although such standards are often not fully met). The nature of this work offers little scope for increases in labor productivity, which results in low profits for providers, typically less than one percent of revenues. Low productivity also results in low pay for workers; the median pay for credentialed childcare workers was $13.71 per hour in 2022, about half of the average pay for production and non-supervisory workers and 23 percent less than other workers with similar skills and training. One in seven childcare workers live below the poverty line (see here). Low pay and high stress result in high turnover. Childcare providers find it increasingly hard to compete for workers with other sectors that pay higher wages. 
  • The failure of the childcare and early education business model has serious economic and social consequences beyond those directly affecting families. High quality childcare and early education can improve children’s cognitive and social-emotional development, reducing costs to society over the longer term. A growing body of research has linked quality care to reductions in costs that are associated with poor education, including low-paid and unstable employment; dependence on social welfare services; and increased crime and drug use, among others (see here). Difficulties accessing childcare also discourage some parents, mothers in particular, from entering the labor force. Others who do work outside the home face the challenge of simultaneously managing work demands and the needs of their children, leading to absenteeism and on-work stress. Strains from these childcare challenges cost American families, businesses, and governments $122 billion per year through lost earnings, lower productivity, and foregone revenues, according to ReadyNation
  • The benefits to the economy and society from more affordable and more available childcare build the case for government support for this industry and for parents who need childcare. Government intervention in a market is usually justified in the presence of “market failures.” A recent U.S. Department of the Treasury report points out several of these failures as relates to childcare. Typically, parents need childcare at an early stage of their careers, when their incomes are lower than they will be subsequently. Parents cannot borrow against their future earnings, and this “liquidity constraint” is a classic market failure. Another market failure is the difference between the private and social benefits of childcare such as a better-educated workforce and a stronger and deeper labor market. A long-term follow up of the Perry Preschool Project, an influential program that demonstrated the benefits of quality early education, found that each dollar invested in the preschool programs paid off more than nine times in terms of benefits to society. Government support also promotes greater equity since lower-income and minority communities disproportionately face high costs of childcare relative to income as well as childcare deserts. 
  • While there has been bipartisan support in the United States for government programs at Federal, State and local levels to help families with young children, these efforts tend to be less ambitious and less well funded than in other rich countries and need to be renewed each year. All told, the U.S. is estimated by the OECD to spend 0.35 percent of GDP supporting childcare and early education, compared to an OECD average of just over 0.8 percent and over 1 percent in France and some Nordic countries, based on 2019 data. Differences between countries in the support for childcare and other parental benefits can partially explain differences in women’s labor force participation across countries and why the United States has been falling behind other OECD peers (see chart).  The U.S. Federal Government does provide a child and dependent care tax credit, as well as a separate child tax credit (unrelated to childcare payments), but the full amount is not available for low-income families. The Childcare and Development Fund (CCDF) is a block grant program that provides federal funding to state and local governments and through programs to support early education such as Head Start – but less than 20 percent of families eligible for assistance from the CCDF actually receive support, in part because of lack of funding: these  programs are subject to annual budget appropriations and are not ongoing entitlements, as is the case with Medicare. 
  • The increase in public spending on childcare and early education in the US during the COVID-19 pandemic illustrates the potential benefits of government support. In response to the impact of the public health crisis on the childcare industry, $24 billion in relief funds were distributed to states through the American Rescue Plan Act (ARPA) and, according to a report by The Department of Health and Human Services, the funds served 220,000 childcare providers, saved the jobs of more than 1 million early educators, and enabled continued care for as many as 9.6 million children. However, these additional supports came to an end in September 2023.

The expense of childcare in the United States, and the lack of sufficient supply relative to demand, will hold back economic growth and have serious long term social as well as economic consequences. Many groups — civil society and corporate as well as governmental —have advocated for policy actions to address the issue. Realistically, a solution requires a multifaceted approach combining agile use of public funds with private sector initiatives. Various proposals have been made by legislators from both major political parties to provide deeper and more long-lasting support for childcare. But agreement on legislation has not been reached. This reflects different views on the appropriate role of Federal vs state and local governments, the role of religious establishments, and the tradeoff between parental childcare and out-of-home childcare. It also reflects concerns about fiscal costs at a time of large budget deficits and high public debt.

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