Author(s)
As $39 billion in child care assistance funds from the American Rescue Plan Act (ARPA) of 2021 began to phase out last September, millions of child care providers in the U.S. faced the prospect of having to either raise tuition, cut workers’ wages and benefits, or downsize their operations.[1] As a result, onlookers warned that up to 3 million children could experience disruptions in child care nationwide — a “child care cliff.”
The U.S. child care industry has faced major challenges in recent years, including high staff turnover and a shortage of providers — particularly affordable ones. These issues only intensified during the COVID-19 pandemic, which brought the growing child care crisis into focus.
This report explores the current state of the U.S. child care industry and reviews solutions that other countries in the Organization for Economic Cooperation and Development (OECD) have employed to address their own child care challenges. It reviews four policy options that could be leveraged to address the child care crisis in the U.S. at the federal level — universal prekindergarten (pre-K), child care provider subsidies, expanded tax credits, and subsidies for employers that offer child care as a worker benefit — and examines the benefits and downsides of each if used individually or in tandem.
Ultimately, with the federal budget already under heavy strain, lawmakers will need to carefully consider policy goals for child care relief and look to options with a low price tag.
State of the US Child Care Industry
In 2019, about 40% of U.S. children under age 6 were cared for solely by their parents.[2] The remaining 60%, approximately 12.72 million children, received some form of nonparent care. For these children, the most common care arrangement was center-based care (day care center, preschool, or pre-K), followed by relative care (grandparents or other family members) and nonrelative care (nannies or neighbors). These last two, more casual arrangements were less common.
According to the Bureau of Labor Statistics, roughly 1.3 million workers were employed in the child care industry in 2022.[3] For occupations associated with paid child care, wages varied significantly by skill level, education requirement, and employer. Table 1 shows that at the low end of the wage profile, child care workers received a median hourly wage of $13.71, equivalent to $28,520 annually, while preschool special education teachers, who are usually not paid hourly, received $62,240 per year. Meanwhile, two-thirds of early childhood workers — child care workers and other preschool teachers — received wages much lower than the national median for all workers.
Table 1 — Early Childhood Workers: Number of Employees and Median Wage by Occupation
Among child care occupations, variations in pay and workforce size are associated with training and education requirements. For instance, close to 40% of child care worker openings require a high school diploma, and very few require a college degree. For preschool teachers, 30% of employers require a high school diploma and another 30% require candidates to have some college experience. Among social workers, about 70% of employers require a college degree, and 25% require a master’s degree or certificate. Finally, for pre-K special education teachers, 56% of employers require a master’s degree and 32% require a college degree.[4]
The pay disparity also has to do with employers: Many social workers and special education teachers are employed by the federal or state governments, while child care workers and pre-K teachers are more likely to work for smaller, private establishments.
High Turnover Spurred by the Pandemic
In the U.S. child care industry, where close to 70% of workers earn less than the national median wage, turnover is unsurprisingly high. In Nebraska, 15%–26% of the child care workforce leaves their job each year, primarily due to low wages in the industry and better opportunities elsewhere.[5] Some day care operators have reported losing workers to fast food chains or retailers offering better pay. Nationwide, turnover rates are estimated to range from 7.5%–23.1%, with higher turnover associated with lower pay.[6] Meanwhile, researchers have found it does not take a large amount of additional pay to increase retention.[7]
Child care customers, mostly working parents, face a similarly challenging environment. Many report feeling frustrated and stressed when looking for care providers.[8] Not only are providers difficult to find, but waitlists are usually long, and costs tend to be high. A Department of Treasury report estimated that, on average, families spend 13% of their household income on child care.[9] This is more than they spend on food, and it is not uncommon for parents to spend more on child care than on mortgage payments.
Back in 2019, few thought the child care industry could get much worse. But in 2020 the COVID-19 pandemic disrupted nearly all aspects of daily life, and child care was no exception. Many parents became full-time caregivers, with the burden becoming a source of tension for many families with young children.
When the pandemic began, a large number of workers left the child care industry following the shutdown of care facilities. As the pandemic gradually came under control, the industry recovered somewhat, but the workforce never returned to its pre-pandemic level. In November 2023, there were 30,400 fewer child care jobs than in February 2020.[10]
Some observers believe that the negative impacts of the pandemic on the child care industry have yet to completely unfold. Although many providers closed permanently during the early stages of the pandemic, the effects of reduced supply were not immediately felt, since many parents worked from home. As the economy reopened, the need for child care increased, and the shortage slowly surfaced.
With the federal subsidy through ARPA running out and Congress yet to approve any funding requests from President Joe Biden’s administration, the shortage may worsen.[11] The robust U.S. labor market might even be hurting the child care industry, as potential workers may be finding higher wages in other sectors.[12]
Government Subsidies for Disadvantaged Households
Unlike K-12 education, child care in the United States is primarily a private, or consumer-funded, expenditure. The federal government does, however, provide subsidies to help certain households pay for care, with a focus on assisting low-income and disadvantaged families.
Before the pandemic, the Federal Child Care and Development Block Grant (CCDBG), enacted in 1990, was the major federal funding source for these means-tested programs. The federal government disburses these funds to the states, which in turn use them to subsidize child care expenses for parents in eligible low-income households — typically families with an income of less than 85% of the state median income and children younger than 13.
Other major means-tested programs include the Head Start, Social Services Block Grant (SSBG), and Temporary Assistance for Needy Families (TANF) programs.[13] Generally, children who qualify for the TANF and SSBG subsidies are also eligible for support through CCDBG. However, because of annual congressional appropriations requirements, not all eligible children receive the funds. A Government Accountability Office (GAO) study estimated that out of 13.5 million eligible children in 2017, only 1.9 million children — 1 in 7— received subsidies through CCDBG, TANF, or SSBG.[14]
Most families that do not qualify for means-tested assistance can utilize the federal child and dependent care tax credit. In 2022, this credit allowed parents to claim 20%–35% of their care expenses, depending on their household income — up to $3,000 for one dependent and $6,000 for two or more dependents. In other words, the maximum credit was $1,050 for one dependent and $2,100 for two or more dependents.[15]
Major Challenges
The U.S. child care industry is highly fragmented; providers range from licensed child care centers to paid family, friends, or neighbors. A 2021 Department of Education report found that parents consider reliability, availability, and qualified staff to be the most important features of child care.[16] These factors reflect three key challenges facing the child care industry: affordability, quality, and accessibility.
Affordability
Data from the Department of Labor shows that although child care prices vary considerably across states and settings, they are generally high.[17] Overall, home-based care costs less than center-based care, and care for pre-K-aged children costs less than care for infants. For instance, the median annual price for center-based care was $17,171 for an infant and $12,307 for a pre-K-aged child in 2022. The same year, the median annual price for home-based care was $11,018 for infants and $10,045 for pre-K-aged children. Some researchers have pointed out that in 34 states as well as in Washington, D.C., center-based care for an infant is more expensive than public in-state college tuition.[18]
The fact that child care prices are high while more than two-thirds of child care workers earn less than the national median wage could lead one to conclude that the child care market commands high profits for center operators. But child care centers usually operate under very thin margins.[19] A frequently cited Federal Reserve study pointed out this phenomenon long before the pandemic.[20]
It would be reasonable to ask why an industry of such high importance and demand faces such thin margins, to the point that very few new providers are willing to enter the market. There are no universally agreed-upon answers, potentially because of the diverse landscape of providers. Observers have offered several possible explanations, however.
First, child care is a labor-intensive business, and wages are a large share of a provider’s total operating expenses. Studies estimate that on average, wages and benefits account for 50%–60% of total operating costs. But this number could be as high as 70%–80% for the care of infants and toddlers, since the caregiver-to-child ratio is lower for this age group; state regulations often mandate a certain teacher-to-child ratio to ensure safety.[21] In some states, the regulations governing child care services are highly detailed and complicated.
Child care also comes with a high degree of liability and sometimes lawsuits. As a result, child care providers must bear insurance costs, further increasing the total cost of care. Finally, there are few large chains in the child care industry, a reflection of the local and nonstandardized nature of service offerings. This limits the industry’s potential to reach economies of scale and reduce costs.
Quality
Quality is an important but less frequently discussed element of child care. Before the pandemic, high staff turnover had researchers concerned about maintaining quality of care. Some observers now worry that child care center closures spurred by the pandemic may have resulted not only in fewer jobs for child care workers, but in a less obvious continued decline in the quality of care.[22]
Researchers often separate quality measures into two groups: regulatable features and process features.[23]
Regulatable features include a provider’s adult-to-child ratio, group size, and vocational training and education. Features like these are assessed by states, which must have a licensing and regulatory system in place to receive federal funds. Their criteria vary significantly.
Regulatable features of child care are easy to assess, but they are indirect indicators of quality. States’ licensing requirements do not guarantee high-quality care; they only ensure that child care providers comply with minimum health and safety standards. Several professional organizations specializing in early childhood education have published higher standards, however, and child care centers can subject themselves to these benchmarks to gain additional credibility.
Process features, on the other hand, focus on children’s daily experiences and activities and can demonstrate quality. Examples of high-quality measures include favorable interaction with adults and other children, encouraging caregiver attitude, positive physical contact, response to vocalization, and activities such as reading. Although these are direct quality measures, they are less easy to ascertain. Studies have found that families may find it difficult to distinguish quality care from nonquality care based on process features.[24]
Accessibility
Finally, the supply of child care presents a further complication. In many ways, researchers believe these three challenges — affordability, quality, and accessibility — are interrelated.[25] There often seem to be trade-offs between availability and affordability: What is available is not affordable, and what is affordable tends to have a long waitlist. In addition, although state adult-to-child ratio requirements control quality, child care workers’ wages are constrained by per-child fees, while facility space limits the potential for child care center expansion.
In addition, the accessibility of child care, or lack thereof, is not evenly distributed. Higher-income households are better able to afford quality care and therefore have more choices. Since the pandemic, they have also become more likely to have the option to work from home, reducing the commute time to their child care provider.
After the pandemic, businesses became more aware of the importance of child care for their workers, and some began to invest in on-site child care. The increases, however, have been marginal. Smaller businesses are unlikely to invest in these resources, and as such, workers for larger companies are more likely to benefit.
Solutions From OECD Member Countries
Challenges associated with child care are not specific to the United States; the problems are prevalent in many OECD countries. In Japan and the United Kingdom, for two-income households with two children, mothers working full-time use half of their earnings to pay for child care.[26] The share is about one-third in the U.S., comparable to Canada, Switzerland, and Ireland.
Governments around the world are aware of child care challenges, and all OECD member countries provide some type of help to meet parents’ needs. However, the amount, coverage, and type of assistance varies significantly. On average, these countries spend 0.7% of gross domestic product (GDP) on child care. At the higher end of the spending spectrum, Iceland, Sweden, and Norway invest 1.3%–1.8% of GDP on child care. The U.S., Ireland, and Turkey are at the low end, spending 0.1%–0.3% of GDP.[27]
The most common types of child care support from OECD governments include direct public provision, fee reduction, subsidies to private providers, cash benefits to parents for child care expenses, and tax relief. Many countries offer more generous provisions to low-income families and families with multiple children. Regardless of the type of assistance provided, regional coverage — from a city, district, or other municipality — is more common than national coverage: Of the 38 OECD member countries, only 13 have policies that apply nationwide.
It is worth noting that although many refer to the care and education of children before kindergarten as “child care,” OECD countries’ policies can be roughly split into two age groups: from birth to 2 years, and ages 3–5. Overall, OECD countries’ policies are more generous toward the latter age group. For countries with available data, the average investment on the preprimary group (ages 3–5) is 75% more than investment in infant and toddler care (under age 3). Even in Nordic countries known for their generous child care policies, care for children under age 3, while heavily subsidized, is not completely free. Some attribute the disparity in investment to countries’ decision to focus on providing free preprimary education, although others note that these countries have relatively generous paid family leave policies that may sufficiently help parents to care for their children at younger ages.
Countries offer benefits either through public or private providers. Among countries that depend more on public delivery, completely free direct public provision is relatively rare, especially in the infant/toddler age group. It is more common for governments to limit child care expenses, often using additional means-tested assistance. Nordic countries generally follow this approach. Both mechanisms — direct public provision and a child care expenses cap — provide a government with direct control of eligibility and fees. It is expensive to rely on public entities, however. Further, the government’s ability to provide care is limited by the number of facilities and amount of space available.
Other countries such as Australia and the Netherlands, as well as the U.S., use a system more closely tied to the market, with government policies focused on providing cash benefits or tax relief to parents. These governments often offer targeted help to low-income households. A market-based approach allows providers to expand faster than in cases where governments provide care directly; however, the disadvantage is that as a result of the government having less control on prices, lower-income households may have fewer options for affordable child care.
In OECD countries, public provision may also coexist with private child care services. In these cases, public provision is often means-tested or functions as part of a general social assistance program. For instance, both Finland and Poland supply child care through the public sector, offering fee reductions for low-income families and households with multiple children in addition to providing benefits for parents who use private child care providers.
Several of these countries attach work requirements to free child care eligibility, although some researchers have cautioned that policymakers should be careful to avoid “cliff edges” as benefits phase out. An overly narrow means-tested range can also leave middle-income families without support and weaken work incentives.
Finally, it is important to bear in mind that greater government spending on child care in OECD countries has not guaranteed a solution to their child care shortages. Proper regulations are still necessary to ensure that funds are used to benefit families. Unethical providers may capture public support for themselves or engage in unproductive spending, rather than passing it on to parents through lower costs.
Federal Policy Tools: Benefits and Drawbacks
Although the pandemic worsened an already precarious child care market in the United States, it also generated lots of attention toward the provider shortage. Many people hope the ongoing debate will lead to policies that fill the void created by widespread problems with affordability, accessibility, and quality. Below is a review of the most commonly discussed policy proposals in the U.S., their pros and cons, and the obstacles for implementation.
Universal Pre-K
Universal pre-K is the most commonly discussed reform of the U.S. child care ecosystem. This is akin to the direct government provision of preprimary education in other OECD countries. Because the government would be able to dictate fee schedules and eligibility standards of care, this option would give it the greatest amount of control from the affordability and accessibility perspectives.
Research Shows Lasting Effects for Children
Strong support for universal pre-K is rooted in research. There is a large body of literature that shows the positive impacts of preschool education, especially in group settings for disadvantaged children.[28]Specifically, researchers have taken advantage of different rules across states and jurisdictions to compare the various effects of publicly funded pre-K programs. Some found that short-term cognitive gains for children from lower-income households are higher if their programs are universal instead of means-tested.[29]In other words, certain child care benefits for children are greater at a publicly funded pre-K program in a state that serves children from different economic backgrounds than at a state-funded program that serves only disadvantaged children. Furthernore, some studies have demonstrated that a dollar invested in preschool programs is paid more than 9 times over through benefits to society, indicating a large positive spillover effect.[30]
Recent studies have focused on more refined analyses, separating cognitive and noncognitive outcomes as well as positive and harmful effects. In a well-known study, for example, researchers found that the positive cognitive effects of early childhood programs diminished over time, while positive noncognitive effects such as reduced impulsivity and risky behavior persisted.[31] These lasting long-term effects led to higher earnings and lower criminal behaviors despite the fading test score gains.
Other research has investigated whether the negative effects of early childhood programs similarly persist over time; some studies have found that they do.[32] When the Canadian province of Quebec expanded access to care for very young children (0–4 years old) by offering universal subsidies, children in the program were more anxious and more likely to engage in aggressive behaviors in school than nonparticipants.[33]Tracing these participants over time specifically, researchers found the program had limited positive effects on cognitive ability but large negative effects on noncognitive development.
The negative impacts included worse health outcomes, lower life satisfaction, and increased criminal behavior, with these effects persisting in the long term. The researchers believe the perplexing results could be associated with implementation issues, such as the quality of the program, or that the problems could be unique to the specific program. Nevertheless, from a policy perspective, it is possible that targeted, high-quality interventions for low-income populations are more effective than universal intervention.
Impact on Existing Providers
Others worry that universal pre-K could unintentionally hurt existing U.S. child care providers. Because universal pre-K policies generally target children ages 3–4 years old, parents would likely still need to find resources to care for children under age 3. A past survey illustrated that labor makes up roughly 68% of the total cost of infant care, 62% of the cost of toddler care, and 56% of the cost of care for preschoolers.[34]This means that if the government began providing free or subsidized pre-K, children ages 3–4 would leave private, paid care for those providers. Existing providers would be left with infants and toddlers, the costliest groups requiring care.
The Biggest Obstacle: Cost
The biggest hindrance to universal pre-K in the U.S. is likely the cost. Although cost estimates vary, it generally presents a high price tag for policymakers. The Congressional Budget Office (CBO) estimated that under Biden’s Build Back Better framework, a universal pre-K program would cost $119 billion over 10 years.[35] Some believe this may be lower than the actual cost because of the estimate’s limited scope: The Build Back Better program would target low-income families in initial years, and states’ financial responsibilities would increase over time, since federal assistance would essentially be limited to six years.[36] Other estimates suggest that universal pre-K could cost up to $351 billion over a decade, including the costs of new infrastructure.[37]
Subsidizing Child Care Providers
Another policy option would be to extend expiring pandemic-era assistance that directly subsidizes child care providers. Similar to universal pre-K, this option could potentially maintain affordability, quality, and availability of care. Because the assistance was intended to help child care providers stay open during the pandemic, it is unclear if extending it would motivate many new providers to enter the market. It is also unclear, however, how many existing providers will stay in the market once it expires.
Less Control Over Affordability, But More Potential for Supply
The benefit of partnering with private providers is that they can potentially expand faster than public entities, the trade-off being less direct government control on price and accessibility. Through ARPA, the government invested $39 billion over approximately two years to keep existing child care providers in the market. Arguably, more funds will be needed to attract new providers. Although the subsidies are intended to keep fees affordable for providers, ongoing monitoring would also still be necessary to ensure providers use the funds to benefit families.
Child and Dependent Care Tax Credit
ARPA also temporarily increased the child and dependent care tax credit, allowing taxpayers to deduct a higher percentage of expenses incurred for the care of a child under 13 years old or older dependents unable to care for themselves. For 2021, ARPA made the credit refundable, allowed a higher maximum level of expenses, and increased the rate of the tax credit. The amount of qualifying expenses increased from $3,000 to $8,000 for taxpayers with one qualifying child or other dependent and from $6,000 to $16,000 for taxpayers with two or more qualifying children or other dependents. The Joint Committee on Taxation (JCT) estimates this expansion costs $8 billion per year in revenue.[38]
Low Price Tag Without Addressing Supply
This policy costs relatively little compared to other options while still making child care more affordable for parents. Because it gives funds directly to parents for child care expenses, it also alleviates concerns about federal funds not trickling down to benefit households.
However, the policy does not directly address the supply of child care and therefore has limited impacts on availability. In addition, some observers have noted that lower-income families that incur child care expenses below the maximum level do not benefit from the policy as much as moderate-to-high-income families.
Expand the Child Tax Credit?
Some suggest addressing the affordability problem by expanding the more versatile child tax credit, instead of the child and dependent care tax credit. Under ARPA, the child tax credit was increased from $2,000 to $3,600 in 2021, and the Internal Revenue Service (IRS) was tasked with issuing the credit monthly instead of annually.
Advocates of the child tax credit argue that this instrument does not discriminate against stay-at-home parents, since some families with moderate income may choose to cut spending elsewhere so one parent can stay home with their children. These families may not have high child care expenses, but have a lower household income as a result of having one fewer working parent.
The main issue with making the expanded child tax credit permanent is, obviously, the cost. A JCT estimate shows that this policy would reduce government revenue by up to $1.4 trillion over a decade.[39]
Tax Credit for Employer-Provided Child Care
Rather than offering financial incentives to providers and parents, policymakers could also expand existing employer subsidies for providing child care benefits.[40] This is currently carried out through federal tax credits. Businesses can claim 25% of qualified child care expenditures plus 10% of qualified expenses incurred to help employees find child care. Ultimately, businesses are allowed to reduce their income tax liability by up to $150,000 per year. A recent House proposal would expand this tax break to encourage employers to provide child care; this would increase the credit to 50% of qualifying child care expenses and the limit to $500,000.[41]
Addresses Affordability, But Ties Child Care to Employment
Subsidizing employers addresses the problem of affordability and can potentially promote quality, but there is one important concern in particular: The benefit is tied to employment.
Historically, the employer child care tax credit has had a low take-up rate. Survey results show that only 11% of workers had access to employer-provided child care in 2022. Lower-wage workers and those working for smaller firms were less likely to have access.[42] Employers also reported that having to navigate complex regulatory and legal requirements for establishing child care facilities was a factor that deterred them from offering the benefit.
Finally, some parents prefer to enroll their children in care centers that are close to home, rather than their workplace, to limit their child’s travel time.[43] This preference has likely increased since the pandemic, as more parents have flexible work arrangements.
Barriers to Reform
Although U.S. lawmakers understand the widespread issues associated with child care, the current fiscal reality means that any federal assistance proposal will face high scrutiny.
Federal Budget Deficit
The federal government has been running on a budget deficit since 2002. In 2021, the deficit was $2.8 trillion, or 12.6% of GDP.[44] The government primarily finances the deficit and pays off existing debts through Treasury borrowing, commonly measured as debt held by the public. More than two decades of the federal deficit combined with the massive debt-financed fiscal policies enacted during the pandemic led to skyrocketing debt amounts in 2023, roughly 98% of GDP.[45]
If the current trend continues, the debt-to-GDP ratio will surpass its historical high — which it reached in 1946, post-World War II, with 106% of GDP — in 2029 and continue to increase. High and rising debt would slow economic growth and put stress on the government’s ability to repay. In early June 2023, the federal government narrowly avoided default with the Fiscal Responsibility Act (FRA) of 2023, which suspended the limit on federal debt through Jan. 1, 2025, by making some spending modifications.
Competing Priorities
In addition to the pressure posed by the debt ceiling, the impending expiration of certain provisions in the Tax Cuts and Jobs Act (TCJA) of 2017 means that other federal resources are slated for consideration. For example, business communities have been advocating for the renewal of bonus depreciation, which already began to phase down in 2023, as well as tax credits for research and development; as of 2022, businesses need to capitalize these expenses over a 5-year period instead of deducting them immediately. They have also been advocating for interest expense deductions, which have had a lower limit since 2022.[46] The CBO estimates that extending these three business provisions over a decade would cost $47.4 billion — $25.4 billion for R&D, $18.9 billion for interest expense deduction limits, and $3 billion for bonus depreciation.[47]
For individual taxpayers, the top individual tax rate, which is currently 37% and set to rise to 39.6% in 2026; the state and local tax deduction cap, a $10,000 limit that expires in 2026; standard deduction; qualified business income deduction; and estate and gift tax exemption amount will likely generate more intense discussion than these business provisions.
Choose One Policy, Or Mix and Match?
Another challenge is that experts who advocate for family-friendly policies have different sets of priorities. Given the cost considerations, lawmakers are debating whether they should choose one policy and authorize more funds, or keep several programs and provide less funding to each.
A 2021 New York Times article asked 18 academic researchers which of four policies — paid family leave, subsidized child care, universal pre-K, and the child tax credit — was most critical.[48] Although such benefits for families complement each other, there were diverse opinions even within the small group of experts interviewed.
The most popular policy proposal among the experts was universal pre-K. Researchers believe the policy could help achieve multiple goals: decreasing poverty, helping parents work, and preparing children for kindergarten. The child tax credit came in second. Its supporters believe this option is the most flexible, since parents can use the funds provided for any expenses. Moreover, the child tax credit is the benefit that states and employers are least likely to offer, creating a gap the federal government could fill.
Bundling Solutions Into Legislative Packages
With many competing policy interests, recent legislative efforts have taken a creative turn. Several seemingly irrelevant pieces of legislation have included opportunities to expand child care, namely the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022, the Infrastructure Investment and Jobs Act (IIJA) of 2021, and the Inflation Reduction Act (IRA) of 2022.
In April 2023, Biden signed an executive order highlighting the connection between child care and other workforce priorities.[49] The order directed federal agencies to specify which funds under IRA, IIJA, and the CHIPS Act could be considered “supporting service” and be used for child care for workers on federally funded projects. In addition, the order indicated that federal agencies should consider requiring applicants for federal job creation or workforce development funds to provide child care, or should consider preferencing applicants that offer child care services. It further directed federal agencies to provide technical assistance to help federal fund recipients connect with potential child care providers and to help recipients provide care.
Reactions to such bundled solutions have been mixed. Some applauded the linkage and the recognition that child care is essential for workers.[50] These proponents believe child care workers are undercompensated and that public funds are necessary to pay for the true value of their services. In addition, as the current financing system leads to chronic underinvestment in child care infrastructure, the funds from CHIPS offer an opportunity to not only expand this infrastructure, but also offer a diverse set of ways to fit parents’ nontraditional working schedules.
Some observers have also noted that these sweeping federal packages provide a valuable opportunity for state and local governments to partner with employers to further the impact of federal funds. This approach may be unconventional, and presents both risks and opportunities. However, state and local governments are in a more advantageous position to engage with local communities and connect them with fund recipients.
Meanwhile, others argue that linking child care to unrelated legislation is only a good idea if the effort involves promoting awareness and leads to additional resources that expand child care.[51] These critics caution that proper implementation is important. For example, if large semiconductor companies decide to take advantage of the federal subsidy and are the only ones providing child care in a particular area, they may attract child care workers away from local small providers that offer higher wages, further exacerbating the dearth of affordability and availability for workers outside the semiconductor industry. As such, this zero-sum game does not benefit local communities overall.
Still others disagree that policies aiming to incentivize chip manufacturing, strengthen infrastructure, or address climate change should simultaneously be used to promote child care.[52] Although child care expansion is a near-universally desired goal, trying to accomplish too many miscellaneous things in one single legislative package risks wasting public funds — and achieving nothing. [53] If policymakers seek to enhance national security by ramping up semiconductor manufacturing capacity and building the best chips, adding social goals, however honorably intended, could divert focus and funding from the primary congressional priorities.
Conclusion
There is widespread concern that the discontinuation of ARPA funds will result in a catastrophic shutdown of the already-crumbling U.S. child care sector. The sector’s workforce has long been characterized by low wages and high turnover, and the pandemic only exacerbated the exodus of child care workers. Many child care centers operate under thin profit margins, while families spend a substantial portion of their household income on child care. This sector is clearly prime for overhaul.
For the most part, child care is privately funded in the U.S., with public subsidies focused only on disadvantaged households. But even means-tested programs are insufficient; as previously noted, only 1 in 7 eligible children received subsidies in 2017 thanks to a lack of funds. This crisis in child care begs the question: Should the sector receive more federal funds? And if so, what policy or policies should fill the gap?
Among the various policy options that have been discussed, universal pre-K has been the most frequently discussed. Several studies have shown that universal pre-K programs generate promising short-term benefits, but only noncognitive benefits persist in the long term. However, these benefits alone have a positive spillover effect that improves societal well-being. And yet implementation is extremely important; other research has found that if universal pre-K programs are not carried out properly, there may be long-lasting negative impacts.
Several indicators suggest that universal pre-K is unlikely to materialize in the near future. First, among the existing policy proposals to expand child care, it is the costliest. The federal government’s chronic deficit and the massive debt-financed fiscal policies enacted during the pandemic have made the current debt trajectory beyond unsustainable. The federal government default that loomed in June 2023 was a near miss, and a highly alarming fiscal reality check. Lawmakers will still need to address the debt issue before 2025.
Further, Social Security and Medicare are in a dire financial position. This, especially coupled with the expiring TCJA provisions, places a good deal of stress and uncertainty on the federal fiscal outlook. A price tag of $200–$300 billion over a decade for a new spending project definitely raises concerns about the program’s viability. Instead of creating a new mechanism to expand child care, it would be more prudent to improve existing instruments.
One alternative is to incentivize employers to provide child care. This is currently implemented through tax credits. However, utilization of the credit has been low, and large employers, rather than small business owners, are more likely to provide child care as an employee benefit.
Another policy option is to subsidize child care providers, allowing them to use federal funds to lower tuition, pay higher wages, and maintain quality. However, state governments may be in a better position to implement such policies, since child care facilities are regulated and monitored by state agencies. A more suitable compromise may be to utilize the existing child and dependent care tax credit or the child tax credit at an amount lower than the pandemic-era stimulus but higher than the amount of the credit before the pandemic.
Both provider subsidies and tax credits allow parents to choose their preferred program, limit parents’ financial burden, and give the federal government the ability to control program costs by adjusting the amounts. However, whether the tax credit is a good compromise also depends on what the federal government’s long-term policy focus is with regard to child care.
This child care challenge is not unique to the United States. Many other OECD countries face similar issues and have tried a diverse range of solutions. Plainly put, no silver bullet can simultaneously address issues with the affordability, accessibility, and quality of child care.
Policymakers must first decide what they want to accomplish. Is the goal to increase child care resources for disadvantaged households, or to enhance kindergarten readiness for all children? Do lawmakers want to follow the path of other OECD countries and focus on children 3–5 years old, and invest less on infants and toddlers? Should the policy be designed to increase mothers’ labor force participation, or to enhance subsidies for all families, including nonworking parents?
The federal government’s recent attempts to bundle child care support with infrastructure, chips manufacturing, and climate projects could be catalysts for state and federal partnerships. But including child care in these sweeping legislative packages could prove more detrimental than beneficial if child care providers are lured away from nonfederal fund recipients as a result. In addition, without proper monitoring, however worthy the goal is, there is the risk of shifting focus from primary congressional priorities and wasting public funds. These points must all be considered if the U.S. is to solve its deepening child care crisis.
Notes
[1] The $39 billion in funds included $24 billion for child care stabilization grants to providers and $15 billion in supplemental Child Care and Development Fund (CCDF) discretionary funds. For stabilization funds, states had until Sept. 30, 2022, to commit their funding and until Sept. 30, 2023, to spend it. For discretionary funds, states had until Sept. 30, 2023, to commit American Rescue Plan Act (ARPA) discretionary funds and have until Sept. 30, 2024, to liquidate them. For more information, see U.S. Department of Health and Human Services, “Information Memorandum ARP Act Child Care Stabilization Funds,” memo, May 10, 2021, https://www.acf.hhs.gov/sites/default/files/documents/occ/CCDF-ACF-IM-2021-02.pdf; Claire Cain Miller, Alicia Parlapiano, and Madeleine Ngo, “Child Care Disruptions Expected as Record Funding Nears an End,” New York Times, June 21, 2023, https://www.nytimes.com/2023/06/21/upshot/child-care-daycare-disruptions.html.
[2] National Center for Education Statistics, Early Childhood Program Participation: 2019 (Washington, D.C.: U.S. Department of Education, May 2021), https://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2020075REV.
[3] U.S. Department of the Treasury, The Economics of Child Care Supply in the United States (Washington, D.C.: U.S. Department of the Treasury, September 2021), https://home.treasury.gov/system/files/136/The-Economics-of-Childcare-Supply-09-14-final.pdf.
[4] “Childcare Workers,” O*NET OnLine, accessed September 5, 2023, https://www.onetonline.org/link/summary/39-9011.00.
[5] Amy M. Roberts, Kathleen C. Gallagher, Susan L. Sarver, and Alexandra M. Daro, Early Childhood Teacher Turnover in Nebraska (Omaha: Buffett Early Childhood Institute, December 2018), https://buffettinstitute.nebraska.edu/-/media/beci/docs/early-childhood-staff-turnover-in-nebraska-brief-final.pdf?la=en.
[6] Rob Grunewald, Ryan Nunn, and Vanessa Palmer, “Examining Teacher Turnover in Early Care and Education,” Federal Reserve Bank of Minneapolis, April 29, 2022, https://www.minneapolisfed.org/article/2022/examining-teacher-turnover-in-early-care-and-education.
[7] Daphna Bassok, Justin B. Doromal, Molly Michie, and Vivian C. Wong, Reducing Teacher Turnover in Early Childhood Settings (Charlottesville: University of Virginia), http://www.see-partnerships.com/uploads/1/3/2/8/132824390/pdg_teacher_turnover_study_summary.pdf.
[8] Sarah Gonzalez, Jeff Guo, Keith Romer, and Sam Yellowhorse Kesler, “Baby’s First Market Failure,” February 3, 2023, in Planet Money, podcast, MP3 audio, https://www.npr.org/2023/02/02/1153931108/day-care-market-expensive-child-care-waitlists.
[9] U.S. Department of the Treasury, The Economics of Child Care Supply in the United States.
[10] “Child Care Sector Jobs,” Center for the Study of Child Care Employment, accessed August 7, 2023, https://cscce.berkeley.edu/publications/brief/child-care-sector-jobs-bls-analysis/.
[11] The White House, “Fact Sheet: White House Calls on Congress to Support Critical Domestic Needs,” White House, October 25, 2023, https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/25/fact-sheet-white-house-calls-on-congress-to-support-critical-domestic-needs/.
[12] Christian Robles, “Why Child-Care Prices Are Rising at Nearly Twice the Overall Inflation Rate,” Wall Street Journal, August 17, 2023, https://www.wsj.com/economy/child-care-prices-are-rising-at-nearly-twice-the-overall-inflation-rate-2c279c61.
[13] For a summary of the Child Care and Development Block Grant, see Karen Lynch, The Child Care and Development Block Grant: In Brief, CRS Report Prepared for Members and Committees of Congress (Washington, D.C.: Congressional Research Service, November 18, 2022), https://crsreports.congress.gov/product/pdf/R/R47312.
[14] U.S. Government Accountability Office, “Child Care: Subsidy Eligibility and Receipt, and Wait Lists,” memo, February 18, 2021, https://www.gao.gov/assets/gao-21-245r.pdf.
[15] “Topic No. 602, Child and Dependent Care Credit,” Internal Revenue Service, U.S. Department of the Treasury, last updated April 6, 2023, https://www.irs.gov/taxtopics/tc602.
[16] National Center for Education Statistics, Early Childhood Program Participation: 2019.
[17] Christin Landivar, “New Childcare Data Shows Prices Are Untenable for Families,” U.S. Department of Labor Blog, U.S. Department of Labor, January 24, 2023, https://blog.dol.gov/2023/01/24/new-child care-data-shows-prices-are-untenable-for-families.
[18] Gianna Melillo, “What’s Behind the US’s Worsening Child Care Crisis?,” Hill, February 12, 2013, https://thehill.com/changing-america/enrichment/education/3852987-whats-behind-the-uss-worsening-child-care-crisis/.
[19] Some antidotal evidence indicates that the owner-operators may not be taking larger salaries, but instead claim most of their operating profits from their business’s bottom line.
[20] Rob Grunewald and Phil Davies, “Hardly Child’s Play,” Federal Reserve Bank of Minneapolis, July 1, 2011, https://www.minneapolisfed.org/article/2011/hardly-childs-play.
[21] Penn Wharton Budget Model, Total Cost of Universal Pre-K, Including New Facilities (Philadelphia: University of Pennsylvania’s Wharton School, June 2, 2022), https://budgetmodel.wharton.upenn.edu/issues/2022/6/2/total-cost-of-universal-pre-k.
[22] Emma K. Lee and Zachary Parolin, “The Care Burden During COVID-19: A National Database of Child Care Closures in the United States,” Sociological Research for a Dynamic World 7, no. 1–10 (2021), https://journals.sagepub.com/doi/pdf/10.1177/23780231211032028.
[23] National Institute of Child Health and Human Development, The NICHD Study of Early Child Care and Youth Development: Findings for Children up to Age 4 1/2 Years (Washington, D.C.: U.S. Department of Health and Human Services, January 2006), https://www.nichd.nih.gov/sites/default/files/publications/pubs/documents/seccyd_06.pdf.
[24] Daphna Bassok, Anna J. Markowitz, Daniel Player, and Michelle Zagardo, “Are Parents’ Ratings and Satisfaction with Preschools Related to Program Features?,” AERA Open 4, no. 1 (January–March 2018), https://journals.sagepub.com/doi/full/10.1177/2332858418759954.
[25] Melillo, “What’s Behind the US’s Worsening Child Care Crisis?”
[26] Organization for Economic Development and Cooperation (OECD), Is Childcare Affordable? Policy Brief on Employment, Labor and Social Affairs (Paris: OECD, June 2020), https://web-archive.oecd.org/2020-06-05/554683-OECD-Is-Childcare-Affordable.pdf.
[27] OECD, Is Childcare Affordable?, Online Annex Figure 6 and Table 1. Because data availability and collection lags across countries, the data could be from 2015–20.
[28] Elizabeth Cascio, “Early Childhood Education in the United States: What, When, Where, Who, How, and Why,” NBER Working Paper 28722 (Boston: National Bureau of Economic Research, April 2021), https://www.nber.org/system/files/working_papers/w28722/w28722.pdf.
[29] Elizabeth Cascio, “Does Universal Preschool Hit the Target? Program Access and Preschool Impacts,” NBER Working Paper 23215 (Boston: National Bureau of Economic Research, July 2019), https://www.nber.org/papers/w23215.
[30] Jorge Luis Garcia, Frederik H. Bennhof, Duncan Ermini Leaf, and James J. Heckman, “The Dynastic Benefits of Early Childhood Education,” NBER Working Paper 29004 (Boston: National Bureau of Economic Research, July 2021), https://www.nber.org/papers/w29004.
[31] James Heckman, Rodrigo Pinto, and Peter Savelyev, “Understanding the Mechanism through Which an Influential Early Childhood Program Boosted Adult Outcomes,” American Economic Review 103, no. 6 (October 2013): 2052–86, https://www.aeaweb.org/articles?id=10.1257/aer.103.6.2052.
[32] Deborah Lowe Vandell et al., “Do Effects of Early Child Care Extend to Age 15 Years? Results from the NICHD Study of Early Child Care and Youth Development,” Child Development 81, no. 3 (May–June 2010): 737–56, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2938040/.
[33] Michael Baker, Jonathan Gruber and Kevin Milligan, “The Long-Run Impacts of a Universal Child care Program,” American Economic Journal: Economic Policy 11, no. 3 (August 2019): 11–26, https://www.aeaweb.org/articles?id=10.1257/pol.20170603.
[34] Simon Workman, “Where Does Your Child Care Dollar Go?” (Washington, D.C.: Center for American Progress, February 14, 2018), https://www.americanprogress.org/issues/early-childhood/reports/2018/02/14/446330/child-care-dollar-go/. Other cost categories: occupancy, administration, and classroom materials.
[35] Congressional Budget Office (CBO), “Estimated Budgetary Effects of Title II, Committee on Education and Labor, H.R. 5376, the Build Back Better Act,” U.S. Department of the Treasury, November 17, 2021, https://www.cbo.gov/publication/57622.
[36] Fabiola Cineas, “Biden’s Pre-K Plan Might Not be as ‘Universal’ as He Hopes,” Vox, December 6, 2021, https://www.vox.com/22796061/universal-preschool-pre-k-biden-build-back-better.
[37] Penn Wharton Budget Model, Total Costs of Universal Pre-K.
[38] Joint Committee on Taxation (JCT), “Estimated Revenue Effects of H.R. 1319, The ‘American Rescue Plan Act of 2021,’ As Amended By The Senate, Scheduled For Consideration By The House Of Representatives,” JCX-14-21, March 9, 2021, https://www.jct.gov/publications/2021/jcx-14-21/.
[39] JCT, Letter to Representatives Brady and Smith, October 19, 2022, https://aboutblaw.com/5Ad.
[40] ARPA also temporarily increased the maximum amount of tax-free child care benefits employers could provide from $5,000 to $10,500 for flexible saving accounts. This expansion is expected to cost $117 million.
[41] Child Care Investment Act of 2023, H.R. 4571, 118th Cong. (2023), https://www.congress.gov/bill/118th-congress/house-bill/4571/amendments?s=1&r=24. The bill also proposes to increase dependent care flexible saving accounts and the child and dependent care tax credit.
[42] “National Compensation Survey: Employee Benefits in the United States,” U.S. Bureau of Labor Statistics, March 2022, https://www.bls.gov/ebs/publications/september-2022-landing-page-employee-benefits-in-the-united-states-march-2022.htm.
[43] Margot L. Crandall-Hollick and Conor F. Boyle, The 45F Tax Credit for Employer-Provided Child Care, CRS Report Prepared for Members and Committees of Congress (Washington, D.C.: Congressional Research Service, April 12, 2023), https://crsreports.congress.gov/product/pdf/IF/IF12379.
[44] CBO, “The Federal Budget in Fiscal Year 2021: An Infographic,” U.S. Department of the Treasury, September 20, 2022, https://www.cbo.gov/publication/58268.
[45] CBO, “The 2023 Long-Term Budget Outlook,” U.S. Department of the Treasury, June 28, 2023, https://www.cbo.gov/publication/59014#section1. The projections are based on the CBO’s May 2023 baseline projections, which also reflect the estimated budgetary effects of the Fiscal Responsibility Act of 2023, enacted on June 3, 2023.
[46] Before 2021, the limit for deductible interest expenses was 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). The limit was 30% of earnings before interest and taxes (EBIT) beginning in 2022.
[47] CBO, “At a Glance: H.R. 3938, Build in America Act as Reported by the House Committee on Ways and Means on June 30, 2023,” U.S. Department of the Treasury, July 27, 2023, https://www.cbo.gov/system/files/2023-07/hr3938_0.pdf.
[48] Cain Miller, “Which of These Four Family Policies Deserves Top Priority?,” New York Times, November 3, 2021, https://www.nytimes.com/2021/10/13/upshot/of-four-family-policies-in-democrats-bill-which-is-most-important.html.
[49] “Executive Order on Increasing Access to High-Quality Care and Supporting Caregivers,” White House, April 18, 2023, https://www.whitehouse.gov/briefing-room/presidential-actions/2023/04/18/executive-order-on-increasing-access-to-high-quality-care-and-supporting-caregivers/. See Sections 3(a), (i), and (ii) specifically.
[50] “CHIPS Child Care Requirement: How Equitable Implementation Can Promote Stable, Well-Compensated Early Childhood Jobs” (Berkeley: Center for the Study of Child Care Employment, May 24, 2023), https://cscce.berkeley.edu/publications/brief/chips-child-care-requirement/.
[51] Tim Bartik, Aaron Sojourner, and Kathleen Bolter, “Child Care for CHIPS: Will Tying Semiconductor Incentives to Child Care Help Build the System We Need?,” Upjohn Institute for Employment Research, March 10, 2023, https://www.upjohn.org/about/news-events/child-care-chips-will-tying-semiconductor-incentives-child-care-help-build-system-we-need. The authors give more examples of state and local government partnerships in “The CHIPS and Science Act Is a Chance for Businesses and Local Leaders to Collaborate on a Stronger Child Care System,” (Washington, D.C.: Brookings Institution, June 2, 2023), https://www.brookings.edu/articles/the-chips-and-science-act-is-a-chance-for-businesses-and-local-leaders-to-collaborate-on-a-stronger-child-care-system/.
[52] Jim Tankersley, “To Tap Federal Funds, Chip Makers Will Need to Provide Child Care,” New York Times, February 27, 2023, https://www.nytimes.com/2023/02/27/us/politics/child-care-chip-makers-biden.html. Commerce Secretary Gina Raimondo said: “If Congress wasn’t going to do what they should have done, we’re going to do it in implementation.”
[53] Catherine Rampell, “Why Chips and Child Care Are a Poor Policy Mix,” Washington Post, March 2, 2023, https://www.washingtonpost.com/opinions/2023/03/02/biden-chips-childcare-ira-industrial/.
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