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Childcare is important for economic development. For many working families with young children, childcare is essential to maintain employment. Childcare plays an important role during periods of economic downturn, enabling dislocated working parents to acquire skills and credentials through education and workforce development services. They can also seek and accept new employment opportunities. However, for low- and moderate-income (LMI) families, the high costs of childcare can limit access to quality educational experiences for children and undermine opportunities for work and career advancement for parents. This challenge is not exclusive to periods of economic downturn, but it is heightened and provides an impetus for thinking about the affordability of childcare as an important lever for economic recovery and growth.

The childcare industry is composed of mostly small private businesses. As such, the infrastructure of the industry has been greatly affected by COVID-19. Many childcare programs have closed and while some of the closures are temporary, without sustained revenue, many are at risk of permanently going out of business. Other programs remain open, but they have been serving significantly fewer children due to social distancing and Centers for Disease Control guidelines, reducing revenue and increasing costs. The ultimate impact to the industry is not yet known, but during recovery families will need childcare. As policymakers focus on levers to strengthen the economy, childcare investments are an important consideration given the near- and long-term benefits to workforce development and economic productivity.

Childcare is necessary for most working families, and quality matters
The reality is, in most U.S. families, adults work. In fact as of 2018, 67 percent of children younger than six had all parents participating in the labor force. There are nearly 61 million children younger than 14 in the United States with approximately 20 million younger than five. Prior to the pandemic, many of these children participated in childcare and after-school programs. A 2019 examination of the childcare industry by the Committee for Economic Development estimated that 58.7 percent of children received regular care from someone other than a parent, with many participating in formal childcare arrangements from a network of nearly 675,000 small businesses. Without access to reliable childcare, the economic recovery for working parents with children will be stymied.

Quality childcare is a two-generational approach to economic opportunity that offers benefits to both working parents and their young children. It can boost work productivity for parents and serves as an effective intervention for improving kindergarten readiness and school success, particularly for children at risk of school failure. Neuroscientists and developmental psychologists have established that the first five years of a child’s life are critical for the development of language and cognition as well as executive functioning skills such as organizational skills, flexible thinking, and emotional regulation. Given the importance of quality childcare for both parents and children, childcare is integral to near-term economic recovery efforts and longer-term economic health and family success.

Florida data connect economic downturns and childcare subsidy demand
The state of Florida tracks wait-list data for the childcare subsidy program; that is the number of families who have applied for childcare but do not receive a subsidy because of funding limitations. Even when the economy was vibrant and unemployment was low, Florida maintained a steady wait-list of families seeking the childcare subsidy.

The chart plots the fiscal year monthly average wait-list length in Florida (left vertical axis) with the annual average state unemployment rate (right vertical axis). During periods of economic decline and increased unemployment, the wait-list surged in Florida. During the height of the Great Recession, the monthly average for the wait-list in 2009–10 was 80,109 and peaked at 91,957 in October 2010. Florida’s unemployment rate was 11 percent during that same period. It stands to reason that a similar spike in the need for the childcare subsidy can be anticipated during the COVID-19 recovery.

The costly trade-off between affordability, quality, and access
Even before COVID-19 shined a light on the inherent funding challenges in the childcare industry, the real conundrum has been the tension between what families can afford and the high cost of providing quality childcare. The U.S. Department of Health and Human Services (HHS) recommends that childcare be considered affordable if family out-of-pocket costs are equivalent to 7 percent or less of total household income. However, the Center for American Progress documented that regardless of marital status, race, age, education, or income, families are paying a greater share of their income than the HHS benchmark of affordability—on average, approximately 40 percent more, with disproportionately greater percentages for LMI families.

The majority of childcare is funded through private payment by families. This is a particular financial hardship for LMI families with young children, given that childcare expenses are typically incurred early in the working years for adults when their earnings can be at their lowest. Childcare is a major cost for the household budget of families with young children who also must factor in large expenses such as housing and food.

While childcare is a commodity for working parents, the true costs for quality services are often beyond what consumers can afford. This is largely because while childcare is expensive for families, it is also expensive to operate.

The childcare business model is labor intensive with a budget that is mostly comprised of staff wages in order to maintain relatively low ratios of children to staff. In fact, on average, 60 to 80 percent of childcare operational costs are spent on worker wages. Even still, early childhood workers are compensated with relatively low wages. The mean hourly wage is $11.83. And while childcare has been demonstrated as an effective intervention, quality is a determining factor. Even in a healthy economy, childcare providers are challenged to set payment rates at a level sufficient for maintaining high-quality care given the high costs are out of reach for many families.

Strategies that support affordability and access to quality childcare
Two funding levers can work to support the COVID-19 recovery and reduce affordability challenges: the Child Care Development Block Grant and the Child Care and Dependent Tax Credit. In combination, these state and federal investment strategies can serve as childcare market interventions benefiting children, working families, and the childcare industry.

CCDBG is the federal childcare subsidy program. States contribute a portion of match dollars to draw down federal funding and make childcare subsidies available to some of the low-income working families that meet eligibility requirements. To be eligible for a subsidy, families must work or be enrolled in an education or workforce training program. As of 2015, based on federal guidelines, approximately 15 percent of families who qualify for financial assistance actually receive it due to lack of funds.

CCDBG funding was relatively flat in the 2000s at approximately $5 billion a year with federal and state match investments. In 2018, $2.37 billion of additional recurring federal dollars were appropriated. The CARES Act stimulus package included an additional $3.5 billion in one-time CCDBG funding. These funds were authorized to provide childcare access for essential workers and assist with childcare operational costs during this time. A number of organizations have indicated that while helpful, these funds are insufficient for addressing the full operational supports the childcare industry will need to avoid a high rate of permanent closures. For example, the Center for Law and Social Policy has estimated near-term funding needs closer to $50 billion.

Further investments in CCDBG can make a meaningful difference for economic recovery in two different ways. First, access to subsidies can expedite the recovery path for low-income families who need childcare to return to the workforce by pulling more children off the wait-list. Second, additional investment in CCDBG can increase the level of subsidy reimbursement, which would provide additional funding for providers to maintain quality and attract higher-quality programs to accept subsidy payments. Currently, due to funding limitations, many state subsidy reimbursements are below the HHS recommendation of the 75th percentile of the prevailing private market rate. Traditionally, tension exists between these two funding strategies. States must make difficult decisions between serving higher numbers of children or prioritizing higher payment rates that make quality accessible for families. With clear benefits to both, additional state and federal funding investments in CCDBG can support the viability of the sector as well as support additional low-income working families.

Families above the CCDBG income eligibility threshold of 85 percent of state median income (SMI) are also significantly challenged with issues of childcare affordability.¹ For example, in Palm Beach County, Florida, for a family of three, 85 percent of SMI in 2019 was $52,602. Approximating the cost of childcare if the family had two children who were 10 months old and three, the cost would be approximately $23,000 annually.² That is nearly 44 percent of the household income. This is a challenging predicament for LMI families just above eligibility for the childcare subsidy.

The Child and Dependent Care Tax Credit is designed to provide a tax break for these families. In 2018, the Urban-Brookings Tax Policy Center estimated that approximately 11.8 percent of families with children benefited from the credit. Parents must be working or in school to qualify. The amount of the actual tax credit is between 20 percent and 35 percent of the allowable expenses, depending on income. The credit is nonrefundable, meaning it can only be used to offset income taxes owed. Eligible childcare expenses are limited to $3,000 per dependent or $6,000 for two or more dependents. This may not be sufficient for making access to quality childcare feasible for LMI families, given the high cost of quality childcare.

While the current credit offers some relief, the benefit of the credit could be maximized to provide increases for LMI families that more closely align with the high cost of childcare. Making the tax credit fully refundable would provide additional income to parents with young children to address their childcare needs. Additionally, increasing the maximum credit rate through an enhanced scale that maintains a graduated credit adjustment based on family income, but provides a larger amount per family, could greatly ease the cost burden of childcare.

For many families with young children, childcare is core to economic revitalization and security. Public investments that support the childcare industry and affordability of care can effectively act as wage increases for millions of LMI families, which can support the broader economic recovery and individual career advancement as well as the educational success of young children and long-term health of the economy.

By Brittany Birken, principal CED adviser

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¹ States can choose to invest beyond this threshold.

² The cost of care was calculated based on the 75th percentile rate for full-time center-based care annualized for an infant and preschool age child in Palm Beach County, Florida, from the state of Florida’s 2017 Market Rate Report.