Economy & Jobs

Work and the Cost of Child Care

6 minute read

Millions of Americans are joining the workforce as Trump Administration policies fuel strong economic growth and historically low unemployment rates. But with job openings now exceeding the number of unemployed people, even more workers are needed.

An important barrier to bringing more adults off the sidelines, especially women, may be the high cost of engaging others to provide child care. Policies that reduce this cost of child care could bring more Americans into the workforce, increasing opportunities for families and ensuring that our current strong economic growth is sustained into the future.

Employment Trends

Just over 50 years ago in 1968, the majority of women with young children (under the age of 6) did not work outside the home (see Figure 1). The picture changed dramatically over the next three decades. Between 1968 and 1995, the labor force participation rate of married mothers grew from 27 to 65 percent. Labor force participation among single mothers initially grew more slowly, from 45 percent in 1968 to 58 percent in 1992. But by 1998, labor force participation among single mothers grew to 77 percent, reflecting reforms that required work as a condition of welfare receipt and rewarded work through tax credit expansions (Robert Moffitt and Stephanie Garlow summarize this evidence).

But these increases in labor force participation among both married and single mothers with young children then leveled off. In 2018, the labor force participation rate for married mothers was 63 percent and for single mothers was 74 percent—modestly lower than their peak levels a couple decades earlier. By contrast, 95 percent of all fathers with a child under 6 were in the labor force in 2018. The cost of child care may help explain a portion of the remaining gap between mothers and fathers of young children.

The Inefficiently High Price of Child Care

The cost of engaging others to provide child care can be substantial. The hourly cost of center-based child care for a four-year old in 2017 ranged from $2.34 in Mississippi to $9.33 in the District of Columbia, based on data from ChildCare Aware of America. On average, these costs represent 24 percent of the median hourly wage across States, and pose a substantial cost to work when layered on top of taxes on earnings. Reducing the cost of child care would reduce the total cost to work and lead more parents to enter the labor force.

Of course, not every parent desires to enter the formal workforce. Parents who work inside the home caring for their children and investing in their wellbeing provide valuable benefits for their families and society, just as parents who work in the formal workforce do. In addition, the optimal price of engaging others to provide child care is not zero. Providing a safe and nourishing environment for young children requires scarce societal resources. Decisions among parents about whether to work outside the home should reflect the tradeoff between the cost of engaging others to provide child care and the benefits of a parent joining the formal workforce.

But the price of engaging others to provide child care can be inefficiently high and distort parents’ decisions about whether they work in the home or in the formal workforce. A key reason is regulation that drives up the cost of care and reduces its supply. As shown in Figure 2, States with higher minimum staff-to-child ratios tend to have higher child care costs. Research by V. Joseph Hotz and Mo Xiao finds that increasing the minimum staff-to-child ratio in a State significantly decreases the number of center-based child care establishments. Devon Gorry and Diana Thomas find that while more stringent regulations are associated with higher costs, they do not appear to significantly improve the quality of care.

While regulations can help promote safe environments, they can sometimes be ineffective or even counterproductive. For example research by David Blau finds that stringent regulations can reduce child care staff wages while doing little to improve child care quality. Meanwhile, regulations that increase the cost of child care may lead parents to seek care in potentially unsafe settings. Minimizing the burden of the costly regulations that do the least to improve overall child wellbeing could help ensure that more children can access nurturing environments outside the home and more parents can choose to work if they wish to do so.

Another reason that child care prices may be inefficiently high is due to distortions from our tax system. Taxes on earnings reduce the number of people who would otherwise work, leading to an inefficiently low supply of labor. Offsetting some of the personal costs that enable work, such as child care, can reduce this inefficiency (Alan Viard provides a detailed explanation). The same concept applies to low-income families whose welfare or Earned Income Tax Credit (EITC) benefits phase out with increased income, which creates a potentially substantial implicit tax on work.

Policies that Reduce Child Care Costs

A number of existing programs reduce the price of child care for low-income families. In 2018, President Trump signed into law a $2.4 billion funding increase for the Child Care and Development Fund, providing a total of $8.1 billion to States to fund child care for low-income families. Additional child care funds for low-income families are provided through the Temporary Assistance for Needy Families (TANF) program, and Head Start and pre-school programs provide care for young children as well. The Supplemental Nutrition Assistance Program (or food stamps) and housing assistance programs allow families to deduct child care costs from income when determining benefits, effectively providing a child care subsidy in the form of additional food stamp or housing benefits for families with child care expenditures.

Tax benefits reduce the price of child care for middle and higher income families. The Child and Dependent Care Tax Credit (CDCTC) provides a non-refundable tax credit equal to between 20 and 35 percent of child care expenses, limited to $3,000 per child and $6,000 per family. In addition, Flexible Spending Accounts (FSAs) allow workers to set aside up to $5,000 in pre-tax earnings to use for child care expenses. Families may use both programs, but the aggregate expenses they can claim for the two programs may not exceed $6,000.

Supporting Working Families

Other programs provide general support of working families that is not tied to child care expenses. In 2017, President Trump championed doubling the maximum Child Tax Credit from $1,000 to $2,000 per child when he signed into law the Tax Cuts and Jobs Act. The EITC provides up to $5,828 of benefits per year to families with two children. Welfare programs like food stamps, Medicaid, housing assistance and TANF provide assistance to low-income working adults and their children.

An advantage of these programs is that they provide support to families regardless of how they provide care for their children. Families with one working parent and one at-home parent benefit, as do working families who receive unpaid care from grandparents.

Ultimately, how families balance work and child rearing is a deeply personal decision. It also has major societal implications in terms of employment and economic growth, and just as importantly, for the long-term outcomes of children. Thus, creating a system that maximizes opportunity without interfering with personal family decisions is a vitally important goal for the economy and society as a whole.