By Heather Boushey, Lisa Barrow, Gopi Shah Goda, Victoria Lee, Anna Pasnau, and Sarah Wheaton
Across the United States, thousands of mostly small businesses supply care for children, the elderly, and the disabled or infirm. Their role in the nation’s care infrastructure is critical. Not only do they support the well-being of the people entrusted to their care, but they also produce important benefits for society more broadly. These purposes of care services means that policymakers have a particular interest in whether the markets for care work for both providers and families; indeed, access to care services is an important component of modern supply side thinking. Is the supply of high-quality care inefficiently low from society’s perspective? Can families that need care access a well-functioning market to meet their needs?
A core concern is whether care businesses are able to recoup the costs of investing in quality—including hiring skilled care workers—while charging rates families can afford. As with any service, quality care can be expensive, especially care that relies on skilled workers. Yet, families may not opt to pay for this level of quality care for several reasons. Many low-income families simply lack the resources to invest in quality care when it is needed and cannot borrow against future earnings to do so. Indeed, as described in a CEA brief on the costs facing families, high-quality care can consume a large share of families’ budgets; one study finds that among low-income working families who pay for child care, this budget item absorbs 35 percent of their income on average. As such, many families are price sensitive to the cost of care and may respond by foregoing market-based care. It may also be difficult for families to distinguish between high- and low-quality care. Finally, even though high-quality care provision leads to societal benefits, such as positive impacts on child development, this may not be fully accounted for in individual family decisions.
This discrepancy creates a gap that could be filled by policy. To address these challenges in care markets, many countries around the world subsidize care, helping to ensure that quality standards remain high, workers are paid well, providers stay open, and families can afford care. The United States spends 0.33 percent of its GDP on early childhood education, well below the OECD average (0.74 percent); while other public and private entities also spend money on child care in the United States, increased Federal funding could help move quality of care towards the socially optimal level.
This issue brief highlights many challenges in the market for care services that contribute to high costs for families alongside low revenue for care business and commensurate low wages for care workers. It explores the role of government policy in improving pay for workers and quality of care, while at the same time reducing the price families pay for care.
Fundamental challenges in the care market
Care businesses supply services that are essential for the millions of families that rely on them and the U.S. economy as a whole, yet they operate within a market with fundamental challenges. In general, there is a gap between the cost businesses incur to provide care at a quality that meets the needs of consumers and a price that consumers are willing and/or able to pay. The need for sufficient quality drives costs, while pricing is limited by the price sensitivity of consumers.
Quality is costly to supply
For care to be considered quality care, it must be responsive to the needs and enhance the quality of life of the person being cared for in ways that are appropriate to the setting (e.g. by developing social and emotional skills in children or by helping an elderly person continue to live safely in his or her home). The skills and attention of a caregiver can make all the difference in not only ensuring health and safety, but also improving the individual’s quality of life, and in the case of children, adding to the future stock of human capital.
Like many services, the quality of care services relies largely on finding the right combination and number of care workers and ensuring that those workers have the requisite skills and experience. Given the importance of ensuring quality care for some of society’s most vulnerable people, as well as the fact that quality can be difficult for consumers to discern, there are rules and standards providers must abide by. Some regulations vary by state, and others are Federal. For example, the Child and Adult Care Food Program Child Care Standards, which childcare centers must meet to receive certain Federal reimbursements, require child care centers to have at least one early childhood educator for every four children under age 3, and one educator for every six children between ages 3 and 6.
While these standards aim to ensure quality care and trust with consumers, they are also associated with cost increases. To the extent quality regulations require higher staffing levels or care workers with in-demand skills, they raise the cost of doing business.
While industries like manufacturing have seen large technological advances leading to improvements in quality and labor productivity, those advances are less applicable to very labor-intensive service-based industries. Like many services, 60 to 80 percent of childcare business expenses go to labor, with similarly high shares for home health and community based services which require little physical infrastructure. Indeed, research points to the importance of focused attention of the caregiver, particularly with respect to care for infants and children, which means that the economy-wide long-term productivity gains may come from having more early childhood educators—or more skilled educators—per child. Yet, increasing wages in other industries that have higher labor productivity gains means that wages for care workers need to also increase so that care businesses can compete, thus raising overall prices.
Pricing is limited by high price sensitivity of consumers
Businesses supplying care services face a pool of consumers with significant financial constraints that limit their ability to afford the cost of quality care. Compared to high-income families, child care costs present a larger barrier to work for low- and moderate-income families.. That is, low- and moderate-income families tend to be more likely than higher-income families to curtail their purchase of these services if the price rises.
The budget constraints facing families in turn affect the supply of quality care. Figure 1 illustrates how care providers serving families who are more sensitive to prices could face smaller incentives to invest in costly quality improvements. Looking at the supply of care, providers choose their investment in quality at the point at which their marginal revenues equal their marginal costs, that is, where the additional dollar invested is equal to the additional dollar earned. In Figure 1, this occurs at q*L for providers serving low-income families. This means that those providers have no (economic) incentive to improve quality; their clients will not pay more for higher quality care—or cannot pay more due to their budget constraints.
Providers serving high-income families, on the other hand, can charge higher prices to recoup the costs of their investments in quality. This is shown in Figure 1 as q*H, indicating that when providers serving high-income families invest in higher quality care, their clients will pay higher prices, in large part because their budget allows them to. This gives rise to a steeper relationship between quality and total revenues and a higher marginal revenue curve compared to that of providers serving low-income families.
The care market includes providers willing to supply care below market rates
Many people provide care themselves, rather than through the market. About one-in-five parents are full-time, stay-at-home caregivers and many families care for aged or disabled loved ones on their own rather than turning to market options. Others who supply care services do so while also caring for their own children or aging or disabled loved one, altering their cost-benefit calculus. These care providers charge lower rates on average than larger, licensed providers, creating difficulties for care businesses who may have to compete with them on price.
In 2018, 88 percent of childcare establishments were solo practitioners (with no employees other than themselves), and average receipts for these businesses were about $16,000. Likewise, 91 percent of home health care establishments were solo practitioners with average receipts around $18,000. Even if we make the (highly unreasonable) assumption that these providers had no expenses, these receipts put the average solo practitioner at approximately the 20th percentile of the earnings distribution. Indeed, absent other resources, at these revenue levels, it would be difficult to sustain a family by running a care-providing business. These data suggest that some providers may supply care with altruistic motives, have limited employment options, or are otherwise willing to forgo revenue.
Fragility of the business model was in full view during the pandemic
The cost pressures created by the need to meet health and safety standards, consumer price sensitivity, and altruistic suppliers put care businesses in a difficult position with respect to their employees. Profit margins are so low that it makes it difficult to keep care businesses open and pay workers adequate salaries, with profits less than 1 percent for most childcare providers, and less than 1 percent for all payment sources in nursing homes in 2019.
Moreover, the owners of care businesses are disproportionately women and people of color. Almost all—96.5 percent of childcare businesses and 86 percent of home healthcare businesses—are owned by women, while half of childcare businesses are minority-owned. Yet, women and minorities tend to have fewer assets to get them through tough times. For example, in 2019, median assets for white businessowners were over $500,000 while for non-white businessowners they were just under $200,000 according to CEA analysis. One study indicates that even after controlling for other differences, small business owners who are women or people of color have lower loan approval rates and pay higher interest on loans for their businesses.
These challenges in the business model and in the composition of care businesses can explain why so few can last more than a few weeks without revenue, as became evident during the COVID-19 pandemic. According to CEA analysis of November 2021 Small Business Pulse data, 82 percent of social assistance small business (which include child and elder care) reported large or moderate negative impacts of the pandemic on the business, compared with 66 percent of small businesses in general. Relatedly, almost double the number of social assistance businesses (3.9 percent) reported temporarily or permanently closing compared to all small businesses (2 percent). Social assistances businesses were also more likely to report that they anticipate needing financial support or additional capital in the next 6 months. These data suggest that even at this stage in the pandemic, social assistance businesses are struggling relative to other small businesses.
Care jobs do not pay well
Care workers make low wages relative to typical nonsupervisory workers. In the United States in December 2021, the typical production or nonsupervisory worker made on average $26.74 per hour, yet care workers earned about half that: in 2020, childcare workers’ median hourly wage was $12.24 and home health care workers’ median wage was $13.02 per hour. Care workers also rarely receive non-wage employee benefits: Only 15 percent of childcare workers and 34 percent of home care workers are part of an employer- or union-sponsored health insurance plan, compared with 58 percent of all workers.
Care workers earn less than comparable workers in other occupations. Childcare workers with similar age, education, and other demographic characteristics as non-childcare workers earned 23 percent less on average, according to one analysis. Comparing the earnings of childcare, pre-K, kindergarten, and elementary school teachers illustrates the degree of low compensation among care workers. On average, childcare workers earn less than half, and preschool workers earn just over half, of the average annual earnings of kindergarten and elementary schoolteachers, according to Bureau of Labor Statistics data. Average earnings of workers in nursing and residential care facilities are approximately 30 percent less than average earnings of workers overall in the health care and social assistance sector.
Low pay makes it difficult for managers in care businesses to recruit and retain skilled workers. One survey by the National Association for the Education for Young Children found that 78 percent of respondents identify wages as the primary recruitment challenge in the childcare industry, as prospective workers realize that almost all other jobs will pay more. Indeed, the Center for the Study of Child Care Employment estimates that 98 percent of occupations offer higher annual pay than child care.
Low pay means care workers are more likely to have income below the Federal poverty line: One in seven childcare workers and about one in four home care workers live in families with income below the official poverty line, compared to 1 in 16 families overall. In addition, 53 percent of child care workers and 47 percent of direct care workers rely on a public assistance program, such as Medicaid or food stamps, compared to 21 percent of the U.S. workforce as a whole. Most childcare and home health aides are women, and disproportionately these are women of color. About sixteen percent of childcare workers are Black and about 24 percent are Hispanic, while 24 percent of home health aides are Black and 22 percent are Hispanic. Both of these are much higher than the share of Black and Hispanic workers in the overall workforce (12 and 18 percent, respectively). As of 2019, CEA analysis suggests that 37 percent of home health workers and 21 percent of childcare workers were immigrants. About one quarter of immigrant care workers are likely undocumented according to CEA analysis.
In addition to cost pressures that limit pay for care workers, historical norms that have devalued care work, and ongoing discrimination that prevents women and people of color from accessing equal opportunities or being fairly compensated for their work may also contribute. Since before the end of slavery, care work has disproportionately been performed by women of color. Since the end of the Civil War, care workers were shut out from workforce protections, such as those enacted in the New Deal. Lawmakers continue to exclude many care workers from labor protections and benefits including minimum wage laws, paid leave, retirement benefits, and overtime pay. Although forces of structural racism and sexism likely affect the pay of many care workers, they are particularly hard on lower-paid women of color.
Subsidies can improve outcomes in the market for care
Subsidizing the nation’s care infrastructure can make it possible for care businesses to provide a quality service (including by paying adequate compensation for care workers) at a price that families can afford. Subsidies tied to the cost of providing quality care relieve the pressure on businesses to cut labor costs, while adjusting the price families pay based on their income makes it easier for them to fit quality care into their budgets.
The Administration’s proposed child care program requires states to create a tiered system to measure the quality of child care providers, generating incentives for providers to increase quality investments. In addition, the framework subsidizes low-income households. As shown in Figure 3, both of these features serve to shift the marginal revenue curve up as providers are able to recoup the cost of additional quality investments by charging higher prices. The point at which marginal revenues equals marginal costs is now at a higher level of quality, counteracting the market failures leading to underinvestment in quality shown in Figure 1.
Investing in quality will require both process improvements and improving job quality for care workers to attract and retain people with the appropriate skills needed. Evidence indicates that the labor supply in the care industry responds to higher wages, which suggests that as care jobs become higher quality, more people will seek to become hired by care businesses. Therefore, the supply of care would increase, helping to counteract both the COVID-19-induced shortages and the long-standing undersupply of high-quality care.
Addressing the cost-price gap has social benefits. First, expanded access to high-quality child care has been shown to lead to long-lasting benefits for children, especially those who are more economically disadvantaged. In addition, research shows that better pay for childcare workers is associated with higher quality care. Also, better pay for care workers reduces turnover, which is associated with children’s weaker language and social development. Moreover, child care workers who are experiencing economic stress have a more difficult time fully engaging with children and offering a quality learning experience.
For elder care, the best evidence on the importance of the quality of care on patient outcomes comes from studies of nursing homes. One study finds that higher wages through minimum wage policies can increase income and tenure for nursing home workers while reducing inspection violations, preventable health conditions, and mortality. Staff turnover has been found to be an important factor related to the spread of infections within nursing homes and increased levels of staffing and lower levels of turnover have been found to reduce mortality and the number of inspection violations or deficiencies. In theory, higher levels of quality of care could increase the use of market-based care by some families who provide care themselves, allowing caregivers to participate in the labor market.
And government policies that increase payments to providers have historically resulted in higher pay for workers. One study calculated that higher Medicaid payments increased hourly pay for direct-care workers including home health aides by 12 percent on average, and more recent work has found that care-worker compensation rises by over $1 for every $1 in increased government spending on payroll subsidies. Pass-through subsidies have also been found to reduce bedsore rates, a metric for quality of care.
Because of the many challenges discussed in this brief, the economy often fails to support care businesses, care workers, and the families in need of their services. This ultimately contributes to an undersupply of high-quality, affordable care for families, and low pay for workers. However, these problems can be mitigated with appropriate policy. Carefully designed government policy can address the market failures that make the care work system so challenging—making care more affordable while simultaneously improving the pay for workers and ensuring investments in quality.
President Biden’s economic agenda is intended to address challenges in the care economy on both the supply and demand sides. The Framework expands Medicaid coverage for home care services for seniors and people with disabilities, subsidizes childcare providers and incentivizes improvements in quality, and increases caregiver pay to a living wage. The Framework also caps childcare expenses at 7 percent for the vast majority of families.
Given the difficulties in the business model laid out in this brief, these supports are particularly important in ensuring that providers are willing and able to provide the high-quality, affordable care needed by families. These are transformative investments in the ways that Americans give and receive care–promising to promote equity, improve health, and ensure lasting economic growth.
 Based on CEA analysis of the 2019 Survey of Consumer Finances. Businessowners refers to all self-employed individuals.