Beyond the household budget: A conversation on the affordability and economics of child care
By Jennie Blizzard, Fed Communities
Charles Aull, vice president of policy at the Kentucky Chamber of Commerce; Brittany Birken, assistant vice president of community and economic development, and child care expert at the Atlanta Fed; Rob Grunewald, an economist and public policy consultant; and Linda Smith, child care system expert and executive director of The Child Care Trust™, discuss the complexities of affordable child care and considerations that the research, economics, and policy lenses bring to the discussion.
Disclaimer: The views expressed in this content do not necessarily reflect the views of the Federal Reserve System or Fed Communities.
“Child care is part of the economic infrastructure but has complexities related to cost, availability, and other supply and demand factors. Understanding these complexities provides insights into the needs, gaps, and opportunities to support both the talent needs of employers and the economic mobility opportunities for working families.”
– Brittany Birken, assistant vice president of community and economic development, and child care expert, Atlanta Fed
Why is child care an important issue for the Federal Reserve to learn more about?
Brittany: This issue supports the Federal Reserve’s goal of promoting a strong economy and maximum employment. Fed researchers and community development experts from across the country study child care. The Federal Reserve does not have a role in setting policy around child care availability or cost, but produces unbiased, apolitical research that can inform policymakers’ decisions that promote maximum employment. Through research and data, the goal is to better understand its implications for labor force participation for working families with young children and the challenges employers may face related to recruiting and retaining working parents. Parental employment often depends on affordable and accessible care. Child care is part of the economic infrastructure but has complexities related to cost, availability, and other supply and demand factors. Understanding these complexities provides insights into the needs, gaps, and opportunities to support both the talent needs of employers and the economic mobility opportunities for working families.
What drives the cost of high-quality early care and education?
Rob: We can look at the cost and affordability question from a supply and demand perspective. On the supply side, child care is an in-person, relationship-based service and therefore operates as a labor-intensive business model that requires early educators—people who can’t be replaced by technology.
Staffing costs make up about two-thirds or more of a child care provider’s budget. States are required by federal law to establish staff-to-child ratios for children receiving care. Child development experts recommend that at a child care center, one adult should care for no more than three infants, four toddlers, or eight four-year-olds. State ratios are typically set a little higher. But even with one adult caring for four or five children, this service is relatively expensive.
We also need to consider the wages, or revenue in the case of home-based family child care providers, benefits, and professional development for early educators. The median hourly wage for child care workers is $15.41 per hour and lower than many other service jobs, such as wait staff, housekeepers, and retail salespersons.
An analysis by the Federal Reserve Bank of Minneapolis shows that among centers with average wages below $10 per hour, 23 percent of staff working with children ages zero to five years leave over the course of a year. By contrast, centers with average wages at or above $25 per hour have average turnover of only eight percent.
On the household demand side, most families with young children face several new costs, such as buying or renting a larger living space or buying a larger vehicle. And furthermore, early in their careers, parents typically start out with smaller earnings compared to what they’ll likely make many years later. Parents who have an infant or toddler earn eight percent less per hour and work 14 percent fewer hours than the average working parent.
How does the availability of affordable, quality child care impact the economy’s health?
Rob: Supporting quality child care can help parents enter the workforce and stay employed and boost the future workforce. First, child care allows parents to enter the labor force and find and retain a job. About two-thirds of children under age six have all their parents in the labor force. This translates to more than 14 million children who need care by someone other than a parent.
Responses to parent surveys show that child care problems can disrupt parents’ work and even their decision to enter the labor force. Child care interruptions can result in parents leaving work early or missing a full day. Sometimes, those interruptions even affect parents’ earnings or their ability to keep a job.
We can also look at long-term benefits of quality child care. Since child care serves children during their early, sensitive years of development, it’s an opportunity to support the next generation of workers. This is especially true for children who are growing up in disadvantaged situations, like poverty.
Child care can foster the type of skills (critical thinking, motivation, working collaboratively, and social-emotional skills) that business leaders value when children become adults and enter the workforce.
What has Fed research and work shown about the issue of child care?
Brittany: Experts across the Federal Reserve System continue to research child care supply and demand considerations, challenges, and innovations that support access to care for working families with young children. “Early Childhood Development: Economic Development with a High Public Return,” produced by Rob and then–Director of Research Art Rolnick at the Minneapolis Fed in 2003, was seminal research that propelled discussion among researchers, policymakers, and educators about the importance of investments in early childhood education.
During the pandemic, it became clear that child care was both a critical support to essential workers and an industry that was hard hit, with many families at home and children not attending care. A group of researchers and community development experts connected to better understand the implications of child care supply and demand constraints happening at that time. The Fed’s Early Care and Education Work Group was formed and remains in place. The group has not only published a resource that highlights why child care is an economic issue but also recently developed a publication that shares strategies that small businesses have used to address employee child care needs.
Various regional research, data, and work related to child care are available on individual District websites. For example, Atlanta recently worked with colleagues to better understand if child care affordability constraints might impact labor force participation and challenge employers’ ability to attract and retain talent. Our goal was to more directly understand the potential financial challenges working families may experience by calculating the household percentage of income that families would likely expend on child care.
We focused on select high-demand occupations in high-growth counties in Florida and Georgia where labor supply will be essential to support community development and employment objectives. While our analysis was limited to the two states, it does shed light on potential implications of child care cost challenges for working families.
Overall, we found that child care costs represent significant expenditures for most household types, regardless of the number of earners in a household, where they reside, or the occupation in which they are employed.
Based on your experience, expertise, and conversations with child care stakeholders, what are some other points that keep emerging about the affordability of child care?
Linda: In the simplest terms, the cost to produce quality child care is more than the average consumer can afford to pay. To make child care more affordable, the question that keeps emerging is how do we fill the gap between what it costs to provide quality child care and what parents can afford? The question that follows is who pays, and what share? To answer that question, we need to understand who benefits from child care? Parents, businesses, the economy? What are the roles of federal, state, and local governments in solving the problem? How much can parents really afford, and what is the role of business? The answers will impact child care affordability differently.
The Child Care Trust™ has been looking at the gap between how much child care is available versus the potential need for care. Based on our data, over four million children do not have access to child care within a reasonable distance of their home. We also know that the lack of care is greater for specific populations of children, particularly those in low-income neighborhoods and in rural parts of the country. The child care business model is especially a challenge in low-income neighborhoods. There simply isn’t enough money in families’ pockets to pay what it costs. The child care business model requires a minimum number of enrolled children to work and in rural areas with small populations, there are no economies of scale and businesses struggle to make the math work.
Another conversation is about where public investments are needed and how the funds get into the programs. A common belief is that putting more money in parent subsidies through the federal Child Care and Development Block Grant (CCDBG) will fix the problem? However, the current funding level serves less than 20 percent of eligible children and not enough to expand or even stabilize the supply of care. To Rob’s point, subsidies are a demand-side strategy. Most economists familiar with child care call for strategies that address both the affordability of care (demand) with supply-side strategies to expand the availability of care.
Another question is how to help those parents who are working but don’t earn enough to afford child care. Even if all children eligible for CCDBG subsides are served, there’s still a significant population of parents who earn too much money to qualify for assistance but not enough to afford the actual cost of quality care. One option out of many related to this complex issue is to consider alternative types of funding that support both the supply side of child care in addition to increasing funds for CCDBG and the subsidy dollars.
“Get more people from all different sectors and from all different viewpoints to the table. I think getting economists, businesspeople, and the faith community to the table to figure out the solutions is important.”
– Linda Smith, child care system expert and executive director, The Child Care Trust™
One final topic of discussion in many states is child care deregulation as an option, essentially allowing more children per adult to solve the problem. As Rob stated earlier, adult-to-child ratios are the biggest driver of both cost AND quality. It is important to note that the turnover rate of child care workers is among the highest of all employment categories and increasing the number of children to one adult only exacerbates the problem. What I have seen happen when the ratios are increased is that staff turnover increases and child care operators can’t hire staff willing to work with larger groups.
Finally, there is a tendency to oversimplify the challenges of child care. The current child care business model exists in a complex system of home-based and center-based care settings that range from small rural towns to very large cities. They are located in faith-based facilities, strip malls, and “mom and pop” neighborhood centers. Addressing the affordability challenge will require comprehensive and sustainable solutions that address both the affordability and availability of care in very diverse settings.
Charles: Linda has brought up an important question of who pays for child care. In our state, Kentucky, policymakers are grappling with that question and asking, how much does this cost in terms of taxpayer dollars? But a big part of that is trying to figure out how much child care supply is necessary. So those who play a part in addressing this issue can ask, how do we get to that point where, at minimum, there’s enough supply?
Historically, our state has looked at availability in Kentucky by looking at all of the licensed capacity of child care in a jurisdiction and then comparing that to all kids below the age of six. But that approach can be problematic. For researchers, I think this is a ripe area for understanding the demand for licensed child care services. As stakeholders can learn more about that demand, the conversation about affordable child care becomes more manageable.
And I think that’s important for policymakers. Because you don’t need an enormous influx of new services in every corner of every state. You might need new services in a whole lot of areas. But I think it’s important to operate with precision and start to better understand how much child care is needed. Not every household wants to use these services.
What success have states had in tackling the affordability issue?
“For example, we have high rates of poverty and very low levels of labor force participation. We don’t have an answer to all of those problems. But we do know that child care can be helpful for a multitude of them. So, when you start to tell that story, it resonates.”
– Charles Aull, vice president of policy, Kentucky Chamber of Commerce
Charles: Our state has created several successful initiatives. A couple of years ago, we started free child care for child care workers. Under the program, a licensed child care worker who works in a licensed child care facility and meets all of the non-income requirements can waive the income requirements and be eligible for free child care.
It’s been remarkably successful, with around 5,000 individuals participating in this program. The feedback we’ve received from child care providers has been extremely positive in terms of attracting, recruiting, and retaining child care workers.
State funding of the program has been increased for the two upcoming fiscal years. Several other states have adopted this model. It’s only a piece of the puzzle, but one that’s moving the needle.
In 2024, the state legislature built momentum for addressing the issue of child care. But there wasn’t a lot of cohesion around viable solutions. Several legislators shared that they were interested in helping with the issue, but felt inundated with different solutions they did not have the expertise [to understand].
This led to forming a state partnership called the Kentucky Collaborative on Child Care. The state brought together child care advocates and people who are on all sides of this issue. It’s important to bring folks to the table who disagree with you and identify points of consensus. That work brought a lot of new voices to the table and led to some big successes.
The state has seen about $135 million in state investment in child care for the next two years, which includes covering programs like our free child care for child care workers program, strengthening our subsidy system, funding early childhood education scholarships, and funding research and improved child care data. I believe our ability to make a strong economic argument and then bring coordination to advocacy efforts has spurred some change.
In Louisville, which is Kentucky’s largest metropolitan area, there’s a new initiative called Thrive By 5. It was initiated by the mayor of Louisville and eventually became an independent nonprofit. What I like about that initiative is it’s very nimble and strategic in how it approaches some of the issues that we’ve been talking about.
For example, part of the work that Thrive By 5 is doing is focusing on coaching local child care providers to help providers move up on quality. It’s also created scholarship programs to target families who aren’t eligible for subsidies but don’t make enough money to afford child care. The program also focuses on recruiting and retaining child care workers, both of which are critical to supply and access.
What tips would you give to communities that want to address the affordability challenge?
“At the local level, it makes sense to bring the community to the table and identify solutions, because the benefits are going to spill over to the community as economic development.”
– Rob Grunewald, economist and public policy consultant
Linda: Get more people from all different sectors and from all different viewpoints to the table. I think getting economists, businesspeople, and the faith community to the table to figure out the solutions is important. The solutions will vary but need to come from the local level as well as state and national levels. The early childhood community has done a good job of helping the country understand the importance of the early childhood years and the impact these years have on our economy and our future. Now it’s time to bring solutions to the problem. And the solutions won’t be simple. There are no simple solutions to complex problems.
Rob: I also think it’s important to bring everyone to the table and to recognize that funding child care is an investment. The benefits tend to spill over beyond the families and the children using child care. For example, parents can work because of child care and earn more income, which is good for families. But they’re also likely to use fewer public services and pay more in tax revenue. More parents in the labor force benefits businesses because it reduces costs related to hiring and retaining employees, since there is a larger, more reliable pool of labor.
When children arrive at school prepared to succeed, we can see many downstream cost savings to education, even cost savings to crime. These children are more likely as adults to enter the workforce, earn more money, and pay more in tax revenue. The return on investment accrues to many different sectors in the economy. At the local level, it makes sense to bring the community to the table and identify solutions, because the benefits are going to spill over to the community as economic development.
Charles: Family homes that provide child care can face some challenges. For example, jurisdictions requiring things like a half-moon driveway if you want to have a certified family child care home is a requirement that’s not possible in all neighborhoods. So perhaps there could be more flexibility in zoning requirements.
I also think it’s important that economists have started turning their attention to this challenge as an economic issue. The work of economists like Rob has really helped inform conversations in states like Kentucky, where we’ve been able to say, “Hey, we know we’re dealing with a multitude of different economic problems.”
For example, we have high rates of poverty and very low levels of labor force participation. We don’t have an answer to all of those problems. But we do know that child care can be helpful for a multitude of them. So, when you start to tell that story, it resonates. And when you can bring high-quality research into this and not just say, “Trust us, this will work,” I think it makes that advocacy and storytelling more effective.
