Honey, I shrunk the budget!: How the Child Care Non-System Hurts Families

Child care costs take up too large a portion of many families’ budgets. Current policy doesn’t go far enough to address this.
Blog Post
Aug. 17, 2016

In a recent post, Laura Bornfreund and I discussed how the child care “non-system” fails to adequately support its own workforce. Wages are so low that nearly half of early care and education teachers qualify for public assistance.

With wages being so low, one might assume the cost of care for parents is also low. That notion couldn’t be further from reality. The average annual cost of child care can range from $4,822 in Mississippi to $22,631 in DC, which exceeds the affordability threshold established by the U.S. Department of Health and Human Services--10 percent of total family budget--in 81 percent of the country. Expenses are worst for families with the youngest children, because their care requires lower adult-child ratios. Having young children generally coincides with the lowest-income time in parents’ lives, and high costs coupled with lower relative incomes causes additional financial burden.

Parents at all income levels have increased their absolute spending on child care in recent years, but costs exact a higher toll on low-income families. On average, the top fifth of earners spend $7,500 more than the bottom fifth on child care annually, yet low-income families still spend a much larger portion of their income on it. This spending and budget gap may exacerbate future income inequality by preventing children in low-income families from accessing the same quality of care as their higher-income peers.

But getting bogged down in the specifics of cost based on income or age of children obscures the larger issue: the absence of a current child care system places a serious financial burden on families. To put it in a broader perspective, infant care costs exceed the cost of in-state tuition at public colleges in 33 states and DC, and it costs about one quarter million dollars to raise a child born today to age 18. These costs have implications for families’ financial decisions as well as the economic health of our country.

Parents, particularly mothers with young children, are much less likely to work than non-parents. Many mothers (and increasingly fathers) face the difficult decision to either leave the workforce to care for their child, or fork over large sums of money for someone else to do it, whose services may not even fit their work schedule. Exiting the labor force can lead to economic insecurity and even poverty, which can be detrimental to children’s long-term health, education, and employment outcomes.

Unfortunately, there are also negative consequences for mothers who remain in the labor force. A large body of economic literature studies the effect of childrearing on wages, and while the estimates vary, several find a long-term wage penalty for mothers ranging from five to seven percent per child using models that control for experience, employer, time of leave, and other factors. A 2010 study published by the National Bureau of Economic Research found that women with bachelor’s degrees or higher are particularly penalized, with wages about 24 percent lower than non-parent women with similar work experience and demographics.

A less active and lower-earning workforce has consequences not only for families and children, but also for the nation’s broader economic health. Thirty percent of mothers do not work, compared to fifteen percent of fathers. While some of this difference is surely due to a mother’s personal choice, social pressures combined with unaffordable child care takes additional mothers out of the workforce. This has implications for the country’s GDP. A one percent decline in labor force participation costs the US economy over $100 billion annually. Additionally, child poverty, often induced by family poverty resulting from the birth of an additional child, costs the US economy nearly $700 billion annually.

The US has some policies in place to support working parents, and expanding these programs could be enormously beneficial for our economy. Two separate analyses have found that for every one percent decrease in child care costs, labor force participation of mothers increases by 0.25 percent. If the US could reform policies to reduce the burden of child care costs, it could increase mothers’ labor force participation and lead to a substantial increase in GDP.

So what does it look like to make child care more affordable? The federal government already targets this challenge from many angles. The partially refundable Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) help some workers and parents. The Center for Budget and Policy Priorities estimates that they will lift 16 million people out of poverty, or bring them closer to the poverty line, by 2018 and beyond. These credits, along with the Child and Dependent Care Credit, are associated with benefits for children and families at nearly every stage of life: increased school performance, higher college enrollment, and increased work effort and adult earnings. On top of these credits, the federal government spends $7.5 billion annually to provide early education and care to nearly one million children in low-income families between ages zero and five through Head Start. The government also provides $5 billion worth of child care subsidies and assistance through the Child Care and Dependent Block Grant (CCDBG).

Unfortunately, both Head Start and CCDBG fail to reach all children who are eligible due to limited funding and arduous application and approval processes. It’s estimated that Head Start and CCDBG reach only four in ten and one in six eligible children, respectively. The gap between eligibility and service provision is particularly problematic because studies have shown that families on waiting lists have lost jobs or given up searching because they can’t find or afford child care.

These efforts fall short in ensuring that all families have access to affordable child care. Policymakers on both sides of the aisle agree that more must be done. Clinton, Trump, and legislators in each party have called for more affordable child care.

On the right, Senate Republicans proposed tax reforms that include measures to correct the previous tax code’s “undercompensation for the costs of raising children,” and there has been a rich theoretical and practical discussion around rethinking redistribution, eliminating bureaucracy, and giving families cash to raise their children. Nationwide, activists and politicians are fighting to raise minimum wages so that working-class families can afford necessities, including child care.

On the left, some reformers have pushed to make current tax credits fully refundable so they reach the most vulnerable families, and House Democrats have introduced a new Young Child Tax Credit, a $125 per child per month credit to families with children between zero and three. Others find common ground with conservatives in supporting cash aid to families.

Making child care more affordable would benefit families and the country at large. Mothers (and fathers) would be able to stay in the workforce which could increase the income available to families, decrease child poverty, and have positive effects on children’s education, health, and economic futures. These positive family effects would also be a boon to the US economy and GDP.

There are numerous routes policymakers can take to make child care more affordable. But it’s difficult to keep track of how three different tax credits, subsidy programs, wage laws, and state and federally financed early education programs make this happen. For government agencies, service providers and families to navigate these systems, it must be more than a headache. As we think about how to turn our non-system into a system, perhaps we should keep in mind what Matt Breunig, who previously wrote for Demos and Salon, said in support of giving parents cash.

“I am quite sure that an alien who came to this world would not say: create three different child-related tax carve outs and then also two different sets of tax rates for parents and non-parents. An alien who came to this world would say: figure out how much money you want to give to parents for each child they are raising and then cut them a check each month.”

Although humorous, he makes the point that an overly complicated system meant to help parents may actually turn out to be less effective and, in some ways, a burden to the people it aims to serve. As reformers and policymakers move forward, it is important for them to consider the feasibility and ease of implementation of any adopted solution so that it may have the maximum benefit possible. A long-awaited National Academies of Sciences study will look at financing early care and education with a highly qualified workforce. Like the Transforming the Workforce report, this study will likely offer up some recommendations worth paying attention to.