Childcare Conundrum: Too Expensive and Not Expensive Enough

For an infant in the US, the average family will pay $1,324 per month for childcare, leaving the median worker just $258 for housing, shelter, groceries, health care, transportation, etc., etc., etc.—you know, all of those famously cheap things. Once they get a bit older, it’ll cost you $1,096 for toddler care. If you aren’t lucky enough to live in one of few states that have universal pre-K, you’ll pay $889 per month once you get past the “terrible twos” until that sweet, sweet fifth birthday when you can enroll them in public school. In 11 states and DC, parents can expect to shell out more than what they pay for rent to enroll two kids in day care. And paying these prices, however unaffordable they are, is only an option for the 50 percent (!) of families who live in an area with enough childcare providers.

Those numbers might lead you to believe that day-care operators and workers are making out like bandits. Quite the contrary: The median hourly wage for childcare workers is just $14.60, less than that of dog day-care workers. And that’s to say nothing of the millions of informal caregivers who together contribute $2.5 to $3.5 trillion worth of unpaid labor.

Most small childcare centers operate with razor-thin profit margins. One big exception is large chains, which control about one-tenth of the licensed childcare market. Eight of the 11 largest childcare chains are owned by private equity firms, with investor-backed companies like KinderCare, Bright Horizons, and Primrose Schools raking in 15 to 20 percent profit margins. To maximize profits, many of these chains minimize the number of low-income families they serve. After all, federal and state subsidies can’t match what higher-income families can afford to pay.

If this sounds unsustainable, it’s because it is.

My colleague Suzanne Kahn has a new brief out today calling for an industrial strategy for the care economy. For decades, she writes, the market has failed to solve a shortage that “drives up prices beyond what many families can afford, even as wages remain too low in the industry to attract more providers into it.” Suzanne is far from the first person to point this out; Treasury Secretary Janet Yellen argues that childcare in America is “a textbook example of a broken market.” For families, childcare—where it’s available—is too expensive. For workers, it’s not expensive enough to pay them appropriate and sustainable wages. For everyone involved, it’s an unstable industry that understandably struggles to maintain accessibility and quality.

Enter, Suzanne argues, the federal government.

A key tenet of Bidenomics is “making smart investments in America.” The Biden administration has earmarked nearly all of a $50 billion fund to increase domestic semiconductor manufacturing. More than half a trillion dollars in tax credits will flow to companies and households this decade to accelerate the clean energy transition. Billions of dollars are improving roads and bridges. These investments, according to the White House, are “all designed to support the middle class and re-establish a strong economic foundation in America, as opposed to benefitting those at the top and hoping those benefits trickle down.” Together this strategy marks industrial policy’s triumphant return, as Roosevelt’s Felicia Wong put it.

Yet, for all the hubbub about industry policy over the past three years, one vital and growing sector has been stranded on the cutting room floor: the care economy. Though the Biden administration proposed investments to expand supply and reduce costs for childcare for infants and toddlers and provide universal pre-K for three- and four-year-olds, these were ultimately negotiated out as the Build Back Better agenda was whittled down to the Inflation Reduction Act.

Save for one brief pandemic-era experiment in large-scale federal childcare investments, the state of domestic public investments in childcare is bleak. The US is a famous outlier among OECD countries when it comes to early childcare spending, amounting to a mere $200 annual tax credit for the vast majority of families. Though there are more generous, highly targeted programs, just one in nine eligible children under the age of six receives assistance. Head Start, the LBJ legacy program that provides free comprehensive early childhood education, serves only 830,000 children per year—only 3 percent of all children under five and 25 percent of children in poverty.

Solving this problem isn’t impossible. We have plenty of federal and state examples in the childcare industry and in others that show us where public investments and leverage have together expanded access and increased quality of key goods and services.

Dating all the way back to World War II, the Lanham Act funded public and private childcare centers run by federal agencies and private-sector employers involved in the war effort. It disbursed over $1 billion for the construction of childcare facilities and “wartime nurseries” and to train and pay teachers, while parents paid about 50 to 70 cents per day (about 9 to 14 dollars today)—just 20 percent of the average cost of childcare today. In 1965 as part of his war on poverty, LBJ launched Project Head Start, establishing 2,000 child development centers to serve half a million children. A feat under any circumstances, but especially considering that, at the time, 32 states didn’t even have public kindergarten. What began as an eight-week demonstration program eventually expanded to a full-day, full-year program and has served nearly 40 million children.

More recently, New York City expanded free pre-K to 70,000 four-year-olds (in just 20 months!) by creating a partially public system, rather than only subsidizing the private market—perhaps the most lasting piece of Bill de Blasio’s legacy, at least among millennial parents in Brooklyn. And in 2021, DC established the Early Childhood Educator Pay Equity Fund to close the gap between early childhood and K-12 educators, raising wages by as much as 40 percent for 4,000 childcare workers, an overwhelmingly Black and brown female workforce.

Beyond childcare, other market-shaping public investment strategies have helped simultaneously supply and demand issues. The Inflation Reduction Act subsidizes both consumers and producers of clean energy technologies and products through point-of-sale consumer rebates and manufacturer investment tax credits for things like heat pumps and electric vehicles—creating and improving jobs in the industry and making products more affordable. Oregon increased wages for long-term care workers by increasing Medicaid reimbursement rates for nursing facilities and home-care service providers without increasing costs for low-income patients.

One clear takeaway from each of these examples—two of which face dire threats to their funding—is that investments in childcare must be sustained, rather than structured as start-up funds to crowd in private investment.

Acknowledging that fact, Suzanne’s brief proposes a different approach to childcare than the Biden administration has implemented in much of its industrial strategy. She argues that because the profit incentives in childcare are so misaligned with the public interest, direct public provisioning must be on the table, rather than just supply-side subsidies for the private sector.

In other words, it’s time to make the Lanham Act great again.

Suzanne’s piece does a deep dive into the market failures of the care economy as a whole and gives lots of perhaps more practical or politically realistic policy solutions than resurrecting a wartime FDR program. She argues a carefully designed public universal childcare program needs to be considered as we search for tools to finally solve the long-standing market failure that’s kept childcare too expensive for families and not expensive enough for care workers. The right flex of public spending and capacity could mitigate affordability, supply, and quality issues. While it would probably keep a few dollars out of the pockets of private equity giants, that seems like a fair price to pay, you know, for the kids.

If You Ask Eleanor

I think the war nurseries were needed before the war just as they are needed now when the war has come to end. The needs of the war brought this problem to the attention of those who wanted to accelerate production, and therefore the war nurseries became a Government program. Now I think there are only two agencies which can undertake to fill this very obvious need. One is the industries themselves, and that will mean only those working in big industries will get the benefit of what is done. The other is the Government.

– Eleanor Roosevelt, If you ask me (1946)