Over the child care "cliff"

The already challenging child care market is likely to become more difficult

Photo by Markus Spiske on Unsplash

Last Saturday, September 30, 2023, federal relief dollars intended to stabilize the child care industry during the COVID-19 pandemic and resulting recession—via the American Rescue Plan (ARP)—ended. While many have referred to the expiration of ARP child care stabilization funds as a “cliff,” the cessation of ARP funding will likely be a less steep descent down the hill toward previous levels of public support for child care. However, that is not to say that it will be inconsequential.

While the industry will not face immediate, dramatic fallout from the cessation of ARP stabilization funding, the total amount of funding directed to shoring up the industry during a turbulent time constituted a substantial infusion of resources into a struggling industry. Because of pre-existing challenges in the market for early care and education, a lack of continuing investment will likely lead to a contraction of child care supply, meaning fewer slots for young children in care and higher prices for families.

The “cliff” is not as steep as some fear

Timing. While there is no publicly available, detailed data on how and when funds have been spent at the provider and state levels, snapshots on the use of child care stabilization funds suggest that some states have already spent down their stabilization funding well before the “cliff,” and while all funds had to be liquidated by the September 30th date, they may still be in use by child care providers. An October 2022 survey by the National Association for the Education of Young Children (NAEYC) indicates that a majority of providers anticipated they would receive their last payment from ARP funds in 2023. 

Types of spending. In addition, providers and states often allocated funds with the termination date in mind, directing funds to temporary purposes or to spending on capital that outlasts the cessation of funds. States have also sought creative ways of cushioning the end of ARP funds through state support and other resources. Finally, the additional $15 billion in Child Care and Development Fund (CCDF) supplemental funding, while required to be obligated by the same September 30 deadline, does not need to be liquidated until September 20, 2024, and is still in use in many states.

Child care is an industry with inherent challenges

The reasoning for the ARP funds directed at child care was rooted in long-standing challenges in the industry, which were exacerbated during the COVID-19 pandemic. Many families—60 percent of children under age six—rely on weekly, nonparental care, and child care businesses are fragile. It is a labor-intensive industry, and there are many sole proprietorships that operate on thin profit margins. As the President’s Council of Economic Advisers synthesized in the 2023 Economic Report of the President and a brief on child care access and affordability, challenges in the market for early care and education are longstanding and were exacerbated by the pandemic and resulting recession. With the disruptions in enrollment and attendance wrought by the pandemic, these already precarious businesses, many of which are small businesses, faced increased uncertainty. 

Workforce challenges in the child care industry include high turnover and, relatedly, low pay. While employment in many industries has recovered to or now exceeds pre-pandemic levels, employment in child care remains four percent below its February 2020 level. These figures do not include home-based, owner-operated employment. In 2019, there were approximately 565,000 establishments without employees in the child care industry, nearly all of which were sole proprietorships. That number fell to 518,000 in 2020, the most recent year for which data are available. For context, there were approximately 78,000 child care industry establishments with about 1 million paid employees in 2019.

Figure 1: Payroll employment in child care services

It is difficult to know what the recovery of child care employment would have looked like in the absence of ARP funds. These resources have likely helped providers recruit and retain staff in the context of a tight labor market, in which workers in child care establishments have improved outside options. Average hourly wages for child care workers have increased 30 percent since 2015, but at $14.22 still fall well below average wages for production and nonsupervisory employees overall ($27.33). Workforce issues in the industry have implications for program quality and contribute to the high costs of providing high-quality care. Child care is labor-intensive and primarily relies on families’ payments for revenue, leaving providers with few options for cutting costs or increasing revenue. 

For these reasons, child care prices have increased dramatically over time—both in the post-pandemic period and over the last several decades—outpacing inflation and increases in median family income. Parents of young children, who are often in the early, low-earning stages of their own careers, are price-sensitive and may respond to higher prices by forgoing formal child care or turning to informal or ad hoc options. In data that pre-date the pandemic, the average household that paid for formal child care spent $920 per month on it (in 2019), or approximately 13 percent of their income. Low-income households are less likely to use market-based child care options, and when they do, those that pay for care for their young children spend one-quarter to 30 percent of their income on it. 

Features of the child care market lead to a persistent gap between the costs of providing high-quality care and the prices that families can afford. These market challenges existed well before the pandemic, continued in that period, and are likely to get worse as Federal funds to shore up the child care industry end.

End of ARP funds likely means reduced child care supply

ARP funds served to fill that gap during an acutely challenging time for the child care industry. Their cessation is likely to have implications for families seeking or using child care. A report from The Century Foundation predicts dire consequences, using estimates from the NAEYC survey of providers, including the closure of 70,000 child care programs, loss of over three million child care slots, and loss of another 232,000 jobs in the industry. While the magnitude of projected impacts in The Century Foundation report are extreme and unlikely, the end of ARP child care stabilization funds does constitute a big shock to an already precarious industry; ARP funds totaled nearly $40 billion against a backdrop of typical federal funding for child care subsidies of about $6 billion in fiscal years 2021 and 2022.

According to the U.S. Department of Health and Human Services’ Office of Child Care, ARP stabilization funds reached over 200,000 providers, or eight out of every 10 licensed providers nationwide. These providers reported capacity to serve over nine million children. The Office of Child Care reports that the vast majority of states used COVID-19-related relief dollars to expand supply, adding 300,000 new child care slots. The NAEYC survey results indicate that 34 percent of providers reported their program would have closed in the absence of relief funds. Looking ahead, 43 percent of child care center directors say that their programs will have to raise tuition, and 23 percent indicate that they will either have to cut wages or be unable to sustain recent pay increases now that funds have ended.

Providers are likely to confront difficult choices between charging higher prices or reducing staff, which leads to contractions in child care slots. Both of those channels likely affect families' access to affordable, high-quality care. Prior to the pandemic and the “cliff,” three-quarters of parents who searched for care for their young children encountered difficulty, with cost being the most common challenge, and a similar share of child care centers reported excess demand for their available slots. Reductions in the supply of child care will put families back in the difficult position of searching for care that meets their needs or making different decisions around work and family responsibilities.

Child care contractions ripple through the economy through effects on labor supply and productivity

Expansions of affordable, accessible child care facilitate parents’—particularly mothers’—employment. Contracting child care supply is likely to affect economic growth in the short-term, through parental labor supply effects, and over the long-term as fewer children benefit from the boost to social, academic, and behavioral skills that high-quality early care and education settings can provide. The market for early care and education has long needed attention, and ARP stabilization funds served as a band-aid on these challenges. Critical, sustained investments in the supply of high-quality, affordable child care could address these problems over the longer term, benefitting child care providers, staff, families, and the economy as a whole.