Child Care Costs and Federal Policy: What Research Shows About Affordability and Access

Child care costs have become one of the most significant drivers of household financial stress for families with young children in the United States. The annual cost of full-time center-based infant care exceeds ten thousand dollars in most states, and in high-cost metropolitan areas it can exceed twenty thousand dollars or more, substantially exceeding typical household expenditures on food, transportation, or health insurance. This cost burden produces a complex set of effects on labor force participation, family wellbeing, and child development, and has driven significant policy attention at both the federal and state levels. Research on the child care market, its distinctive economic characteristics, and the effects of different policy approaches provides a basis for evaluating these debates. The child care market exhibits characteristics that economists associate with market failure. Child care is simultaneously a private good for the family and a public good that generates externalities through the effect of early childhood experiences on children's development and long-term productivity. Information asymmetries make it difficult for parents to accurately assess quality before purchasing care, and price is not a reliable signal of quality in child care markets. The labor market for child care workers is characterized by monopsony-like dynamics in which providers face low competition for workers, producing wages well below what would be necessary to attract and retain qualified staff. These market failures provide a theoretical basis for public intervention that most economists across ideological positions accept. Federal support for child care takes several forms. The Child and Dependent Care Tax Credit allows families to claim a percentage of child care expenses as a tax credit, but because the credit is nonrefundable for most families, it provides no benefit to families with incomes too low to have federal tax liability. The Child Care and Development Fund provides block grant funding to states, which use it to subsidize child care costs for low-income working families. Research on CCDF subsidy programs finds that they increase maternal employment and reduce child care cost burdens for recipient families, but the number of families served is far below the number of eligible families, with most states serving fewer than 20 percent of eligible children. The relationship between maternal employment and child care access is bidirectional. Research finds that availability of affordable child care increases maternal labor force participation, particularly for mothers with young children. Conversely, high child care costs discourage employment by raising the net return to work, particularly for mothers with lower wages. Studies in states and localities that expanded child care subsidies find increases in maternal employment following expansion, with positive effects on family income and poverty reduction. Child care quality is highly variable and poorly correlated with cost in most markets. Research on child care quality uses observational measures of classroom interactions, structural features such as caregiver-to-child ratios and caregiver credentials, and more recently administrative data on child outcomes. Studies find that the quality of interactions between caregivers and children, rather than structural features alone, is the most important determinant of child development outcomes. However, interaction quality depends substantially on caregiver preparation and stability, which depends in turn on compensation that most child care markets cannot sustain. The Build Back Better Act proposed a large expansion of federal child care subsidies that would have capped child care costs at seven percent of income for most families, raised provider reimbursement rates, and improved compensation for child care workers. This proposal did not pass in the form originally proposed but generated significant research attention on what such an expansion would produce. Research commissioned on the proposal found large projected effects on maternal employment, child development outcomes, and child poverty, though the estimates involved assumptions that analysts debated. The proposal highlighted how large the gap between current policy and the investment level that research suggests would be needed to address child care affordability is. Child care deserts, defined as areas with insufficient licensed child care capacity to serve the young children who live there, are documented by research in communities across the country. Rural areas, communities of color, and low-income communities are most likely to be child care deserts. Research on care supply finds that home-based providers, who operate more small programs in residential settings, are the dominant provider type in lower-income communities and in rural areas, while center-based care is more common in higher-income and urban areas. The COVID-19 pandemic severely disrupted the child care sector, with programs closing, enrollment declining, and providers exiting the market. Research on the pandemic's effects on child care supply finds that the sector has partially recovered but remains below pre-pandemic levels in many communities, with particular shortfalls for infant and toddler care. Pandemic relief funding temporarily stabilized the sector, and research on the effects of this funding finds that it supported provider survival, maintained some access for low-income families, and in some states supported wage increases for child care workers. The research evidence supports the conclusion that the child care market as currently structured produces outcomes that are poor for families, for children, and for the workers who provide care. Addressing these failures requires investment at a scale that significantly exceeds current federal and state child care spending, directed toward both making care affordable for families and making child care work financially sustainable as a profession.