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ASU expert sees turning point in concern over affordable child care

Ongoing research predicts federal subsidies would boost employment

Empty children's tables and chairs in a room with windows.
June 13, 2023

The COVID-19 pandemic highlighted the fragile nature of the child care system in the U.S., and the crisis is getting a lot of attention now as companies scramble to fill positions. A recent report from the bipartisan Council for a Strong America found the cost in lost earnings, productivity and revenue from the child care crisis to be $122 billion last year.

The ChildCare Aware organization reports that in 2021, the average national price of child care was around $10,600 each year, and low-income families and families of color are disproportionately affected.

Chris Herbst, a Foundation Professor in the School of Public Affairs at Arizona State University, is an expert in child care policy. He says the topic has been on the minds of policymakers as the nation grapples with high demand.

Herbst was on a team of researchers that worked on a project last year to measure the expected impact of child care subsidies in President Biden’s proposed Build Back Better Act, which would have capped child care costs at 7% of income for parents earning up to 250% of a state's median income.

The team found that employment would increase, child care costs would plummet and the quality of child care would increase under that proposal.

That act did not pass, yet child care continues to be a critical issue.

Herbst answered some questions from ASU News.

Question: What’s happened since the Build Back Better Act failed to pass?

Answer: A couple of interesting things have happened both at the federal level and, maybe even more importantly, at the state level.

With the passage of the CHIPS and Science Act, the Biden Administration has stipulated that any corporation receiving over $100 million in grants has to describe in its application — and then actually fulfill the promise — of how to provide child care for its employees.

My understanding is that there’s some flexibility in terms of how companies can define the term “provide.” They can provide direct, on-site care or provide their employees some form of financial assistance to purchase it through the local private market.

The other thing the administration has done through executive actions is a “whole-of-government” approach ... (by which) each of the executive agencies can think through ways to make child care more accessible and affordable through the programs that each agency is running.

This is the first time a president has used an executive order for a whole-of-government approach to child care policy. Neither of these things, the CHIPS and Science Act nor the executive order, is really child care policy.

It’s not optimal, but I think it shows just how serious we are getting about this issue. For myself and others who have been studying this issue for a long time, we tend to be more pessimistic than optimistic, but things like this really increased my and others’ optimism about the possibility of getting a Build Back Better-style child care entitlement sometime soon.

Q: What’s happening at the state level?

A: You have states like New Mexico and Vermont now raising new funding in different ways to essentially overhaul and make more generous their child care subsidy system.

New Mexico is tapping into its petroleum reserves, a reserve of cash based on petroleum and natural gas taxes, to fund a system of child care. The state of Vermont is raising some taxes to fund its brand-new child care subsidy system.

When you think about all this together, there is a lot of reason for optimism.

Q: What’s happening in Arizona?

A: Arizona like every other state received a share of the American Rescue Plan Act, a $20 billion cash infusion from the federal government to basically stabilize the child care sector, which, coming out of the pandemic, had to compete with other industries to keep its workers. Child care providers couldn’t compete with Target and Walmart and Amazon in terms of compensation, so they were losing workers to these big companies. The cash infusion was aimed at allowing states to experiment with staff compensation programs.

Arizona, like every other state, has done some innovative things. Thousands of child care programs across the state in every county have received these funds to pay their child care workers more. Some programs are giving one-time bonuses. Other programs are doing things around sign-on bonuses in addition to more permanent increases to staff compensation.

The issue is this money will dry out soon, so there’s a lot of concern about what will happen.

Q: Are businesses driving some of the action around child care as they scramble for ways to attract and keep employees?

A: You are seeing this and it’s a cause (for) ... optimism and concern at the same time.

Because the federal government isn’t doing as much as it should in terms of providing child care assistance at the state level — it very much depends on what state you’re in — you’re seeing a role for providing on-site child care or, as a job perk, subsidies for child care costs.

This is a good thing if you’re one of the lucky few who works for a company that provides these benefits, because most employers do not. If you’re a low-wage worker at Walmart or McDonald’s, there’s zero chance that you’ll benefit from these kinds of employer-provided benefits.

My view is that this kind of assistance is a stopgap. It’s not the policy we need. Policy needs to cover, first and foremost, low-income families, and employer-provided benefits don’t do that.

Q: Describe your ongoing research project, which released a working paper, “An Equilibrium Model of the Impact of Increased Public Investment in Early Childhood Education,” in 2022.

A: It included eight child care and early-education researchers. We came together to evaluate the child care subsidy program that was included in the Build Back Better Act. We started our work because we felt a certain responsibility for providing really rigorous evidence about the anticipated impact of this policy.

We felt like we were providing not only a solid piece of academic work but also some guidance to policymakers when they returned to this issue in the future.

Basically, in very simple and concrete terms, we built a statistical model of the child care market, the demand side and supply side. How do parents typically behave as it relates to their child care decisions and what kinds of things determine the choices they make in the child care market? What kinds of incentives and environmental conditions do providers pay attention to when making decisions around staff compensation?

We then introduced the BBB Act child care proposals to the model and showed how parents and providers behaved before and after — to what extent parents changed their employment behavior, how they changed their child care consumption behavior and were they willing to spend more on child care after? On the provider side, were they willing to alter teacher wages?

Q: What were the results?

A: Our model predicted somewhere in the neighborhood of about a million new parents entering the labor market because of this policy.

It’s driven by two things. One, the subsidy is generous and far reaching. Second, the benefit is really generous for low-income families, whose employment rates are lower than average employment rates. There are many more potential new working parents in low-income families to entice into the labor market as a result of this policy.

Q: And what about child care costs?

A: Not surprisingly, this was a policy whose benefits were targeted at low-income families. At the same time, this was a policy that had a really long reach into the income distribution. Its benefits were made available to the vast majority of families with kids. But the benefits were much more generous at the lower end of the income distribution.

We found that for low-income families, a BBB Act type of subsidy was going to lead to really big increases in employment amount. Their child care costs were going to plummet in level terms and as a share of their income. Our estimate suggests that for low-income families, their child care costs would decline about 75% with the BBB Act.

Also, because of the subsidy, we saw parents taking their kids out of lower-quality, potentially dangerous providers and putting them into higher-cost, higher-quality providers because, for the first time, they were going to be able to afford it. If you were a low-income family, it would be really good for employment but also for the kids’ early development and school readiness.

On the provider side, we found that because there was a big increase in demand, the supply of child care would blossom. A lot of the supply problem that we have now would likely evaporate or mitigate under a BBB Act-type subsidy because so many parents would demand child care that the supply side would have to ramp up to meet the demand.

Part of meeting the demand is that the providers would have to attract teachers and their wages would have to increase. The model predicted really big increases in child care wages — on the order of 30% if you were a highly skilled, highly educated teacher.

Q: Did the model predict any downsides?

A: For the small share of families that’s not income eligible for the subsidy, your child care prices will increase. If you’re a provider and have to pay teachers more, you’ll pass those costs on to the families. For high-income families, your expenses are going to rise.

Q: With the influx of people in the labor market, would the short-term results be chaotic?

A: Probably. Almost overnight you would be putting tens of millions, if not hundreds of millions, of dollars into families’ pockets for child care. It’s going to start a feeding frenzy of sorts. They would move en masse into the market, look for child care and probably there would be supply constraints in the short term.

You can’t construct child care centers overnight. It would take six months to a year for the wrinkles to get ironed out. But eventually the market would stabilize and you would see the supply needed to absorb the demand.

One of the smart things the legislation would have done is to phase in the policy over a couple of years. It would start with low-income families absorbed into the system immediately, and in successive years it would admit more families by income levels.

Q: The working paper was released in order to gather comments before submitting it to peer review at an academic journal. What has the reaction been?

A: We’ve been really happy with the response to the paper. It’s had a real-world impact on policy discussions in the media as well as in official public-policy circles. ... We know that our paper has been cited by some official publications coming out of the White House.

I think this paper and its relevance will only grow over time.

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