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Childcare Costs, Reduced Work, and Financial Strain: New Estimates for Low-Income Families

According to new survey data from the Federal Reserve’s 2023 Survey of Household Economics and Decisionmaking (“SHED”), low-income families are more likely to reduce work to care for young children while high income families are more likely to pay for care.[i] These differing decisions have financial consequences, as families who reduce work are less well off financially than those who are not reducing work. Although families who pay for care are better off overall, child care costs are still a notable expense. On average, families who pay for care pay about half as much for that care as for housing each month. This analysis suggests how government and private sector support for child care might vary by income

Families handle care responsibilities differently across income levels

As shown in Figure 1, families at different income levels make different decisions about how to care for their children. Households with young children and that make less than $75,000 per year are more likely to provide care themselves, with about 35 percent of these households reducing work to care for children. As income rises, the share of households using paid child care rises – from 17 percent for those making less than $24,000 to 41 percent for those making more than $150,000. The highest earners are unlikely to reduce work to care for children, without only about 14 percent of households doing so.

Families who reduce work to care for children are worse off financially

The data in the SHED cannot tell us whether these differences in care arrangements come out of preference or necessity.  It may be that some parents choose not to work because of the cost of child care, especially for multiple children.  Alternatively, it may be that some parents choose to not work or work fewer hours because they want to stay home with children despite lost income. However, the SHED does show that there are financial costs for families who reduce work to take care of children.

As shown in Table 1, households where parents have reduced work to care for children do less well on a range of financial measures, with less than half reporting they could cover an unexpected $400 expense with cash or that they are doing “at least okay” financially. Only 30 percent saved any money in the previous month. Meanwhile, parents who paid for care, as well as parents who did not pay for care or reduce work (likely those who used free public or family care), were more likely to be able to cover expenses, report doing well financially, or save money. Overall, only 64 percent of work-reducing households responded positively to any of the three measures, compared to 80 percent of those paying for care and 77 percent of those with free care.

Academic literature provides an additional clue in the preference-necessity debate. A body of work suggests access to affordable care increases parental labor supply, implying that there are parents who want to work but cannot due to lack of available or affordable care (Morrisey 2017). Together, academic evidence and the SHED suggest that helping families access affordable child care could increase the supply of workers and reduce negative financial consequences of paying for care.

Paid child care is a large financial cost for families

Although families who pay for care are on average wealthier and in better financial circumstances, care is a real financial burden for many of them. OUSEA analysis suggests that the median individual with a child under 13 who pays for child care spends $1,700 per month on their rent or mortgage and $867 on child care, meaning child care costs are 51 percent of monthly housing costs on average. Housing is the largest expense for the average American family. If child care is half as much, that makes it a large contributor to many family budgets.

Government and private sector support for high quality child care could increase financial well-being, labor supply, and economic growth.

This analysis shows that many low-income families reduce work when they have children at the cost of their financial well-being. Even for families who can pay for care, child care costs are often prohibitively expensive, costing half as much as housing per month.

Stronger government and private-sector support for care could alleviate these difficulties. Providing high-quality care is often not profitable, leaving almost three-quarters of families in areas where there is an under-supply of care. Some parents have no choice but to stay home and care for children, even at the cost of financial well-being. Many countries solve these issues with government investment, but government child care spending in the United States is one of the lowest in the Organisation for Economic Co-operation and Development (OECD).

This investment is not only important for families, but also for businesses and the macroeconomy. On a business level, child care benefits help attract and retain top talent and decrease absenteeism among existing workers (Kos et al. 2024). On a macroeconomic level, reducing barriers for marginalized workers creates better allocation of talent, increasing productivity and economic growth (Hsieh et al. 2019; Buckman et al. 2021). The decision to use paid care depends on various factors not captured in survey data, such as parental preference, availability, and affordability. However, what we do know is that child care costs for American families remain high.

[i] The SHED is a naturally representative, convenience sample of 11,400 participants. The small sample, combined with a low response rate (4.1 percent) limit the scope and precision of this analysis.