Capacity Building vs. Cost Shifting
It is great to finally see child care as part of the mainstream political conversations. It’s a significant part of household budgets and influences how parents, and grandparents, engage in the labor market. It’s also a contributing factor in whether or not families choose to add children to the household. One of the few silver linings of the recent pandemic is that it revealed the real value of reliable child care arrangements for working parents.
There are a variety of different ideas being proposed, implemented, or reworked as we search for solutions. While it’s encouraging to see to new ideas being tried and tested (old ideas haven’t gotten the job done), my inner economist is always looking for the unintended consequences around the corner. Many of the proposals to make child care more affordable will make it more affordable for some parents by shifting cost to another payer, such as an employer or government subsidy program. While these are great for families who participate, they may also raise the price of care for other parents. This has the potential to shift which families get squeezed out of the child care market and/or labor force while making only modest progress on a growing problem.
In econ-speak, many of the current proposals increase the demand for child care by supplementing some parents’ ability to pay for care without changing anything in the market supply or cost structure of firms providing the care. In this scenario, additional spots will be made available only as providers respond to rising prices. These changes are shifting costs without building capacity. To increase the number of spots available and build capacity we need a corresponding shift in the supply curve by implementing policies that make it more rewarding or profitable to provide child care.
I am not against policies that influence the demand side of the market and I am sure to discuss them in future posts. But for now, here are some policies that could help build capacity, or shift the supply, that should be included in the policy considerations:
Reward extra hours. Workers in health care, construction, and retail struggle to find care arrangements that match their work schedules. When they do find them, they can be so expensive that work no longer makes financial sense. For any potential solution considered, we should look for ways to increase the incentives for child care available outside the typical work day.
Let teachers retire gradually. Allow retired teachers (early ed and K-12) to work as early ed teachers without fully counting all of the income against the earnings limit of pension plan or social security benefits. It gives new retirees with expertise in children’s brain development a financial incentive to spend some time caring for young kids.
Combine 1 and 2. Increase the amount retired teachers can earn without penalty even more for hours they work before 8:00 AM or after 5:00 PM to encourage extended hours care. Perhaps exclude 50% of income earned between 8 am - 5 pm and 75% of income earned for extended hours from the earnings test. It would require centers to track earnings by clock hour, but modern time tracking systems should be able to handle this with minimal cost. To offer extended hours centers will need help beyond their full-time staff and newly retired teachers may be a good source of part-time help.
3. Invite impact investors. Allow tax provisions to facilitate impact investors in the capital stack for child care providers. Rather than create a whole new program, why not use some of the current programs in place for affordable housing? We could reward opportunity zones that include child care centers. This would provide additional tax benefits to centers created in low-income census tracts or child care deserts. We can also draw from the affordable housing toolkit and make the tax benefits contingent on serving a target population. Could we add child care center provisions into the Low Income Housing Tax Credit (LITHC) regulations to reward projects that include space for a center? The families who live in LITHC developments are likely the ones who benefit most from quality, affordable child care close to home.
4. Be smart with tax credits. Any tax credits for child care workers need to be calculated into payroll withholdings and not subject to household income limits. If we want to grow and stabilize the child care work force it has to be more rewarding. The labor of a child care worker with a highly paid spouse is just as valuable in opening additional spots as a the labor of a single parent. Credits should not require continued employment at the same employer for a long time, only received when they file their tax return 9 months later. Process it through payroll so it becomes an immediate pay raise. It’s counterintuitive, but it may work to reduce turnover and employment churn if this makes compensation more competitive with retail and fast food.
Also, rather than just increasing the child care tax credit (CCTC), increase the earned income tax credit (EITC) and the income range to receive it. The CCTC benefits workers who are paying for care, i.e. the demand side of the market. The earned income tax credit benefits all low wage workers, which includes most of the people providing child care, the suppliers in the market.
5. Encourage thinking outside the box (or center). We need flexible systems to facilitate creative organizational structures such as centers with remote classrooms. The remote classrooms can be in homes or other child-friendly spaces in neighborhoods and operate much like a home care center but without the need for the care provider to do all the additional administrative work. The administrative work is done by a small staff that works with dozens of local, remote classrooms in addition to a center. This could work to address several issues: unemployed parents can be trained to provide care, homes and churches in child care deserts can be targeted as potential locations, and the center can provide substitute teachers to fill in when the primary provider is ill or unavailable.
6. Better match the payment to cost. In private centers, Pre-K rooms frequently subsidize the infant and toddler classrooms due to the lower number of infants and toddlers one worker can care for. The discrepancy in labor cost is not fully captured in the different rates charged based on the age of the child. When a state offers universal Pre-K, it is harder for private centers to offer as many infant and toddler spots as they have fewer Pre-K students helping to subsidize the higher labor cost of younger children. To address this, have an incentive system that rewards centers based on the ratios of infants and toddlers to Pre-K children.
7. Eliminate licensing barriers. No one wants unregulated centers or children being cared for in high-risk environments. We want to eliminate the barriers, not the licensing. Child care centers should be regulated as all businesses and additionally as safe places for our children. But the regulation should be clear, objective, and streamlined to avoid unnecessary costs or delays to opening a center. Any changes that facilitate a more easily understood and clear path to opening a child care business will help build capacity.
I realize there is little political appetite for a big new program or spending increases at any level of government and some of the ideas included here would require changes to tax code at the federal level. But many smaller initiatives can be adjusted to supplement the market supply if we are looking for them. Foundations already recognize the need for capacity building and earmark funds for that when needed. This is a case where we should all be thinking like smart philanthropists and considering ways to increase the supply while we add support to the demand side of the market.