This report contains corrections.
Introduction and summary
The United States’ child care industry is in crisis. Families across the country are unable to find high-quality early care and education (ECE) options for their young children, and the COVID-19 pandemic has wreaked havoc on already strained businesses. Congress failed to pass a historic investment in child care in the 2022 session, and the nation faces a divided House of Representatives and Senate in 2023.
Absent major federal increases to the Child Care and Development Fund (CCDF), authorized by the Child Care and Development Block Grant (CCDBG), states must work to address the crisis. Governors can lead the way by engaging in bold action to support young children and their families. This report identifies five steps governors can take to increase states’ supply of affordable, high-quality child care:
- Calculating the true cost of care and setting child care subsidy rates accordingly so that these rates reflect the actual cost of child care for providers
- Developing wage scales that create parity with K-12 compensation
- Creating new financing strategies to address the pending fiscal cliff spurred by the expiration of federal COVID-19 relief funding
- Compensate providers based on enrollment, not attendance*
- Offering incentives to expand child care options in child care deserts
The scope of the child care crisis
The child care industry is facing a national shortage of ECE providers and programs. During the past two years, 16,000 child care programs across the country closed, and the industry experienced a 9 percent decline in its number of licensed providers. From February 2020 through July 2022, nearly 90,000 providers left the child care industry, and another 2,000 left from August to September 2022. In September, child care employment dropped to 9.7 percent below what it was in February 2020, with 102,400 jobs lost.1
From February 2020 through July 2022, nearly 90,000 providers left the child care industry.
Child care spots were already scarce before the pandemic: As of late 2018, the Center for American Progress found that about half the neighborhoods in the country qualified as “child care deserts,” defined as areas where three children compete for each available spot at a licensed child care center.2 This shortage is negatively affecting parental employment and the nation’s economy. In a 2022 U.S. Census Bureau survey of households, more than 365,000 adults reported losing a job in the four weeks preceding the survey because they needed to take time to care for children under the age of 5. More than 1.3 million survey respondents reported that an adult in their household had in the past two weeks left a job to care for children, and more than 1.6 million parents reported supervising one or more children while working.3 In 2022, child care challenges for parents and caregivers in the workforce cost the economy an estimated $122 billion in lost earnings, productivity, and revenue.4 Research has found that productivity problems associated with child care issues cost employers $23 billion annually.5
Even when families do have access to child care, it is often unaffordable to them. Nationwide, the average cost of licensed center-based care is $1,300 per month for an infant and nearly $900 per month for preschool-aged children.6 More than half of parents with children younger than age 15 spend 20 percent or more of their household income on child care7—and that cost has increased over the past few years, by an average of 41 percent.8
As demonstrated by the numbers above, the true cost of infant care is significantly higher than the cost of care for preschool-aged children. While every state provides a higher subsidy reimbursement rate for infants than for older children, there is a significant gap between how much states pay for infants and how much infant care actually costs. On average, across the United States, the cost of infant care is 49 percent higher than the cost of care for a preschooler, but the average subsidy rate is only 26 percent more for an infant than for a preschooler. As a result, child care providers often lose money when serving the youngest children. This results in a far higher number of infant child care deserts for children younger than 3 years of age, when compared with the overall number of child care deserts for children from birth through age 5.9
The child care workforce, meanwhile, is underpaid and undervalued. Even before the COVID-19 pandemic, the historical and pervasive undervaluing of labor predominantly performed by women, especially women of color, had created one of the most underpaid workforces in the United States. In 2017, national median wages for early educators ranged from $10.72 per hour to $13.94 per hour—$22,290 to $28,990 full time annually. These are poverty-level wages: The federal poverty threshold for a family of four in 2017 was $24,600. Average wages are even lower for early educators of color, who make up about 40 percent of the national ECE workforce, and for infant and toddler educators.10 Real wages for child care teachers fell 6.5 percent from 2012 to 2019, compared with an increase of 6.1 percent across private sector employees overall.11
Real wages for child care teachers fell 6.5 percent from 2012 to 2019, compared with an increase of 6.1 percent across private sector employees overall.
Economic insecurity is widespread among the ECE workforce, regardless of higher education attainment or years of tenure.12 The majority-female child care workforce disproportionately employs women of color,13 and national data from 2012 and 2019 point to significant racial and ethnic wage gaps that have widened over time.14 In 2019, Black women earned 76 percent of what white teachers earned, while the gap for Hispanic women was 85.2 percent of white women’s earnings.15
Finally, public funding for child care is inadequate. Despite the critical role that child care plays in the economy, public funding to support widespread access is woefully inadequate. The primary public funding source for child care is the federal CCDF, authorized by the CCDBG. This federal and state partnership program, which requires state matching funds, pays subsidy vouchers to providers for eligible children. However, lack of funding means the CCDF reaches only 1 in 7 eligible children, and many families who need help paying for child care do not meet the eligibility criteria.16
On the whole, the child care industry is operating as a broken market. Families cannot afford care, and providers are underpaid. Public funding is necessary to prop up the industry and fill the gap between what child care costs and what families can afford to pay. Governors are in a prime position to take action to address the issue and fund child care as a public good in the vein of K-12 education, libraries, and parks. The next sections detail five actions governors can take to fix the broken child care system.
1. Calculate the true cost of care and set child care subsidy rates accordingly
The first step that governors can take is to call on their state’s child care and early care and education agency to develop models to calculate the true cost of care. The high price of child care has long been a burden for most families. In most states, child care rivals the cost of college and forces families to make difficult decisions and trade-offs. And this high price often does not even capture the actual costs that child care providers incur. Indeed, it rarely, if ever, covers the “true” cost of care—as CAP defines it, the cost to provide “high-quality, developmentally appropriate, safe, and reliable child care staffed by a professionally compensated workforce.”17
The true cost of licensed child care for an infant is an average of 43 percent more than the amount providers can be reimbursed for through the child care subsidy program—and 42 percent more, on average, than the price programs currently charge families.18 A provider who can recoup the cost of care through parent tuition has no incentive to offer child care slots to subsidy-eligible families, severely limiting choice for families who rely on this assistance to access child care.19
Federal guidelines require states to set payment rates at a level intended to provide access to a majority of providers within the child care market. As of 2020, however, only one state, Maine, set rates at the federally recommended level—and even then, rates are still based on the broken market, which fails to account for the true cost of care.20
State agencies are required to assess the market rate for child care and set payment rates that ensure families eligible for subsidies and those not receiving subsidies have equal access, with a recommendation of the 75th percentile of market rates.21 States are required to reevaluate the reimbursement rates every three years and can set them to reflect market surveys that were completed up to two years prior.22 However, the National Women’s Law Center has reported that the majority of states are basing their subsidies on market rates that are three to four years old, and six states are basing their 2021 reimbursements on data from 2016 or earlier.23
In most communities, this puts the burden of paying for child care primarily on families who struggle to afford the true cost of care.24 Families are extremely price sensitive, with child care often taking up one-third or more of their monthly budgets and forcing them to consider price above many other factors.25 While there is a high demand for child care across the country, supply does not respond to that demand because families are already paying as much as they can afford, even though this amount rarely covers the true cost of operation.
The average child care worker in the United States earns less than $13 per hour and rarely receives benefits.
The impact of this broken market falls heavily on the early childhood workforce. The average child care worker in the United States earns less than $13 per hour and rarely receives benefits, leading to high turnover and a demoralized profession.26 The COVID-19 pandemic has only made it more difficult to attract workers to the child care sector.27 Research has shown that beyond the basic health and safety standards, the largest driver of quality in a child care program is the interactions between caregivers and children.28 The current child care market, with its broken fiscal model, fails to provide the investment necessary to pay early educators a fair wage or attract skilled workers to the field.
More and more policymakers are acknowledging that the market price-based approach to rate setting has shortcomings as well as that child care investments must be better aligned with need. According to Prenatal to Five Fiscal Strategies, “Several states are considering utilizing the existing flexibility offered under CCDF to set rates based on cost, which can better align rates with the cost of care and address the inequities of market-based tuition.”29 Using a cost estimation model to set subsidy rates allows policymakers to ensure that the subsidy system does not exacerbate the broken child care market. The model provides data on the cost of serving children at various ages and with different needs, as well as in various settings and30 at varying quality levels.
As Prenatal to Five Fiscal Strategies describes:
Distinct from a budgeting tool which would account for specific characteristics of a given program, a cost estimation model is intended to provide policymakers with an estimate of the cost of operating a child care program that is informed by provider data and representative of most providers within different categories. This allows policymakers to understand variations in the cost of care based on:
- Program size and ages of children served
- Program auspice
- Geographic location of program
- Licensing standards
- Quality requirements
- Program business practices
- Increased compensation31
States agencies can complete cost modeling efforts on their own or in consultation with an early childhood commission or task force. They can also hire outside consultants to provide objective analysis and manage communication with key stakeholders, including ECE providers and parents.
In 2021, New Mexico Gov. Michelle Lujan Grisham (D) announced that the state used a cost estimation model to set new child care subsidy rates for providers. The new rates will increase subsidy payments to providers in all settings. These across-the-board increases will allow child care businesses to better support the true costs of providing high-quality education and care to New Mexico’s children, as well as help child care providers improve quality and expand offerings. As a result, providers will be able to enhance choices for parents and families seeking a full range of high-quality child care services.32
The Washington, D.C., Office of the State Superintendent of Education (OSSE) uses a cost-modeling approach to analyze the costs of delivering child care. According to OSSE, using the cost-estimation model, the department:
explores the likely costs of delivering services at each level of the District’s Quality Rating and Improvement System (QRIS), Capital Quality, in center and home-based settings that serve children of mixed ages and needs. OSSE’s cost estimation model is based on the Provider Cost of Quality Calculator developed by national experts for the US Department of Health and Human Services and is further customized to reflect the District of Columbia context.
OSSE updates its analysis of the cost to deliver care in the District of Columbia every three years and uses this information to inform reimbursement rates for subsidized child care, make policy decisions that will support child care providers in maintaining financial sustainability and enhance business supports for child care providers, in support of the District’s efforts to ensure that all District of Columbia children have equal access to quality child care.33
For more information on calculating the true cost of care, see:
Governors should call for additional public investment to set subsidy rates based on the true cost of care, rather than current market price. They should also look to expand the number of families who receive help to pay for child care and ensure that they spend no more than 7 percent of their income.34 Increased state investment will create better wages, a more stable educator workforce, and sustainable systems for children, families, and communities. Research has shown that increased public investment in child care pays for itself several times over, improving maternal labor force participation;35 providing increased educational and socio-emotional benefits for children; and boosting pay and employment opportunities for the early childhood workforce.36
2. Develop wage scales that create parity with K-12 compensation
One key strategy for rebuilding the ECE system is to fund and institute well-designed salary or wage scales that provide transparent and equitable wage lattices and make ECE a competitive career.37 As defined by the Center for the Study of Child Care Employment, a salary scale, or schedule, is “a scale with clearly differentiated salary increments based on qualifications and years of experience, which provides guidance for salary increases over time.”38 According to T.E.A.C.H Early Childhood National Center, “It can also be thought of as a table of wage steps and ranges that provides a career pathway aligned to higher wages.”39
As T.E.A.C.H. explains:
Salary scales define expected earnings in a uniform way for an identified group of individuals. Scales have a series of levels, all with beginning and end points to promote fairness and transparency, and are based on predetermined criteria. Education and/or credential requirements are likely to be the primary criteria at each level, with training/professional development, relevant experience and/or roles and responsibilities also used in some states. … Salary scales also typically define the number of hours worked per week and months per year, as well as the requirements for movement across the scale.40
While several states have developed wage scales, and some have legislation directing state offices to develop them, few have implemented a scale of their own. Financing is the largest barrier. Without significant investment of public funding, wage scales are not feasible because programs cannot afford to pay higher wages, especially as parents are currently the main source of ECE funding. In states that have implemented salary scales, the scales are almost exclusively specific to publicly funded pre-K for 3- and/or 4-year-olds, where the scales have been tied to wage parity with kindergarten teachers in public schools. While this is progress, it does not serve the whole field, especially infant and toddler educators.41
Minnesota’s proposed wage scale, however, is designed for early childhood educators in all settings, including those working in family child care homes. The scale does not differentiate based on the age of children served. North Carolina’s plan, meanwhile, includes educators with credentials ranging from introductory certificates to pre-K certification, in all settings.42 In Oregon, the current wage scale is limited to educators working in three state-funded programs, with plans to make it available eventually to all early educators.43
Some states have based their scale levels on the National Association for the Education of Young Children’s Power to the Profession framework. This framework establishes a primary set of pathways—early childhood certificate/credential programs, early childhood associate degree programs, and early childhood bachelor’s degree/initial master’s degree programs—that will prepare early childhood educators for licensure at three professional designations: ECE I, II, and III.44 Minnesota built its wage scale upon these designations, adding a level before ECE I to include early childhood paraprofessionals on the wage scale.
3. Create new financing strategies to address the pending fiscal cliff
The American Rescue Plan—through its historic $24 billion Child Care Stabilization grant program—has already provided vital aid to the ECE system, helping more than 200,000 child care providers keep their doors open to as many as 9.5 million children and allowing their parents to work. Already, stabilization funds have assisted providers employing more than 1 million child care workers.45 Yet the American Rescue Plan funds will expire in September 2024, with no replacement or continuation planned. The Bipartisan Policy Center estimates that states will face a $48 billion funding cliff in 2024,46 and the challenges in hiring staff are likely to only worsen. To address this, governors must act now.
Much of the funding for ECE is allocated through the annual budget process through appropriations, which is dependent on Congress and state legislatures. This leaves the consistency of funding vulnerable to changes in political will—and means that early childhood systems are unable to count on sustained investment. Currently, funding for children is projected to constitute a shrinking percentage of the federal budget in coming years. And states have targeted most, though not all, of their funding at pre-K programs that are often limited to 3- or 4-year-olds. While publicly funded pre-K programs are a critically important investment, funding programs only for 3- and 4-year-olds leaves out infants and toddlers, meaning that many families of very young children are unable to find care.47
Public support for investments in ECE is at an all-time high. According to a national survey, 70 percent of voters say “access to high-quality child care for all infants and toddlers is a high/very high priority,” and 69 percent support access to “high-quality preschool programs.”48
Public, dedicated funding streams for early childhood have emerged as models for financing child-serving systems. According to the Louisiana Policy Institute for Children, “[D]edicated revenue streams are both practical and attractive sources of funding for early childhood because they provide the sustainability and continuity required to build a true system of ECE supports and services.”49 They could come in the form of sin taxes, lottery dollars, sales taxes, or tax credits, or through inclusion in school funding formulas.
Sin taxes—excise taxes on certain “vices” such as tobacco, gambling, alcohol, or sweetened beverages—are mechanisms for financing ECE that are popular with voters. A variety of these taxes, designed both to generate revenue and to discourage certain behaviors, have been used for this purpose. The most popular is the tobacco tax.50 In 2006, voters in Arizona levied a tobacco tax that funded the First Things First Arizona initiative, making Arizona the second state, after California, to institute a tobacco tax primarily for funding early childhood education. Arizona’s tax raised $143 million in 2018, and California’s has raised an average of $383 million annually since 1998.51
Lottery dollars and gambling taxes
A few states are using lottery dollars and taxes on sports betting to fund ECE services. Georgia funds its universal pre-K program through its lottery system.52 Louisiana tags 25 percent of sports betting tax revenues, up to $20 million, to the Louisiana Early Childhood Education Fund,53 a state matching fund that offers local entities a dollar-for-dollar match on investments made to expand access to ECE.
While states often use general sales and taxes for their general funds, one state, South Carolina, dedicates a portion of sales tax revenue to early childhood. The state has a 1 cent sales tax that generated $15.5 million in 2017 for pre-K programs.54
Inclusion in school funding formulas
Early childhood is often financed through funding dedicated to education more broadly. For example, inclusion of pre-K in a state’s constitutional definition of “core educational services” allows funding for pre-K programs to flow through the state education financing formula, which guarantees more stable annual funding. Many states use grants and contracts for these funds to provide pre-K programs in community-based settings as well as in public schools. It is important to note that the level of funding allocated per child is subject to the amount of funding allocated by the state legislature, which may choose to cover all eligible students or to cap available funding.55 Currently, nine states, and Washington, D.C., include funding for pre-K slots in their funding formulas: Colorado, Iowa, Kentucky, Maine, Oklahoma, Texas, Vermont, West Virginia, and Wisconsin.56
Tax credits can be an effective, efficient means of incentivizing child care supply and quality in a targeted way. They should not, however, be considered a substitute for child care subsidies or a direct appropriation, as they are only paid once per year and do not cover the full cost of care. They should be made fully refundable for low-income tax payers. Louisiana’s school readiness tax credits are five refundable tax credits for a variety of child care-related expenses or activities structured to incentivize quality care. The parent and provider credits increase with the quality of the center. The child care resource and referral credit is a dollar-for-dollar credit to businesses that donate up to $5,000 to their local resource and referral agency. These credits average around $17 million annually.57
4. Compensate providers based on enrollment, not attendance*
Child care subsidies for low-income working families are typically administered as portable vouchers,58 which families can use in the child care market to help cover the cost of the program of their choosing.59 However, in many states, programs are reimbursed based on child attendance rather than enrollment.60 Since providers cannot anticipate whether each child will be present on a given day, they cannot anticipate how many staff they will need, and this misalignment can lead to staffing costs that exceed the state reimbursement.61 Maine is using its COVID-19 relief funding for a range of strategies, including to base reimbursement amounts on enrollment rather than attendance for providers serving children whose families receive child care assistance. Wyoming and Montana are also paying providers based on enrollment. 62
5. Offer incentives to expand child care options in child care deserts
To better understand the U.S. supply of licensed child care and national trends in families’ proximity to child care, CAP has analyzed the geographic locations of licensed child care facilities, including centers and family child care homes. These analyses assess trends in proximity to child care as one component of a child’s ability to attend a high-quality early childhood program. To describe this geographic proximity, in 2016, CAP introduced a working definition of child care deserts: areas where there is a ratio of more than three young children for every licensed child care slot. This definition is derived from U.S. Census Bureau findings showing that approximately one-third of young children are regularly in the care of someone who is not a relative.63 A 2018 CAP analysis included data from all 50 states and Washington, D.C., and found that more than half of Americans—51 percent—lived in neighborhoods classified as child care deserts.64
A 2018 CAP analysis included data from all 50 states and Washington, D.C., and found that more than half of Americans—51 percent—lived in neighborhoods classified as child care deserts.
When the number of licensed child care slots is insufficient to reach at least one-third of young children younger than age 5, the likelihood that parents face difficulty finding child care increases. This could affect employment decisions or force families to turn to unlicensed options.65
Other key findings from the 2018 CAP report include:
- Families in rural areas face the greatest challenges in finding licensed child care, with 3 in 5 rural communities lacking adequate child care supply. High-income suburban neighborhoods are the least likely to experience child care shortages.
- Hispanic/Latino families disproportionately reside in child care deserts, with nearly 60 percent of their population living in areas with an undersupply of licensed child care.
- Child care deserts have, on average, maternal labor force participation rates that are 3 percentage points lower than those of communities where there is adequate child care supply.
- The prevalence of child care deserts varies from state to state, from fewer than 23 percent of Maine neighborhoods to more than 75 percent of Utah neighborhoods.66
Governors can use grants and contracts with child care providers to incentivize the supply of care in child care deserts.** An increasing number of states are using grant and contract systems to address some of the disincentives for providers to participate in the current subsidy system; this, in turn, increases low-income working families’ access to high-quality child care settings, especially for infants and toddlers. Over just the past few years, grants and contracts have gained significant momentum: In 2012, nine states used contracts to pay a share of their providers,67 while a review of the 2016–2018 CCDF plans found that 30 states and territories were using grants and contracts with providers.68
New York Gov. Kathy Hochul (D) announced that $30 million in additional federal grant funding will be available to existing child care programs in areas of the state that are child care deserts.69 The funds, which are part of the $100 million child care desert initiative approved in the state’s 2022 enacted budget, are being made available through the American Rescue Plan Act and will be administered by the New York State Office of Children and Family Services. According to the governor’s press release, “The grants will help existing child care providers in underserved areas, and the request for applications (RFA) will have two parts. The first focuses on expanding child care in existing day [child] care centers and school-age child care programs, with bonus funding for those slots specifically designated for infants/toddlers and/or children with special needs. The second part of the RFA focuses on expanding specific types of child care in existing small child care centers, family child care programs and group family child care programs – whose current enrollment is under capacity – specifically for infants/toddlers or children with special needs, or if the program wants to expand to include nontraditional hours.”
According to the New York Office of Children and Family Services:
Allowable expenses include program development costs and short-term program operating expenses, including:
- Personnel costs, including payroll, salaries, similar employee compensation, employee benefits, retirement costs and educational costs;
- Supporting staff expenses for accessing COVID-19 vaccines;
- Rent or payment on any mortgage and utilities; and
- Training and technical assistance expenses, including professional development, business trainings and business services70
Similarly, Oklahoma is using pandemic relief funds to provide Child Care Desert startup grants to build supply in underserved areas and special needs grants to increase the supply of child care for children with disabilities.71
The U.S. child care shortage is placing heavy costs on families and ECE providers alike. Absent federal legislation to address the crisis, it falls to states to take action and adopt policies that will increase the supply of high-quality, affordable child care. As the infusion of resources from federal COVID-19 relief funding comes to an end, governors must take the lead in calling for equitable policies to address the current crisis. State policies are needed to fairly compensate providers for the skilled work they perform, incentivize the creation of programs in child care deserts, and relieve families from the high cost of care. Governors should institute reforms that will leave lasting positive impacts on child care in their states and that better support working families.
* Correction, February 27, 2023: This report has been corrected to clarify that governors can use their child care subsidy systems, not grants and contracts, when adopting the policy change to reimburse child care providers based on enrollment, not attendance.
** Correction, February 27, 2023: This report has been corrected to clarify that governors can also use grants and contracts to incentivize the increase of the supply of care in child care deserts.