three kids playing at daycare

The conversation around access to childcare and its impact on labor force participation has gotten a lot of national attention in recent years. One issue of focus are the challenges faced by childcare providers stemming from declining enrollment and escalating operational expenses. Another is the prospect of childcare costs imposing a significant financial burden on working families, potentially impeding labor force participation rates. Notably, low- and moderate-income households are disproportionately affected by rising prices in this sector.

As of 2021, a substantial proportion of the American workforce—53 percent—are parents, with 37 percent of working parents having young children. Childcare is an indispensable service for the majority of single-parent and dual-working households to engage meaningfully in the labor force. Among families with young children, childcare and housing constitute substantial components of the household budget. According to the Florida United for ALICE Survival Budget, in 2021 the average annual expense for a two-bedroom apartment at Housing and Urban Development's Fair Market Rent stood at $7,524 while family-based childcare for a preschooler amounted to $6,744. These figures represent families' baseline costs, but actual expenses may often exceed these amounts. Notably, the Florida United for ALICE Stability Budget underscores that the monthly expenditure on childcare surpasses that of housing, with figures approximating $1,448 and $1,253, respectively, for a two-parent, two-child household.

Since February 2023, there has been a noticeable uptick in the labor force participation rate among women aged 25 to 54, reaching record levels, particularly among those with children under the age of 4. As employers endeavor to attract and retain a robust workforce, understanding potential barriers such as the cost of childcare becomes increasingly important, especially considering the observed surge in female labor force participation rates among mothers of young children.

Using Florida as a case study, researchers from the Federal Reserve Bank of Atlanta and the University of Florida analyzed publicly available data to understand the potential financial strains encountered by families with young children seeking childcare services. This analysis entailed calculating the Household Proportion of Income (HPI) by dividing the annual cost of childcare by the household's gross yearly income. The resulting quotient offers insight into the proportion of household income allocated towards childcare services across various household compositions and income levels. The study incorporated six household scenarios, delineated by the number of adults and number and ages of children needing childcare. The analysis leveraged the Low Income Home Energy Assistance Program estimates for State Median Income (SMI), given their role in guiding the Child Care and Development Fund (CCFD) childcare subsidy eligibility assessments. Childcare cost estimates were derived from the 2021-2022 Florida childcare Market Rate Survey using median prices for infant and 3-year-old preschool care. HPI calculations were conducted across four income thresholds: minimum wage, 200 percent of the Federal Poverty Level (FPL), 85 percent of the SMI, and 100 percent SMI, offering a comprehensive perspective on the financial burden borne by households in securing childcare services.

The data table below (Table 1) presents the HPI allocated towards childcare costs across various household scenarios and income levels:

Table 1: Florida Childcare Costs across Household Scenarios and Income Levels

Scenario Adults HH Size Min-wage Min- Wage HPI 200 FPL 200 HPI 85% SMI 85% SMI-HPI SMI SMI HPI
2 adults, inf, 3yo*** 2 4 $ 49,920 38% $ 60,000 32% $ 75,561 25% $ 88,895 22%
1 adult, inf, 3yo 1 3 $ 24,960 77% $ 49,720 39% $ 63,471 30% $ 74,672 26%
2 adults, inf*** 2 3 $ 49,920 22% $ 49,720 22% $ 63,471 17% $ 74,672 15%
2 adults, 3yo*** 2 3 $ 49,920 16% $ 49,720 16% $ 63,471 13% $ 74,672 11%
1 adult, inf 1 2 $ 24,960 44% $ 39,440 28% $ 51,381 21% $ 60,449 18%
1 adult, 3yo 1 2 $ 24,960 33% $ 39,440 21% $ 51,381 16% $ 60,449 13%

Source: Calculations by Herman Knopf
*** Child care cost estimates used in this analysis are derived from Florida's 2022 Market Rate Study: The 2022 annualized weighted median rates are $11,000 (Infant Care) and $8,150 (Three-Year-Old Care).

Noteworthy is the significant financial commitment required to secure childcare services, particularly for families at the lower end of the income spectrum. For instance, families earning the current minimum wage in Florida may need to allocate anywhere from 16 percent to 77 percent of their earnings toward childcare, depending on household composition. Even at higher income thresholds the financial outlay for childcare remains substantial, underscoring its impact on household budgets across income strata.

Although childcare subsidies may alleviate some of the financial strain for eligible families, their coverage remains limited. The US Department of Health and Human Services Assistant Secretary for Planning & Evaluation factsheet (2022) estimates that in 2019, 12.5 million children were eligible for childcare subsidies, whereas 2 million children received them. Considering that the CCDF program has funding to support approximately 16 percent of eligible families, many low- and moderate-income households are left to grapple with the considerable proportion of income earmarked for childcare expenses. Consequently, these families may face significant decisions regarding labor force participation due to the financial constraints imposed by childcare costs.

By Brittany Birken, director and principal adviser in Community and Economic Development, and Herman Knopf, senior research scientist for the University of Florida, Anita Zucker Center for Excellence in Early Childhood Studies and visiting scholar in Community and Economic Development. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.