The Potential Effects of a Minimum Wage Increase Underscore Key Flaws in the Child Care Market

Child care providers operate on razor-thin margins, and are stretched thin as they try to strike a balance between affordable tuition for families and fair wages for their employees. They rely almost completely on tuition, paid by families, for their revenue. At the same time, as a labor-intensive business, employees are by far the largest expense for providers. According to Child Care Aware, employee pay makes up 65 percent of providers’ operating costs, and labor costs are even higher if employee benefits are included. Providers can’t do much to mitigate these high labor costs, as strict child-to-teacher ratios make it difficult to rely solely on technology, outsourcing, or economies of scale to cut expenses.

Therefore, since salaries make up such a large percentage of providers’ costs, any increase in worker pay comes with a trade-off. When they can’t off-set the additional expense with cuts to their operating costs, both center- and home-based providers are left with only one option—to increase revenue—either by raising tuition or by choosing to accept fewer children whose slots are funded by federal, state, and local subsidy programs. These subsidy programs usually provide less per-child funding, although states have recently taken steps to address the gap between the cost of providing care and the subsidy pay rate.²

On top of this budget dilemma, employers in child care would also likely have to deal with the labor-market consequences of a wage hike. As salaries for other low-wage jobs start to match or exceed those of child care workers, providers could have a difficult time retaining their employees, as they could leave for higher-paying, less-stressful jobs with fewer training requirements in industries that can more easily adapt to minimum wage increases. In addition, providers may have a hard time retaining their more-qualified employees due to wage compression: the lowest-paid members of the workforce receive a pay bump due to the increased minimum wage, while the higher-paid employees don’t necessarily see a raise.

The recent CBO analysis also noted that workers who would be affected by an increase to the minimum wage—through either lost employment or higher earnings—tend to come from groups in which low wages are common. This includes the child care workforce (disproportionately women and people of color³), whose national median pay of $11.17 per hour constitutes a near-poverty wage. Across the country, more than half of child care workers, compared to 21 percent of the U.S. workforce as a whole, were part of families enrolled in at least one of four public support programs: the Federal Earned Income Tax Credit (EITC); Medicaid and the Children’s Health Insurance Program; Supplemental Nutrition Assistance Program; and, Temporary Assistance for Needy Families.⁴

Clearly, this workforce, tasked with fostering our children’s early development, deserves better compensation. However, a higher minimum wage would not necessarily translate to increased earnings for child care workers. As discussed above, child care businesses cannot deploy traditional mechanisms to offset higher wages. Therefore, the unique circumstances of the child care industry mean that while some workers would benefit from wage increases, others could lose their jobs or see their hours decreased below full-time to compensate for those increases.

A University of Washington study of Seattle’s recent minimum wage ordinance demonstrates this phenomenon. The majority of area child care providers already have been or will be affected by minimum wage increases by the time it hits $15/hour in 2021, and their most common strategic responses were to raise fees or tuition for parents and to reduce work hours or number of staff to offset rising wages. A decrease in supply hours could have a ripple effect on parents (who may modify their own work schedules or opt out of the workforce altogether in order to care for their children), their employers, and the economy more broadly.

This impact could extend beyond the state or locality that enacts the minimum wage increase. In regional economies that cross state lines or in metropolitan areas, highly qualified child care workers could relocate to the part of the region with the highest minimum wage (especially if there are major wage disparities), leading to a lack of continuity, supply, and quality of care available for families in the lower-wage region.

Families most often cite cost as the primary reason they have difficulty finding child care,⁵ and justifiably so. The cost of high-quality child care is often prohibitive, particularly for low-income, working families—according to a New America report, infant care costs exceed the average cost of in-state college tuition at public four-year institutions in 33 states and the District of Columbia. As many parents already struggle to afford child care at current prices, any increase in labor costs—like an increase in wages for child care workers—must come from somewhere, and the majority of a provider’s budget comes from tuition.

Low-income, working families may have access to subsidies to help them pay for child care. However, just a small fraction of those eligible receive one: only 15 percent of federally eligible children received a subsidy in Fiscal Year 2015. Further, because states have struggled to stretch limited resources to provide quality child care to as many children as possible, the subsidy amounts they pay to providers are often already lower than the cost to provide child care. When the cost of providing care goes up due to increases in labor costs after a minimum wage hike, families relying on voucher and subsidy programs could be pushed into lower-quality care environments unless states raise subsidy reimbursement rates. States face a difficult decision: either raise reimbursement rates to ensure high-quality care for children in the program, and thus serve fewer children, or see more children served, but in potentially lower-quality settings.

On the other hand, some of the families who benefit from the minimum wage increase may run the risk of earning too much to qualify for child care subsidies. Working families may experience a “cliff effect” if higher wages push them over the eligibility threshold. If not accounted for, this cliff effect has the potential to be devastating for working families—especially those with two working parents and those who rely on Head Start programs—if their income gains are wiped out by higher child care costs. To ensure continuity of service, any meaningful minimum-wage legislation must also take steps to mitigate cliff effects, as states like Colorado, Florida, and Maryland have done. This could include a redesign of Head Start and Child Care and Development Fund eligibility standards to account for large rises in wages for low-income families.

Similarly, lower- and middle-income families who don’t qualify for subsidies could see their costs go up and may be priced out of their preferred child care arrangement. This could drive vulnerable children into lower-quality environments that might not do enough to foster child development, including unregulated care, which often has health and safety concerns, or informal care arrangements with family and friends. It could also force working parents to cut back their own hours or leave the workforce altogether to care for their children.

As the University of California Berkeley’s Center for the Study of Child Care Employment puts it, “from the perspective of every actor in the private market for care, there are grave concerns” with raising the minimum wage.⁶ If that is the effect of giving child care workers a living wage, then there are larger issues with the current state of the market. The nation’s underpaid, overworked early care providers deserve a living wage, as do millions of other Americans, but solving the myriad of challenges in the child care system requires a broader vision. It requires grappling with the most critical dilemma the industry faces: how to provide working families the care they need while paying child care workers a living wage.

There is no easy answer, but it is clear that in order to mitigate unintended consequences for child care employers, workers, and the families who rely on them, there is more to do than simply raise wages. A holistic approach to fighting poverty is necessary. This could include: provisions to raise and align federal eligibility guidelines for early childhood education programs; additional funding for child care providers to offset spikes in labor costs and help them train their employees; a rethinking of calculating the rates at which providers receive subsidy reimbursements; and a tax policy that supports working families through an expanded EITC, a modified, fully refundable Child Tax Credit, and a School Readiness Tax Credit like the one offered by Louisiana, which uses a series of credits to incentivize investment in high-quality care and ease the financial burden of child care for families, workers, and providers.

Whatever the solution, the complex effects of a minimum wage increase could have on the child care industry underscore the market’s failure on both ends—a failure to provide affordable, high-quality child care for working families and a failure to adequately compensate caregivers for their essential role in educating our children.

^{1 National Survey of Early Care and Education Project Team. (2013). Number and Characteristics of Early Care and Education (ECE) Teachers and Caregivers: Initial Findings from the National Survey of Early Care and Education (NSECE). OPRE Report #2013-38, Washington DC: Office of Planning, Research and Evaluation, Administration for Children and Families, U.S. Department of Health and Human Services. Available at https://www.acf.hhs.gov/sites/default/files/opre/nsece_wf_brief_102913_0.pdf 
2 GAO. Child Care and Development Fund: Subsidy Receipt and Plans for New Funds, GAO-19-222R, 2019. Available at https://www.gao.gov/assets/700/696930.pdf 
3 M. Whitebook, et al. Early Childhood Workforce Index 2018, University of California, Berkley, Center for the Study of Child Care Employment, 2018. Available at http://cscce.berkeley.edu/topic/early-childhood-workforce-index/2018/
4 Ibid.
5 L. Corcoran and K. Steinley, Early Childhood Program Participation, Results from the National Household Education Surveys Program of 2016, U.S. Department of Education, Institute of Education Sciences, National Center for Education Statistics, January 2019. Available at: https://nces.ed.gov/pubs2017/2017101REV.pdf
6 M. Whitebook, et al. At the Wage Floor, University of California, Berkley, Center for the Study of Child Care Employment, 2018. Available at https://cscce.berkeley.edu/at-the-wage-floor/}