The Economics of Child Care: A State-Level Analysis

An important reason for the Federal Reserve’s interest in researching the effect of child care on the labor market is its congressional mandate to promote maximum employment. Simply put, child care is necessary for parents to work. This care can be informal—such as when a parent, grandparent or nonworking relative watches a child—or formal—such as when parents enroll their children in early childhood education or at day care centers. While many parents and guardians use a mix of approaches, in this blog post we focus on center-based care.

Our recently updated state-by-state analysis of data around the economic impact of child care suggests that, while important cross-state variation exists, five themes remain consistent:

1. Child care served as a key support for the U.S. workforce.
2. Child care was particularly necessary for single parents—who made up more than 1 in 5 parents with young children—to work.
3. Having a young child in the household boosted men’s workforce participation and lessened women’s workforce participation.Women are more likely than men to provide unpaid care for their children, and mothers are more likely than fathers to cite child care as the main reason for not seeking work.
4. Child care costs represented a significant share of the household budget for families with young children.
5. Despite child care’s cost, child care workers earned less than the typical U.S. worker, a trend discernable as far back as the data go.

Child Care: A Key Workforce Support, Especially for Mothers

In 2024, nearly 1 in 5 prime-age adults (ages 25 to 54) in the U.S. had a young child (under 6) living with them. Nationally, that’s about 24.4 million people. However, this number represents only a snapshot in time. Most people have a child—whether biological, adopted or stepchild—during their lifetimes. When child care is not available or affordable, it becomes more difficult for parents to work. All else equal, engagement in the workforce positively affects economic growth. This means a child care industry that is not fully meeting parents’ needs can have broad economic implications. Access to center-based early childhood education can increase parents’ labor force participation, as well as improve young children’s future outcomes in the classroom (PDF).Studies have found that high-quality child care improves children’s school readiness. There is also evidence on its longer-term effects, including higher educational completion rates and earnings. Thus, access to quality child care can affect future economic growth in this way as well.

Access to child care can be a notable barrier to some parents’ ability to work. Nationally, in 2024, 16% of mothers with young children (again, under 6) who wanted to work indicated they were not actively looking for a job because they couldn’t arrange child care, according to our analysis of data from the U.S. Census Bureau’s Current Population Survey. These mothers were three times as likely as fathers with young children to respond this way. In total, about 560,000 U.S. parents weren’t working because of child care issues.

A probable reason mothers of young children reported an inability to work due to issues around child care is that they were more likely than fathers of young children to be single parents. In the U.S., 28% of mothers living with young children were separated, divorced, widowed or never married, compared with 16% of fathers living with young children. In some states, like Mississippi, much of which is in the Eighth Federal Reserve District,The Eighth District covers all of Arkansas, most of Missouri, and parts of Illinois, Indiana, Kentucky, Mississippi and Tennessee. the difference was much larger (36% of mothers and 16% of fathers).

More broadly, that the impact of parenthood on workforce participation differs by gender is well established across many countries. In the U.S., 70% of women with young children were in the labor force in 2024. This was 11 percentage points lower than the rate for women not living with minor children and significantly lower than the rate for men. In 2024, 95% of men with young children were in the labor force, compared with 86% of men not living with minor children.

The Affordability Dilemma: High Costs, Low Wages

Many people decide to temporarily or permanently step out of the labor market to raise young children. Often, the cost of child care factors heavily into the decision, and families make a simple calculation: Does the lower-earning parent or guardian’s paycheck exceed the cost of sending the child or children to care outside the home at a day care or early childhood education center? If not, or for many good nonfinancial reasons, the chips may fall in favor of a parent’s staying home to provide care. However, this simple calculation may fail to account for long-term costs, such as forgoing skills acquired in the workplace that result in promotion and raise opportunities.

Immediate costs often loom large for good reason; nationally, the average cost of center-based care per child per year was $9,200 in 2023. That’s 10% of median income for U.S. households with a young child, above the 7% of income the U.S. Department of Health and Human Services considers affordable. Cost is one reason low- and moderate-income households are less likely to use center-based care. Minimum-wage families in Florida, for example, would need to allocate 16% to 77% of their earnings toward child care, depending on household composition and the age of the child.

A family’s actual child care expenses can be significantly less or much more than the overall average, depending on a child’s age. For example, the cost of infant care was higher than the cost of care for a preschool-aged child in all states. In Missouri, the average cost of providing care for an infant is $13,600, more than double the $6,600 cost of care for a preschool child. (See the table below.) The cost calculations in the table primarily use wage data and state-level child-to-teacher ratios, as summarized in the appendix of a 2022 Regional Economist article.

Despite the high cost of child care for families, providers face challenges that can strain affordability, particularly the need to recruit and retain staff. Nationally, full-time child care workers earned $14.60 an hour, less than the $23.11 an hour the median, or typical, U.S. worker earned. However, increasing child care workers’ pay can be a delicate balance for employers. Because the largest cost for providers is worker wages and benefits, which make up at least 50% to 60% of total expenses (PDF), increasing wages can result in higher tuition and fees for parents.

Ripple Effects: Longer-Term Economic Implications

The challenges outlined in this blog post show that, across all states, center-based child care remains expensive for many families. Parents, especially mothers, may decide to leave the workforce as a result.Parents, of course, may choose to leave the workforce to care for young children at home for many reasons other than the cost of center-based care. This can lead to a loss of income for families and lower labor force participation in the economy.

At the same time, a lack of access to quality child care can have long-term consequences for children’s development. Early childhood education can play a crucial role in cognitive and social development (PDF). As Nobel Memorial Prize-winning economist James Heckman has argued, quality child care can provide a high rate of return in terms of reducing social costs and strengthening the economy (PDF).

Notes

1. Women are more likely than men to provide unpaid care for their children, and mothers are more likely than fathers to cite child care as the main reason for not seeking work.
2. Studies have found that high-quality child care improves children’s school readiness. There is also evidence on its longer-term effects, including higher educational completion rates and earnings. Thus, access to quality child care can affect future economic growth in this way as well.
3. The Eighth District covers all of Arkansas, most of Missouri, and parts of Illinois, Indiana, Kentucky, Mississippi and Tennessee.
4. Parents, of course, may choose to leave the workforce to care for young children at home for many reasons other than the cost of center-based care.