To support the Federal Reserve’s goal of promoting a strong economy and maximum employment, researchers and community development experts from across the Federal Reserve system study the economic challenges resulting from inaccessible formal child care for many working families. Some parents opt for informal care through friends, families, or neighbors, but for others, care options are a matter of what is accessible rather than what is needed or preferred. Formal child care that meets parents’ preferences for quality may be inaccessible when it is unaffordable or unavailable when, where, or for whom parents need it.

Across the Federal Reserve System, staff work together to explore how formal child care issues and opportunities impact working families and the child care sector at national and local levels. Their goal is to understand and quantify the problems and implications of inaccessible child care and highlight innovative approaches.

Parental employment often depends on accessible care. As of 2024, a substantial proportion of American adults—19 percent—are parents of young children under the age of 6. Child care (whether formal or informal) is used by the majority of parents of young children. Care disruptions can have a profound impact on parents’ ability to work. There are also parents outside of the labor force who might otherwise be working if they could access care.  

In addition to access challenges, parents and guardians regularly report child care and breakdowns threatening their productivity at work. These reliability issues result in an estimated $122 billion of annual lost economic output per year. State-level studies by the Federal Reserve Bank of Minneapolis  and the US Chamber of Commerce Foundation echo these findings. The breakdowns are in part due to pervasive market challenges. Simply put, the child care market does not work as well as it could for parents, providers, employers, and communities.  

Why is the child care market so challenging for families and providers? 

One of the main complexities of the market is the tension between the cost of child care operations and what families can afford to pay for services. In many cases, what parents pay is insufficient to cover the operational costs of labor-intensive care. 

Providers tend to set tuition (what they charge) according to what they think parents can pay. Formal child care usage increases with household income, and affordability challenges particularly affect parents and guardians with low incomes.  

Another challenge for the child care market is that parents may be more exposed to child care expenses when they are younger and at the beginning stages of their careers. Incomes tend to be lower at this point than at later stages.  

Families have varied needs for cost, location, and hours of child care. They may also have preferences for more specific criteria like curricula and caregiver qualifications. While a range of child care choices exist, many parents struggle to find care that meets their household needs. This is especially true for parents of infants needing care and for those working nontraditional hours, such as evenings and weekends. These barriers result from constraints on the larger supply of child care.  

How is child care currently funded?

The bulk of funding of the child care sector comes from parents and guardians who pay out-of-pocket. One estimate suggests that American households spend about $42 billion on child care annually. In one analysis, child care costs on average about 10 percent of the median income for a two-parent, two-income household in many states. The same care would cost a median-income single-parent household about 32 percent of its earnings.  

Another source of funding is government dollars. The government spends approximately $34 billion annually on early education and care, much of which is used to subsidize the costs of child care for low-income families. Limited funding caps the amount of available government support for families. The largest source of funding to help low-income families pay for child care is the Child Care Development Block Grant (CCDBG). Among other eligibility requirements, the family’s income must be at or below 85 percent of state median income. However, because of funding limitations, only about 15 percent of children whose families are eligible for this child care assistance receive it. Reliance on a mostly private market that is challenged to pay for the true cost of services contributes to the fragility and inconsistency of the supply of child care. 

How do these challenges unfold for child care providers?

Typically, child care providers operate on thin profit margins, having to weigh their expenses and potential profit with what they think parents can cover. Additionally, low staff-to-child ratios (e.g., 1-to-3 or 1-to-4) for infants and toddlers recommended by child development experts and required by state licensure make it difficult to cut costs by reducing staff. Many providers may need to rely on the tuition from three-, four-, and five-year-old classrooms, which have higher staff-to-child ratios, to subsidize the younger classrooms.  

What do these challenges mean for child care workers?

Early educators are one of the most important parts of quality child care and the largest cost. But wages for early educators in a classroom setting—one of the key components of the child care workforce—have persistently been among the lowest of any occupation.  

As a result, turnover tends to be high in the child care sector. Only by the end of 2023 did the sector return to pre-pandemic levels of child care workers. A survey of Minnesota child care providers suggests that the country’s overall child care capacity is likely being squeezed by these workforce challenges. In turn, workforce shortages among child care workers can put parents at greater risk of facing child care disruptions, which impacts their ability to work and earn.   

What Fed resources and research are available on early care and education?

Constraints on both the supply and demand sides of child care are tightly intertwined, so the Fed’s work has considered both. That work, conducted by experts at Federal Reserve Banks across the nation, includes continuing to monitor the drivers of child care access gaps and the effects of those gaps on the workforce. The resources below represent a selection of the early education and child care work available from the Federal Reserve.  

Research and analysis

Snapshot: Child Care and the U.S. Economy

Below are some key U.S. child care and labor force statistics at a glance. Data are sourced from the U.S. Census Bureau’s Current Population Survey (via IPUMS CPS), U.S. Census Bureau’s American Community Survey (via IPUMS USA), Child Care Technical Assistance Network, U.S. Bureau of Labor Statistics’ Occupational Employment and Wage Statistics, and calculations by St. Louis Fed researchers.