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Supporting Full Capacity Could Help Reduce Costs

Supporting Full Capacity Could Help Reduce Costs

Excerpt from the Open Vault Blog of the Federal Reserve Bank of St. Louis: Estimating the Affordability of Child Care across U.S. States

By Kevin Bloodworth II , Charles S. Gascon October 06, 2022

Our analysis identifies very acute challenges in improving the affordability of center-based child care—as some of the key drivers of costs are also associated with better quality of services—while also raising broader economic equity concerns.

Child care workers are among the lowest-paid occupations. Raising wages would help attract more people into a very demanding job, but this also could reduce affordability absent an increase in household incomes. Forms of household assistance, such as child care subsidies to households, may have adverse effects in the long run by increasing the demand for child care when supply is limited, thus pushing up prices; in this case, affordability could remain unchanged.

The model highlights the value of supporting the full capacity of centers as a way to reduce costs. For example, employers could consider paying for vacant spots at a particular center for their workers who need care in the future. This would directly benefit businesses by allowing the employees to return to work while also reducing costs for all families who send children to that center as effective capacity would remain higher.

Government assistance to the centers to mitigate the cost of seasonal enrollment declines could also reduce costs, but this may also create adverse incentives for operating at lower capacity; centers would have less incentive to fill vacant spots. Meanwhile, our model is not explicit on drivers of overhead costs, which remain substantial; reductions in overhead costs could also cut costs today and reduce barriers to entry in the market, thereby increasing supply. For example, locating centers in order to utilize surplus office space would be another approach to reducing overhead costs while providing additional reasons for workers to return to the office.

Source: Estimating the Affordability of Child Care across U.S. States. (n.d.). Www.stlouisfed.org. Retrieved October 13, 2022, from https://www.stlouisfed.org/on-the-economy/2022/oct/estimating-affordability-child-care-us-states

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