The American workforce remains historically tight.
Key takeaways
Middle market employers are asking a question: Where are we going to find the workers?
The answer lies in expanding the number of women in the workforce, which will require making child care more accessible and affordable.
Recent changes in public policy are beginning to affect the domestic economy. One sign is the strong increase in manufacturing construction linked to the bipartisan Infrastructure Investment and Jobs Act and the CHIPS and Science Act.
But with the unemployment rate at 3.6% and the participation of workers in their prime years at multidecade highs, we must ask: Where are we going to get the workers to rebuild America’s infrastructure, build new microchip supply chains and facilitate the transition to a less carbon-based economy?
Currently 89.2% of men ages 25 to 54, the prime working years, are employed, and 77.8% of women in that cohort are employed. In addition, there were roughly 9.82 million job openings in June and only 5.4 million workers not in the labor force looking for a job.
But even with such a tight labor market, millions are on the sidelines, which only adds pressure on policymakers and employers to bring those workers back into the labor force.
It’s not as if employers haven’t tried. Many are offering more flexibility and higher wages, as well as investing in productivity-enhancing technologies and pushing for expanded immigration.
But there is another solution, one that does not receive enough attention: women in their prime working years who are not in the labor force. If they are to be won back, child care must play a big role.
Make no mistake: There is a shortage of labor in the United States and other developed economies, exacerbated by dislocations during the pandemic.
The growing chasm has had a lasting effect on the economy and comes at a challenging time as employers demand ever-higher levels of technical aptitude and as political resistance has limited sensible immigration reform.
This disconnect in the workforce is fueling a profound structural adjustment in the American economy, resulting in an unemployment rate well below the 4.4% that we consider full employment.
We contend that a solution to ease this shortage is to increase the availability of women who are not in the labor force. And this requires broad access to affordable child care.
Women are ideally suited to solve the labor shortage. After all, they now make up the majority of college graduates, and possess the high-demand skills required by the knowledge economy and the advanced manufacturing sector.
In the end, child care is destined to shape the economic and policy narratives around the U.S. labor force.
In the end, child care is destined to shape the economic and policy narratives around the U.S. labor force.
Help wanted
We are not convinced that traditional avenues of increasing the labor supply will prove sufficient to meet demand or that we are far enough along in the technological cycle to move toward a pure substitution of artificial intelligence for labor.
The U.S. labor force has been increasing, but we have yet to recover from the pandemic-induced setbacks.
During both the nine-year recovery from the early 2000s recession and the six-year recovery following the austerity of 2010 to 2013, the labor force increased at an average rate of approximately 0.85% per year, a figure expected as the population grows.
Had that growth not been interrupted by the pandemic, the labor force would have roughly 2.7 million more workers than it has today.
Some of that gap can be attributed to deaths from the pandemic, the estimated 2.4 million in excess retirements during the pandemic, and the desire by many to strike out on their own.
But if the economy is to achieve its potential, businesses will need a vibrant supply of workers.
Enter women in their prime working years. The labor force participation rate among prime-age women has in fact increased over time, reaching a record 77.8% in June. But that is still short of the rate for prime-age men.
What’s missing is the means for these women to both care for their family and work outside the home.
Something else is going on
The lack of workers in the post-pandemic environment would seem to require policy solutions different from what were used over the past two generations. So far, most efforts have focused on the tried-and-true strategies of higher wages and better work flexibility—but those have their limits.
The participation of prime-age men in the labor force, for example, is unlikely to go much higher given the recent shift in labor norms. The best one could hope for might be simply holding on to the current 90% participation rate.
An obvious strategy, then, is a continued increase in the participation rate among women. Although the rate among prime-age women is at a record high, the rate among women who are under 25 is considerably lower, which suggests the potential of adding 10% to 15% of women to the labor force.
Too often, though, women face a trade-off: Take a job and earn a wage that barely covers the cost of child care, let alone the rising cost of food and gas, or simply stay home.
The case for expanding child care
We contend that this is a false choice. Three strands of research support the argument that making child care affordable and accessible benefits the economy as well as workers and families, according to Sharon Kagan, a professor of early childhood and family policy at Columbia University.
In a 2012 interview with the Economist Intelligence Unit, Kagan explained, “From neuro-scientific research, we understand the criticality of early brain development; from social science research, we know that high quality programs improve children’s readiness for school and life; and from econometric research, we know that high quality programs save society significant amounts of money over time. Early childhood [care] contributes to creating the kinds of workforces that are going to be needed in the twenty-first century.”
A paper published by the National Bureau of Economic Research last year estimates that a substantial child care assistance program would increase mothers’ employment by six percentage points and full-time maternal employment by nearly 10 percentage points, with substantially larger increases among lower-income families.
In addition, the NBER paper points to the dual role of an early care and education services policy. Such a policy not only supports parental employment but also promotes better life opportunities for children.
Research shows that substantial public investment in child care and nutrition services is especially important for disadvantaged children in developing intellectual capabilities.
Children who receive quality early care grow up with an increased ability to climb the income ladder, generating benefits for society at large in addition to benefits for themselves and their parents.
Raising productivity
The NBER paper finds that early childhood education may increase adult educational attainment, raise tax revenues due to higher adult earnings and improve productivity.
The paper and other research advocates a policy of broadly expanded subsidies that limit family payments for early childhood education.
The policy would induce a shift from informal care and parent-only care to higher-quality care centers, again with larger subsidies benefiting lower-income families.
The paper finds that family expenditures on early childhood education services would decrease throughout most income levels while teacher wages and market prices would increase to attract better-educated workers.
How are businesses coping with the tight labor market?
Long-term gains
The final justification for an early childhood education policy is economic self-sufficiency. By reducing costs for families, those subsidies encourage parental employment and other investments in parents and children, which in turn increase the likelihood of long-term economic security.
Increasing the labor force
How, then, does this relate to the workforce and economic prosperity? Access to high-quality child care can determine whether women remain in the labor force, whether in the United States, Canada, Latin America or Western Europe, according to evidence cited in a 2021 report from the U.S. Treasury Department.
That report also found that parents tend to need child care when they can least afford it—at the beginning of their career, when their income is lowest. Economists call this a liquidity constraint that argues in favor of government support.
Treasury Secretary Janet Yellen put it bluntly: “The free market works well in many different sectors, but child care is not one of them. It does not work for the caregivers. It does not work for the parents. It does not work for the kids. And because it does not work for them, it does not work for the country.”
She added that the financial cost of fixing a “broken market” does not account for all the benefits it confers.
The existing child care system in the United States relies on private financing for most children and fails to adequately serve many families. For example, fewer than 20% of families eligible for one of the largest federal assistance programs receive funds for child care.
At the same time, almost 20% of children from infancy to age 5 live with their mother only, and that share has been rising, according to the U.S. Census Bureau’s 2020 Current Population Survey.
Yellen added that the current system leaves families paying out of pocket for child care—and they pay a lot. For quality child care, the average family must spend 13% of their income, more than they spend on food.
Taking care of our children
There are 250,000 child care workers in the United States, according to the U.S. Bureau of Labor Statistics. This includes workers at schools, businesses, private households and child care centers.
Their average wage is $14.20 an hour, with annual earnings ranging from $21,000 to $39,000 and averaging $29,600.
Their income matters for two reasons. First, families want the best care for their children—yet paying minimum wage may fail to attract the highest-quality workers.
Second, child care workers themselves cannot afford child care. Imposing work requirements on aid recipients presents a mother with a dilemma: caring for a child when the child needs it most versus working to have enough money to provide for the child.
The U.S. lags in child care
A report from the Economist Intelligence Unit in 2012 ranked the Scandinavian countries, along with England and Belgium, as best for the availability, affordability and quality of child care. The U.S. was ranked in the middle.
At the same time, the U.S. spends a fraction of what other wealthy countries spend on child care, according to the Organization for Economic Cooperation and Development.
OECD countries spend an average of 0.7% of gross domestic product on caring for toddlers, mainly through heavily subsidized child care. Denmark, for example, spends $23,140 annually per child on care for children 2 and under.
Building a better child care model
Though women now outnumber men among college-educated workers in the United States, the availability and cost of child care are still primary factors in their ability to keep working.
As Yellen said, “The lack of child care leads so many parents—mostly mothers—to drop out of the workforce.” She cited one study that found that from 2018 to 2019, 2 million parents of young children had to quit, refuse or change a job because of problems with child care.
Yellen added that economic studies show that children with access to quality child care stay in school longer and end up in higher-paying jobs. It is time to treat child care as what it is, she said: A contributor to economic growth “as essential as infrastructure or energy.”
So how do we do this and still address concerns of those who see expanded early childhood education as government overreach?
Let’s start with applying the idea of government funding of K-12 education to children 5 and under, for whom nutrition and mental development are most important.
The private option for child care will always be available for upper-income families. For this reason, providing child care assistance to all is not a zero-sum issue.
That leaves the public option, which offers facilities subsidized by the entire community. The current system consists of locally administered Head Start programs and block grants to states that operate voucher systems. But voucher systems can be difficult to navigate and particularly disruptive as people move above or below state poverty guidelines.
To address this issue, Mary Ann Ziomek, director of the Cushman Scott Children’s Center in Amherst, Massachusetts, advocates for funding to be sent directly to schools. The schools in turn can use the money to maintain a qualified staff and facility and keep tuition costs affordable.
Ziomek cited the monthly grants of $11,000 to $12,000 that Cushman received during the pandemic, which the school used to cover the cost of an emergency replacement boiler and to pay teacher salaries that are now approaching public school salaries.
In addition, Ziomek says, direct funding to the schools can provide indirect aid to families by reducing the need for tuition increases.
On a national scale, a draft proposal by President Joe Biden would make attendance at child care centers free for the lowest-earning families, and limit the cost for families earning more.
The plan would provide universal public preschool for children ages 3 and 4 and increase the pay of child care workers and preschool teachers to be equivalent to the pay of elementary teachers.
Other options for expanding the workforce
Beyond enticing women into the workforce, other ways to address the labor shortage include:
- Corporate funding: Corporations have made strides when it comes to accommodating women. Today, for example, many employers provide lactation rooms. Are they willing to take the next step and provide child care centers?
- Immigration: The passage of any kind of immigration program that increases the supply of workers would be beneficial—but is unrealistic in today’s political environment. Measures such as temporary programs for agricultural workers and expedited visas for workers in knowledge-based industries would stand little to no chance of getting past Congress.
- Subsidizing worker mobility: We arguably have enough potential workers to fill the number of job openings. In May, a rough estimate of the number of available workers included the 6.1 million who are officially classified as unemployed members of the labor force plus the 5.5 million people who are not included in the labor force but want a job. This theoretical supply of available workers would cover the 10.1 million job openings reported in May. But this balancing act assumes either perfect matching between employers and workers and unfettered mobility among workers, or greatly expanded remote work. Both options are unrealistic. Automation will likely eventually alleviate the shortage of skilled workers, but that process will take time.
The takeaway
Women represent an untapped source of labor supply, but to participate in the workforce they need access to affordable, quality child care.
The fact that women now graduate from college at a higher rate than men makes them prime candidates for positions in the knowledge economy and advanced manufacturing.
For many women, their ability to participate in the labor force most likely hinges on family obligations, particularly caring for young children.
Access to child care for all income levels would give women the choice and the means to join the labor force.
Universal child care is the most realistic tool to help expand the labor force at a time when the economy needs workers the most.
RSM contributors
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