More childcare might reduce inflation plus other benefits
With inflation in the neighborhood of 8 percent, price rises have become a top concern for consumers and voters alike. All eyes are on the Federal Reserve and whether it can engineer a soft landing — reining in inflation without putting the economy through a debilitating recession.
Ironically, some of President Biden’s legislative proposals, if they had been enacted earlier, might now be helping to modestly contain these inflationary pressures. They still could —as he claimed in his Wall Street Journal op-ed (May 31, 2022).
The Build Back Better legislation included a child care proposal that heavily subsidized child care for all but the highest-income families. It provided free universal pre-K for all three- and four-year-olds and paid leave for family caregivers.
What has gotten lost in the debate around this bill is that, had it been enacted, it could have helped to reduce current inflation. Spending more on child care, on universal pre-K and on paid family leave had the potential to help mothers join or get back into the labor force. More workers would have expanded the capacity of the economy to produce the goods and services that people want. Because families would also have more income to spend, that would work in the opposite direction, offsetting the reductions. But, on balance, we believe that inflation would have been restrained.
To be sure, there are still other causes of inflation right now. They include the war in Ukraine, supply-chain problems, and earlier stimulus packages such as the American Rescue Plan which left many consumers with extra cash to spend.
But what’s happening in the labor market is unprecedented. Employers simply cannot find enough workers. Reported job vacancies now exceed the number of unemployed workers by over 5 million. Millions of workers have left the job market, and those who stay are choosier about their jobs and pay. That is forcing employers to raise wages and prices, adding to inflation.
Enticing more women off the sidelines and back into the labor force would help. With shortages of teachers and health care workers, in particular, and employers desperate for more help in many other sectors as well, their only recourse has been to raise wages and prices. Many women dropped out of the labor force during the pandemic, and their participation rate is still short of where it was before the pandemic in 2019.
But the U.S. also has a longer-term problem, unrelated to the pandemic. Compared to other advanced nations, women work less in the U.S. – partly because the U.S. provides so little support for child care, early education, and paid leave. With more such supports, more women would work, producing more of what people want, and potentially limiting inflationary pressures as well. The gaps in the proportion of women who work between the U.S. and similar countries is wide; in Canada, France, and the U.K., for example, the proportion of women, aged 25 to 54, who work is 8 percentage points higher than in the U.S. Were the U.S. to look like these other countries, there would be an additional 5 million workers in our shops, factories, and offices.
Our research finds that bringing down the cost of childcare for working mothers would enable many more to join or rejoin the ranks of the employed and substantially lower the number of “missing workers” in the current job market. That, in turn, would modestly reduce the inflation rate. We cannot pinpoint the exact magnitude of the effect; it would not be large –– we suggest under one percentage point –– but it would help to dampen inflationary pressures. Of course, the subsidies and higher earnings for so many families would increase spending levels as well as worker supplies; but families typically adjust their spending only slowly in response to an increase in income, and some of any new income will be saved.
None of these changes in employment would happen immediately, which is why we wish the legislation were already in place. But even now, it might help a little. The Congressional Budget Office projects that the Fed’s efforts to contain inflation will take about two and a half more years and that could be optimistic. Bumping up the supply side of the economy and not just restraining demand would be a sensible and less painful policy.
In addition to any effects on inflation, the subsidies will provide extra income to help Americans offset the higher prices they face in supermarkets and at the gas pump. The typical family pays around $12,000 a year for the care of one preschool child. If that family’s annual expenses were $50,000, and the inflation rate was 8 percent, then those same expense would cost $54,000 a year later. But with one of the biggest expenses removed from their budget, that family would still be far better off.
Fully financing the new child care subsidies, as the administration proposed, through higher taxes or other means is critical. Deficit financing of these subsidies could, in fact, lead to substantially more household spending that would add to, not subtract from, inflation.
But the most important reasons to subsidize childcare, pre-K programs and paid leave are not just because they might help a little in the current battle with inflation and ease the strain on family budgets. Much more critically, they would permanently boost the labor force to look more like that in other advanced countries, and have positive effects on the skills and education of our children.
So Congress should enact all of these critical supports for working families. They would not just be good for fighting inflation; they would boost economic growth, bolster family incomes, and change children’s life trajectories. That’s an economic home run, in our view.
Harry J. Holzer is the LaFarge SJ Professor of Public Policy at Georgetown University. Isabel Sawhill is a senior fellow at the Brookings Institution.