Child care subsidies, low-wage work and economic development.

• Author: Davis, Elizabeth E.
• Position: Report

Abstract

Public spending for work supports like child care subsidies has been greatly increased in recent years to "make work pay' and to encourage the labor force participation of low-income parents. This study tracked changes in earnings and employment sectors over three years for parents receiving child care subsidies in Minnesota. Employment of these parents was more concentrated in a few sectors of the economy than for the workforce as a whole. The overall pattern of concentration of employment did not change over the three years, but parents who moved into or stayed in the health care sector received higher average wages and experienced greater wage growth. Given the importance of the health care sector for community development and projected future shortages of healthcare workers, opportunities for linking work supports like child care subsidies with training and employment in these fields could improve outcomes for both families and communities.

Introduction

Public spending for work supports like child care subsidies has been greatly increased in recent years to "make work pay,' reinforced welfare legislative changes passed in 1996. "Work supports" are government programs intended to provide additional resources to working families with low incomes, and they include federal and state earned income tax credits, food stamps and child care subsidies. Over a ten year period, spending on work supports for low income families grew from $13 billion (in 2000 dollars) to over $70 billion (Haveman, 2003). A key public policy goal of these programs is to support low-income families who are working and who might otherwise apply for or return to cash assistance (welfare) programs such as Temporary Assistance for Needy Families (TANF).

This study focuses on low-income families who participate in the child care subsidy program. Recent research has demonstrated the effectiveness of child care subsidies in increasing the work effort of low-income parents (see for example, Blau and Tekin, 2001 and Tekin, 2004). The cost of child care is often high relative to workers' wages (Chase and Shelton, 2000), and public subsidies to help make child care affordable to families may increase the labor force participation of parents. Further, the expectation of many policy makers is that encouraging low income parents' employment will increase their work experience and will lead to promotions or better jobs, and, eventually, financial self-sufficiency. However, there is growing recognition in the welfare to work literature that the nature of the jobs many former welfare recipients obtain is unlikely to lift them substantially out of poverty in either the near or long term (Acs & Loprest, 2004, Loprest 1999, Burtless, 1995).

Affordable, quality child care plays an important role in enabling parents to work in the paid labor force. However, the role of child care in the economy extends beyond parents' workforce decisions. Recent studies have emphasized child care's "multi-faceted role" in the economy, including its linkages to local economic development. Increasingly, child care is recognized as an important economic sector in addition to its crucial role in the education and development of future workers (Warner, 2006, Warner & Liu 2005). For example, Ribeiro and Warner (2004) identify over three dozen studies completed or in progress that measure the importance of the child care sector to the local economy in specific states and local communities.

Economic development policies have traditionally focused on job creation in sectors with customers outside the local area (export-led growth). In contrast, Pratt and Kay (2006) describe the recent shift in economic development thinking to focus on the role of service sectors (including child care) as generators of local economic growth. At the same time, welfare policy has typically focused on getting parents off the welfare rolls and into jobs. Government subsidies to help low-income families pay for child care can be viewed as operating at the intersection of welfare policy and economic development policy. However, policy makers have paid little attention to the role of child care subsidies in workforce availability and economic development. The purpose of this study was to examine the role of child care subsidies as an economic development tool that increases the size of the available workforce both overall and in particular sectors.

The specific objectives of the study were to analyze the types of jobs held by parents receiving child care subsidies and to track their industry changes and earnings growth over time in the context of local economic needs. The study linked administrative data on parents receiving child care subsidies in Minnesota with wage records collected from the unemployment insurance or ES-202 program, for three years from 2001 to 2003. The primary research questions of the study were:

1) In which sectors do parents receiving child care subsidies work? Did the sectoral distribution of jobs change over the three years?

2) Which sectors had the highest earnings per job? The highest earnings growth over three years?

3) How did earnings growth compare for parents in different industries or sectors? Did earnings increase more if parents stayed in the same sector or moved to a new one?

4) Did parents' annual earnings increase over the three-year follow-up period? By how much?

5) How do the sectors of employment of these parents compare to local workforce needs?

The answers to these questions may help to suggest ways to improve families' long-term financial well-being. In addition, the findings may help policy makers better understand the linkages between government funding of child care subsidies and meeting the present and future workforce needs of the local economy.

Background and Literature Review

With the passage in 1996 of the Personal Responsibility and Work Opportunity Reconciliation Act, (PRWORA), the focus on moving families from welfare to work and helping other low-income working families avoid cash assistance has increased the importance of child care subsidies. In 2006, the federal government provided $5 billion to states to assist low-income families pay for child care so they can work or attend training or education programs. Federal funding to states is provided directly through the Child Care Development Fund (CCDF) block grant and, in addition, indirectly by state transfers of funds from the Temporary Assistance to Needy Families (TANF) program into CCDF. States have wide discretion in determining eligibility rules, parent co-payments, provider payment rates and other child care subsidy program rules. Parents typically must be employed or in an approved training program in order to be eligible for child care subsidies. Most eligible parents receive a voucher to pay for care by the provider they choose (though in some states, direct contracts with providers are also used). The decision by eligible parents to use a child care subsidy depends on many factors including welfare program rules and child care regulations as well as child care subsidy policy.

In Minnesota, the Department of Human Services (DHS) oversees the Child Care Assistance Program (CCAP), which is administered at the county level. There are two subprograms within CCAP, reflecting differences in program eligibility (categorical versus income eligibility). Minnesota Family Investment Program (MFIP) Child Care serves families receiving cash or food assistance through the state's welfare program (MFIP is the state's TANF program). In addition, eligible families who leave MFIP may receive transition year (TY) child care assistance for up to one year after leaving MFIP for employment. For families not on welfare, the Basic Sliding Fee (BSF) Child Care serves eligible low-income working families. Families in the MFIP and TY program are guaranteed access to the program; BSF families' access to child care assistance is contingent on program funding levels. For most years of the program's operation, there have been waiting lists in some counties for BSF child care. A total of about 30,000 children per month on average received child care subsidies in Minnesota during state fiscal year (SFY) 2006. The average monthly total cost per family in 2006 ranged from $717 for BSF to $992 for an MFIP family (Minnesota Department of Human Services, 2007).

Studies of the relationship between child care and employment frequently focus on the influence of the price of child care on employment decisions of mothers. However, estimates of the responsiveness of child care use to the price of child care (the price elasticity) vary widely. Blau and Tekin (2001) carefully reviewed the studies to date and concluded that that price elasticity is probably fairly small, though it may vary by income level and marital status. A small number of studies have addressed the question of the effect of child care subsidies on employment decisions more directly. Among mothers leaving welfare, one study found that child care subsidies were associated with quicker movements into employment in two states, with no significant effect in another state (Ficano, Gennetian and Morris, 2006). The study by Lee, et al. (2004) found a strong link between employment retention and receipt of child care subsidies among welfare leavers. Tekin (2004) concluded that single mothers were more likely to work if they receive child care subsidies. These studies suggest that child care subsidies increase the work effort of low-income parents.

Several researchers have examined the employment sectors in which parents receiving child care subsidies work. In a review by Okuyama and Weber (2001), updated by Jefferys in 2004, consistent employment patterns by child care subsidy recipients were observed across the states studied. In general, child care assistance recipients were more likely than the entire workforce to be employed by the retail and...