Temper your expectations on child care and the Chips Act

Claudia Sahm
Bloomberg Opinion (TNS)

The Biden administration is requiring any semiconductor manufacturer that applies for more than $150 million in subsidies under the Chips Act to submit “plans to provide both their facility and construction workers with access to affordable, accessible, reliable, and high-quality childcare.” This requirement is expected to cover fewer than 200,000 workers, but it is a novel way to use national defense and economic subsidies to invest in an inclusive, family-friendly workforce. Whether it works will depend on the employers’ plans themselves.

The problem is real. Even before the concern over current high rates of inflation, parents struggled with the cost of raising with young children. Having long outpaced inflation, the average weekly cost of childcare was $250 among families with children under age five, or about 10% of their income, according to Survey of Income and Program Participation. The burden is higher for families with less income.

Moreover, the high cost of child care has negative effects on women’s work lives. The U.S. has the eighth-lowest labor force participation rates for prime-age women at 76.9% among Organization of Economic Cooperation and Development countries. That includes Japan, in which participation has risen almost 10 percentage points in the past decade while pursuing active labor market policies for women, including more accessible daycare.

Renee Kuykendall has operated a day-care center out of her home in Antelope, Calif., for nearly 20 years. (Mackenzie Mays/Los Angeles Times/TNS)

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Replicating that success was one motivation for including a large expansion of child care subsidies in the Biden administration’s Build Back Better proposal, but those subsidies weren’t enacted. The Chips Act provides an opportunity to accomplish something on child care, albeit less directly and on a much smaller scale. The fact that women are underrepresented in manufacturing and construction is another reason to include the requirement in the Chips Act.

What would a successful child care plan from a semiconductor manufacturer look like? The best plan would be one in which the manufacturer receiving the subsidy financially supports the opening and operation of a new childcare center for its employees, whether on-site or community based. To ensure affordability, it could give discounts to lower-income employees.

Supporting more demand for child care should be paired with new capacity. The lack of supply and the high operating costs of centers are the primary reasons affordable childcare is unavailable for many. The Bipartisan Policy Institute estimates, across a sample of 35 states, that the shortfall in childcare slots is equivalent to three in 10 children who are potentially in need of care. One new center from a Chips Act recipient will not make a difference overall, but it could be meaningful for local supply.

A challenge, particularly now, in expanding the supply of childcare slots is the shortage of childcare workers. Even as overall employment has more than recovered from the pandemic, there are 5% fewer employees in childcare services than before, reflecting the low wages, staffing regulations, and the inability with thin profit margins to raise wages have put the sector at even more of a disadvantage than before the pandemic. Hiring caregivers to operate a new childcare center will be even more costly now. Plus, the ability of the semiconductor manufacturer to pay higher wages could worsen the local labor shortages at nearby centers.

Another plan would be for employers to subsidize the cost of child care for its employees. Putting as few restrictions as possible on the type of child care that is subsidized would enhance the inclusivity of the program. Patrick Brown, formerly a fellow at the Niskanen Center, a libertarian think tank, contends that childcare benefits should accommodate the wide range of preferences for caregiving by parents. Focusing on for-profit, center-based care, which is common among employers, would be too narrow, and not serve lower-income families well.

There are drawbacks to the childcare subsidies approach. Without an increase in the local supply of care, the additional demand would put upward pressure on prices and thus offset some of the improvement in affordability from the program. Also, the shortage of caregivers raises the likelihood that the additional demand bids up prices. In addition, it would make childcare more accessible to workers at the manufacturer, but at the expense of other local parents, especially those with low incomes, whom the new demand might price out of the market or to lesser quality care. As a result, any boost to women’s employment and a more diverse workforce at the semiconductor manufacturer due to required child care would likely overstate the overall gains for women in the workforce.

An add-on requirement to the Chips Act subsidies for semiconductor manufacturers cannot replace broad-based investments in child care. It is unreasonable to expect a private-sector company to be mindful of possible adverse spillovers from its childcare benefits.

As a potential model to pursue, the American Rescue Plan offered, albeit on a temporary basis, block grants for care providers and subsidies for low-income parents. The block grants, which are administered by the states, are providing a wide range of support. Some examples, as reported by Pew Trusts, include opening of new centers in New York, South Dakota, and Utah, and paying caregivers higher wages or bonuses in several states. More subsidies targeted to low-income families, such as via the Child Care and Development Fund program since the 1990s, allow for inclusivity and are complimentary, not a substitute, to capacity. A renewal of federal funding would allow states to continue their tailored support to accessible child care.

One should temper expectations about the benefits of tying childcare to receiving Chips Act subsidies. An argument could be made that if the government is investing in a firm, then the firm should be required to invest in its workers, including parents. But to claim that the requirement is a path to bring more women into the workforce is unfounded, and it distracts from the programs that might.

— Claudia Sahm is the founder of Sahm Consulting and a former Federal Reserve economist. She is the creator of the Sahm rule, a recession indicator.