Executive Summary: “Caring for Young Children: Inequality in the Cost Burden of Child Care” by Dan T. Rosenbaum and Christopher Ruhm

How much of their income do parents spend on childcare for their young children? To our knowledge, this study provides the first comprehensive study of this seemingly simple question. There are two main reasons why we know so little about what we call the “cost burden of child care”, defined as child care expenses divided by family incomes. First, it is difficult to compile data that simultaneously provides accurate information on childcare expenses and family incomes. Second, conceptualizing the childcare burden is surprisingly complex, since parental employment and childcare use are closely linked.

Our analysis addresses five specific questions. First, what is the average cost burden of caring for children under six years of age? Second, how does the burden differ across types of families? Third, does accounting for child care costs increase or decrease measured income inequality? Fourth, how would inequality in the cost burden change if the modes of day care obtained or the costs per hour paid for this care became more similar across groups than they currently are? Finally, do government tax and transfer policies and childcare subsidies exacerbate or mitigate differences in the cost burden of childcare?

This analysis utilizes the 1996 panel of the Survey of Income and Program Participation (SIPP). Our information on child care comes from the wave 10 topical module covering the period from March through June 1999 and that on income is from the wave 10 core survey providing information on average incomes in the four months preceding the interview. We also use data from the March Current Population Survey (CPS) to construct a measure of socioeconomic status (SES) that is based on predicted income percentiles and use the National Bureau of Economic Research (NBER) TAXSIM program to estimate taxes for our SIPP families.

We estimate that the average child under the age of six lives in a family that spends 4.9 percent of their after-tax income on childcare. However, this conceals a wide distribution: 63 percent of such children reside in families with no (non-immediate family) child care expenses and 10 percent are in families where the cost burden exceeds 16 percent. A large portion of differences in the cost burden are related to family characteristics – children living with married parents are in families where the average cost burden is 3.9 percent; the corresponding average cost burden is 7.4 for families with an absent spouse or where the parent has never been married.

Income inequality is somewhat greater when measured net of childcare expenses than when these costs are not taken into account. However, average childcare cost burdens are not systematically related to SES as proxied by predicted incomes. The reason for this is that disadvantaged families use lower cost modes and pay less per hour for given types of childcare. Equalizing costs per hour would dramatically increase the cost burdens of disadvantaged families. Finally, our evidence suggests that government policies operate to reduce inequality of the child care cost burden. Most importantly, tax policies are redistributive because of higher marginal tax rates at the top of the income distribution and the role of Earned Income Tax Credit at the bottom. Transfer payments have smaller effects.