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Child care programs face massive hit as American Rescue Plan funds dry up

About $24 billion dollars of funding from President Biden's American Rescue Plan will dry up this weekend. According to research from the Century Foundation, more than 70,000 childcare programs will likely close, resulting in up to 3.2 million children potentially losing their child care spots. Chloe Gibbs, University of Notre Dame Department of Economics Assistant Professor tells Yahoo Finance that those estimates likely reflect more of a "worst case scenario," but that the U.S. "will experience some contractions in the supply of childcare."

Gibbs explains the rough road ahead for childcare programs. Gibbs says that to fill the gap created by loss in revenue they may have "to increase the prices that families face, another [option] might be to contract in terms of the number of hires... which would mean a reduction in slots [available for kids] in the child care centers." Gibbs warns this may have "overall effects on economic growth" as parents may be "less able to engage in the labor market."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript


JOSH LIPTON: Child care is about to fall off a cliff. That's what experts are saying as government funding set up in the pandemic is about to dry up this weekend. The Century Foundation is warning when funds from the American Rescue Plan run out, 70,000 centers could close, impacting the lives of more than 3 million children. Ripple effects could see parents, particularly women forced to leave work for-- to cut their work hours impact the economy as a whole.

For more on this is Chloe Gibbs, assistant professor at the Department of Economics at the University of Notre Dame. So, Chloe, this sounds pretty dire. What are your expectations?

CHLOE GIBBS: What we will see will be less of a cliff and probably more of a slow descent down the hill, back to the prior levels of child care funding. That is not to say that we won't feel the effects of these American Rescue Plan funds drying up, because this was a substantial infusion of resources into the child care industry. So the $24 billion in stabilization funds, a total of nearly $40 billion in funds that were directed towards shoring up the child care industry during this pandemic period and the resulting recession.

So I think that the Century Foundation numbers are likely a worst case scenario. But I do think that we will experience some contractions in the supply of child care as these funds roll back. And we know, as you mentioned, that those contractions will likely have ripple effects throughout the economy.

JULIE HYMAN: Well, Chloe, give us what you can about this in terms of, the American Rescue Plan was, as you said, sort of meant to be a bridge, right, at a time when these child care centers were not getting infusions of money because people were at home. They weren't taking their kids for the most part to child care centers. Now that many people are back to work, one would think that the financial fortunes of many of these centers has improved. What are some of the different economic wins, if you will, that are affecting them at this point?

CHLOE GIBBS: So that's right. This was intended to shore up the industry during this tumultuous period. But child care businesses, as a general rule, they run a precarious business model. They rely on being full. That is, having full enrollment at all times, because they generally have pretty thin profit margins. We're talking a lot-- about a lot of sole proprietorships. And so this was a very turbulent time for them.

Now that we are through that time and, as you said, many people are back to work, we still see that the child care industry-- employment in the child care industry is below pre-pandemic levels and has not recovered in the way that employment in most other industries has. I think a key consideration here is what has happened to wages in this period of time. And so child care businesses, which are very labor intensive, that's their primary cost. And many of them report having used the ARP funds to pay personnel.

And so what we may see in this period of funds ending is that child care businesses have to make some difficult choices about how they sort of close the gap between their costs that they face to provide high-quality care and the prices that families can afford. And so one way to do that might be to increase those prices that families face. Another might be to contract in terms of the number of hires, the number of people working in the business, which would mean a reduction in slots in child care-- in the child care centers.

And so both of these have effects for families. Because families will face increased barriers to finding affordable, accessible child care for their children. And so I think what we're likely to see is overall effects on economic growth. Because in the short-term, we may see parents less able to engage in the labor market. So we'll see those effects on labor supply. And over the long-term, we know that this has implications for families who are unable to access high-quality early care and education experiences for their young children in terms of future productivity.

So I think we are likely to see these kinds of ripple effects. A lot of this is being driven through the difficulty for child care businesses to recruit and retain staff in the context of what is a tight labor market.