The great exit

October 1, 2025

The Covid-19 pandemic severely disrupted the childcare sector. Daycare operations shut down while schools went online. Many women cut their work hours or left the labor force to care for their children. They saw little choice.

Then funds from the federal government stabilized the sector.¹ Companies, too, shifted online, providing remote work opportunities that brought many back into the labor force. Women with young children drove record participation of prime-age women in the US economy.²

Those gains are now reversing. Since late 2023, women with young children have been leaving the labor force. Those with a college degree or higher are driving those losses. Over the same period, men with young children have increased their participation in the labor force.

Labor markets are expected to be tight in the years ahead due to retiring baby boomers, low birth rates and curbs on immigration. The childcare crisis is adding additional stress to the labor supply. Employers are currently losing talent; as a result, the US economy will grow more slowly.

Retaining childcare workers remains a challenge. Turnover is high due to low wages.⁶ That harms children’s health, safety and development. The inflation-adjusted median wage for childcare workers was $15.90 per hour in August. That is not enough to cover the basic cost of living in most US counties.⁷

Recent policy shifts are likely to contribute to supply-side shortages. An estimated one-fifth of childcare workers overall are immigrants, including one-fourth in center-based daycares.⁸ Anecdotal data suggest immigration restrictions are already affecting the supply side.⁹

Higher inflation is another challenge; it adds to the costs of running a childcare center. Many diapers, wipes, toys, supplies and food, especially for young children, are imported and subject to tariffs and the shift in trade policy. Utilities and insurance costs are rising. Most childcare providers operate as small businesses with thin, if any, margins.¹⁰ Higher prices could force centers to close, making supply shortages even worse.

Rapidly increasing childcare prices reveal supply and demand imbalances

These supply-side shortages are clashing with elevated demand. Though many believe lower fertility rates mean less demand for childcare, the number of births actually increased in 2024 compared to 2023.¹¹ Millennials (mostly in their 30s) and Generation Z (mostly in their 20s) are now starting families, which is increasing the demand for childcare.

Price is the ultimate equalizer in economics. When demand outstrips supply, prices surge.

Chart 2 compares the overall Consumer Price Index (CPI) with the daycare and preschool subcomponent. Childcare prices have risen much faster than overall inflation since 1991. One exception was during the height of the broad-based pandemic inflation from 2021-2022.

The childcare crisis is not new, but it has increased in intensity. Once parents returned to work and sought more childcare services, prices started to surge again. Since August 2024, prices for daycare and preschool have increased around two times the pace of overall inflation. That has contributed to the stickiness in service sector inflation.

The CPI is composed of a basket of goods and services for the typical urban consumer. Daycare and preschool comprise 0.7% of that basket, because mainly only parents with young children pay these costs. However, those parents often spend up to 20-30% of their income on childcare alone.¹²

In effect, they have been experiencing a much higher inflation rate than suggested by the headline CPI. That helps explain why the childcare crisis is increasingly affecting parents’ labor market decisions and outcomes, especially those who have young children.

The potential GDP of an economy equals the size of the labor force times productivity. The US is facing three headwinds to the size of the labor force: (1) aging population, (2) declining birth rates and (3) curbs on immigration. All else equal, a smaller labor force results in slower growth.

Boosting labor force participation rates can help offset these unfavorable trends. In the US, men’s prime-age rate, defined as those aged 25-54 years old, has recovered its post-pandemic drop but remains on a long-term downward trend. Research by the Federal Reserve found that the share of men not participating in the labor force due to caregiving has increased in each generation from the Silent, to the Baby Boomers, to Gen X to Millennials.¹⁷

Women’s prime-age participation rate has remained roughly flat over the past 30 years after surging in the 1970s and 1980s. Over the same period, the rates in other countries have grown substantially, including countries that previously lagged the US such as Japan and Spain.¹⁸

There are multiple reasons why the US is now the laggard among OECD countries. Parental leave expanded as firms competed for workers post-pandemic, but the US still lacks the paid leave and childcare benefits of its peers.¹⁹ There is a lack of part-time work options, especially compared to European countries.²⁰

Other reasons include income taxation, job clustering by demographics and differences in healthcare, disability policies and work culture.²¹ Finally, the motherhood penalty plays a role.²²

At the root, labor force participation rates reflect people’s ability to choose to work or not, in the arrangement that works best for them and their families. However, parents in the US face a more constrained choice than those in other countries due to the hurdles to accessing quality and affordable childcare.

The gap between those who can and those who want to work is still large. One survey found that nearly three-fifths of parents not working or working part-time would choose to work full-time if they had access to quality and affordable childcare.²³

That means there are opportunities for employers to tap the talent base of these discouraged workers. On top of everything else, higher inflation in recent years has made working less of a choice and more of a necessity for everyone.

There are long-term consequences when parents are not able to provide for their children. Financial instability affects children’s development and mental health.²⁴ Unstable childcare arrangements worsen these outcomes; reduced earning potential becomes generational and enacts large social and economic costs.²⁵

Zeroing in on those with more education, Chart 6 shows the participation rates of prime-age women who have a BA or higher, by the age of their youngest child. Since December 2023, college-educated women with no children or whose youngest child is between 5-18 years old have posted gains in participation. Both groups have begun to slip in recent months, but the upward trend is clear. Only the rate of those whose youngest child is under 5 has dropped.

Layoffs in white-collar industries like technology do not explain this disparity. Instead, specific features of the childcare crisis are disproportionately affecting women with young children, thereby influencing labor force participation rates.

First, these women are increasingly squeezed by high childcare costs, which they are more likely to pay out of pocket, in addition to daycare centers closing. Research has found that high childcare costs cause declines in labor force participation of mothers with young children.²⁷

Second, return to office (RTO) mandates resulted in previously fully remote workers needing to work on a hybrid schedule.²⁸ For parents with young children, shifting from zero days in the office to one, two or three days disrupts existing care arrangements.

Even if a hybrid schedule is more flexible than fully in-person, it still requires parents to create new childcare arrangements, especially as many workers now live farther away from workplaces.²⁹ Facing these sudden shifts, one parent, disproportionately the mother, reduces work hours or leaves the labor force entirely.

Finally, unsupportive managers and workplace cultures are making it more difficult for some women to remain in the labor force. Given the higher demands of taking care of young children, this is not affecting women with older children or no children to the same degree.

Men whose youngest child is under 5, regardless of educational attainment, have increased their participation in the labor force over this same time period. This illustrates that the childcare crisis is continuing to disproportionately affect women and their labor market outcomes.

Labor shortages in childcare are colliding with elevated demand, resulting in higher prices. Women with young children in their prime working years are increasingly working part-time, missing work or leaving the labor force entirely. Those with a college degree are exiting the workforce the most.

Workers lose income, financial stability and career growth opportunities. Businesses lose productive and experienced workers and see a rise in employee burnout. The US economy as a whole grows more slowly.

Employers can gain an edge over competitors by understanding the stresses on the labor market caused by the childcare crisis and who is disproportionately impacted. Childcare is not an individual or personal issue; it is an economic and business imperative.