How Does Raising the Minimum Wage Affect Families with Children? Analysis of Effects on Childcare Costs and Marginal Tax Rates

Background and Purpose: In November 2016, Colorado voters will decide whether to raise the minimum wage in Colorado to $12/hour. In anticipation of this vote, we undertook an analysis of anticipated effects of the wage increase on low to middle income families with children.  Although the impact of minimum wage on fast food has been studied, we conduct the first study of its kind of the effects of higher minimum wages on childcare costs. Childcare costs can consume 30-50% of the after-tax income of young, low-to-middle income families. Therefore, we analyzed how the wage increase might impact these families, focusing specifically on childcare costs and eligibility for and benefits from programs like the Colorado Child Care Assistance Program (CCCAP), the Low-income Energy Assistance Program (LEAP), and Medicaid.

Methods: Using advertised rates posted by samples of childcare providers in Colorado, California, Washington, and Arizona, we calculated average childcare costs, focusing specifically on Denver and comparable cities in California and Washington, where minimum wage increases have already been implemented. Using contiguous cities analysis, we examined how childcare costs were affected in these cities; then, adjusting for differences in average labor costs and cost of living in these cities, we projected effects of wage increases on childcare costs in Colorado. With these effects in mind, we estimated how these cost increases would affect workers whose incomes near the eligibility limits for public means-tested programs.

Results: In 2015, infant-care costs in Colorado ranged from $145/wk. to $345/wk. at daycare centers and $120-$225/wk. for in-home daycare, while care for toddlers was slightly lower. As expected, higher costs were found in metropolitan areas like Denver and Boulder counties. Labor costs for childcare in Colorado are slightly lower than nationwide averages; we find that labor accounts for roughly 50% of center costs, but closer to 70% of in-home care costs. Using contiguous analysis to understand how wage increases affected childcare costs in similar cities, and wage data for Colorado as reported by the Bureau of Labor Statistics, we estimate that childcare costs will rise by roughly 7-10% once the minimum wage reaches $12/hr. in Colorado. For instance, in Denver, care for a two-year old may increase to roughly $300/wk. for center-based care and $193/wk. for in-home care, which equates to roughly 63% and 40% of full-time income at $12/hr. If current CCCAP eligibility limits and provider reimbursement rates remain the same, a worker earning $12/hr. would continue to receive CCCAP benefits, and may see some net gains despite having slightly higher (though still subsidized) costs for childcare. Those whose incomes rise to slightly more than minimum may see net losses because of higher payroll taxes and a loss of public supports. 

Conclusions: Discussion will focus on implications for families that depend on programs like CCCAP, LEAP, and Medicaid, and how eligibility and benefits may need to change to offset increases in household costs related to the statewide minimum wage increases, especially for families with young children.