New Report Unpacks the Economics of Wisconsin ECE

On May 12, the Wisconsin Policy Forum released a new report on early childhood education (ECE) emphasizing the economic challenges currently plaguing the sector, along with the associated burdens placed on families, employees and operators.

“Not Mere Child’s Play: Unpacking the Economics of Early Childhood Education and Care,” funded in part by the Greater Milwaukee Foundation and supported by research and insights from Milwaukee Succeeds and its ECE Coalition, provides a glaring look at the high costs and low wages associated with care. It also provides a glimmer of hope, giving a glimpse into possible solutions that could stabilize the sector and bring relief to millions across the state.

The Burden on Families

The report underlines what many know all too well: child care is simply not affordable for the average family. In fact, as it stands now, ECE is more expensive than in-state tuition at any UW school, costing an astounding $12,142/year for a 4-year-old (22% of the median household income) and $16,236 for an infant (29.6% of the median household income). For reference, federal guidelines recommend that no more than 7% of a family’s income should go toward child care.

While the child care subsidy program Wisconsin Shares covers a portion of these costs for eligible families, most still pay above 7%, with single-parent households facing an increased burden. And the burden doesn’t stop there. When the cost of care gets too high, many choose to withdraw from the workforce, creating a ripple effect for employers and the economy.

Workforce & Wages

The report also reiterated what Milwaukee Succeeds found in its recent ECE Workforce Survey: early educators are struggling to earn a living wage. According to DCF’s Market Rate Survey, the average educator at a 2-star provider makes only $12/hour. Meanwhile, an Amazon warehouse associate makes $18.50 – plus health insurance and a retirement plan, which many centers can’t offer.

Even kindergarten and pre-K teachers at MPS earn more, with a starting salary of $22.59/hour (assuming a 40-hour workweek paid over 12 months), in addition to benefits. The same goes for substitute teachers ($25/hour without benefits) and paraprofessionals ($17.61/hour).

These low wages mean that many of our educators hover around or below the poverty line, with even more qualifying for some sort of public assistance.

Operating on Thin Margins

Yet despite high costs for families and low wages for workers, child care centers are still operating on razor thin margins. “This high-quality report shows what we have known for years,” says Kristin Kappelman, Milwaukee Succeeds’ director of research. “Child care providers are struggling to make ends meet and stay open.”

So where does the money go? Well, the labor-intensive nature of ECE, which allows only four infants per adult, means the majority is funneled into staffing. The Policy Forum found that a full 50% of a center’s expenses are eaten up by personnel costs: wages, mandatory benefits, voluntary benefits (often just paid time off), training and background checks. The rest are consumed by food, rent or mortgage, utilities, maintenance, supplies and technology, like internet access.

In an ideal scenario, a 2-star center at 85% enrollment would yield 9% net revenue each year after such costs. However, current conditions are far from ideal. Due to staffing shortages and other factors, enrollment numbers have dropped significantly, meaning a costly blow to the bottom line. Even a 5% reduction in enrollment means that a center’s net revenue plummets to only 3%. Any attempts to raise wages in order to attract more staff would quickly eat into those meager profits.

The High Cost of Quality

Things become even more complex – and costly – when quality is added to the mix. The Policy Forum’s numbers are drawn from a 2-star center, yet 3 stars is considered the entry point to “quality care.” So what happens when a center moves up one or more stars? Simply put, things get even more expensive – and profit margins suffer accordingly. Due to increased educational requirements for lead staff, recruitment and retention costs rise. This means that the net revenue for a 3-star center at 80% enrollment drops from 3% to 1%.

At the top of the quality scale – 5 stars – the budgetary pressure increases to the point that costs outweigh revenues, even with an increase in tuition. At 85% enrollment, centers operate at -1%. At 80% enrollment, it’s -7%. To remain open while operating at such a deficit, owner-operators often shoulder the burden, taking a cut to their own salaries to finance the center’s continued operation.

“Absent external investments or interventions,” the study reads, “the cost of quality can quickly erode operators’ sustainability and further strain families’ budgets. …These dynamics undermine efforts to increase access to high-quality early childhood education, despite research supporting its value to families and society.”

Seeking a Sustainable Solution

“Without a long-term, sustainable investment and solution, the child care crisis will not only continue, but worsen,” says Kappelman.

The Child Care Counts program, created during the pandemic to allocate federal relief funds, provided a glimpse at what increased investment into the industry can achieve. An overwhelming majority of the money was put into increasing access to quality care and bolstering retention and recruitment, suggesting a desire by providers to invest in these critical – but costly – areas.

When this funding ends in January 2024, “providers, workers, and families [will] face looming challenges and difficult choices.” Over 60% of providers will have to increase tuition, while one-third will have to cut wages for staff. Yet neither families nor educators can afford such measures.

“Policymakers face a choice,” the report contends. “On the one hand, they might allow the economics of [ECE] to revert back to pre-pandemic policies, thus, at least for now, re-creating the same or even greater challenges for families, child care workers, child-care operators, and employers.”

Or they could set the stage for a more sustainable solution, one that supports this essential industry instead of leaving it to flounder. An investment in the upcoming 2023-25 state budget would be a start. The Milwaukee Succeeds-led ECE Coalition, alongside the statewide Raising Wisconsin Coalition, is advocating for an investment of $300 million in the budget to extend Child Care Counts once it expires. While the funding represents a short-term fix, it would help to stabilize the industry over the next few years and prime the state for a more permanent set of solutions.

"Child care benefits Milwaukee families, employers, and communities," says Milwaukee Succeeds ECE Director Daria Hall. "But as this research makes clear, child care providers are forced to operate under a broken business model in which families can’t afford to pay more and educators can’t afford to earn less. We must change that dynamic through significant, sustained public and private investment into child care. Until we do, parents of young children will face impossible choices between working to support their families and paying for child care. Employers will struggle to recruit and retain young parents. And we will all miss a huge opportunity to have healthier, safer, and better-educated communities."