What drives the cost of high-quality early care and education?

This article is part of a series produced by the Federal Reserve’s Early Care and Education (ECE) Work Group that explores the cost, affordability, and racial-equity issues in ECE. As the series' overview blog post explains, the first three articles use existing research and data to frame each of these issues in turn, and the series finishes with an article that explores these topics using findings from human-centered-design focus groups conducted with ECE providers and parents of young children. Quotations in this article are from ECE providers and parents who attended the focus groups.

Investing in high-quality early care and education (ECE) can achieve a high financial return for the public. Groundbreaking studies of these investments demonstrate that early learning programs targeted to children from disadvantaged environments can improve child development outcomes, with benefits extending well into adulthood.

But research also shows that these benefits are only obtainable from high-quality programs. The programs yielding the largest benefits tend to have relatively well-paid and prepared teachers,¹ low child-teacher ratios, and a research-based curriculum. However, high-quality program elements often cost more than providers receive in revenue through tuition payments and government funding.

Ingredients of high-quality ECE

While there is no single formula for what constitutes a high-quality provider that serves children age birth to five years, there is consensus on the general ingredients necessary for a quality program.

The quality of child-teacher interactions and relationships is the most important factor in achieving positive developmental outcomes for children.² Supporting these relationships requires attracting and retaining talented teachers with sufficient wages and benefits (or revenue, in the case of home-based providers) and supporting teacher interactions with children through education and professional development.

Other elements that influence child-teacher relationships include group sizes and child-teacher ratios, which affect the ability of teachers to give children individualized attention. In addition, curricula, teaching methods, instructional support, supplies, and child assessments can bolster child-teacher relationships and learning environments for children.

Facility and outdoor space influence the context in which teachers build relationships with children and the overall experiences of children, whether in a center- or home-based program. In addition, business technical assistance, management software, shared services, and other supports for the business aspects of child care influence a provider’s financial performance, which in turn can affect the amount of resources available to support child-teacher relationships.

Finally, the ability of an ECE program to build relationships with children’s families and help families connect to community resources can indirectly affect child outcomes. Furthermore, cultural competence—care that respects the diversity of the population served—can influence the ability of programs and teachers to respond to the cultural context of children and their families.

Relative costs of program ingredients

Research suggests that, while recruiting and retaining teachers is the most important ingredient in high-quality ECE, each of the elements described above contributes to the health, safety, and development of children. State licensing requirements include several of these elements, and Quality Rating and Improvement Systems (QRIS) and national accreditation processes build on those requirements with the goal of further supporting child development outcomes.

Providing wages and benefits to attract and retain quality ECE teachers—especially when child-teacher ratios are kept low—is the largest and most important cost. But other costs can also affect the thin operating margins that are typical of ECE providers.³

Program costs

Over 60 percent of expenses at center-based programs are typically related to personnel costs, mostly wages for teachers (see Figure 1).⁴ These wages are relatively low. According to the Bureau of Labor Statistics, the median wages for U.S. child care workers and preschool teachers in 2020 were $12.24 and $15.35 per hour, respectively. The Center for the Study of Child Care Employment reports that for a single adult with no children, median child care worker wages are equivalent to at least the living wage in only ten states.⁵ Furthermore, Black and Latino/a ECE teachers on average earn lower wages than White ECE teachers, even after accounting for education attainment.

In addition to personnel costs, ECE providers pay building expenses, which include mortgage or rent, insurance, utilities, and maintenance. Supply expenses include food, curriculum and classroom materials, and office supplies. Centers face unique facility-related costs to meet health and safety requirements, including food-preparation areas, eating areas, and bathrooms designed for children.

Home-based family child care providers have similar categories of costs as centers, but in their business model the provider is the owner, administrator, and teacher. Some larger home-based providers or group home providers hire assistants, but the majority of family child care providers work on their own. Home-based providers earn income from operating the business; income before expenses averaged an inflation-adjusted $33,284 in 2011. With home-based providers delivering direct care an average of 57 hours per week, that figure is equivalent to just over $11 per hour. Like centers, home-based providers often need to make physical modifications to meet licensure regulations, and they require a similar set of supplies.

On a per-child basis, personnel costs are higher for serving younger children such as infants and toddlers at both centers and home-based providers, primarily since they require lower child-teacher ratios. Unlike primary school classrooms where teachers on average serve about 20 children, ECE child-teacher ratios are much smaller (see table below).

System costs

System-level supports refers to a range of education, training, facility, and licensing costs that are either paid for by governments, providers, or teachers. Government pays for many of these supports for Head Start and public-school-based programs. Meanwhile, private ECE providers pay for or receive government support to access these services.

Education and professional development system supports range from a credential or certificate to an associate’s or bachelor’s degree in early childhood development, with a wide range of costs depending on the post-secondary institution. Practice-based professional development includes apprenticeships and coaching that help ECE teachers gain skills that support children’s development as they work directly with children. In addition, the pandemic has highlighted the need for and benefits of mental health supports for ECE providers. Meanwhile, business technical assistance and training focuses on the business side of child care, primarily for center directors and home-based providers.

A few key institutions, like CDFIs (community development financial institutions), assist with facility construction and renovations. State and local government licensing and monitoring, and QRISs are other examples of system-level costs paid for by government, although providers spend administrative and other resources in order to conform to regulations or achieve quality ratings.

Cost to attract and retain ECE teachers

Data on ECE teacher turnover at center-based programs provide evidence that the current combinations of wages, benefits, and working conditions lead to considerable teacher turnover. Turnover is a concern because it erodes quality, undermining the child-teacher relationship and potentially families’ experiences with reliability of care. Relatively low wages and high turnover among ECE teachers of color also have implications for equity and meeting families’ priorities for cultural diversity.

Studies report that annual ECE teacher turnover ranges from 26 percent to 40 percent; one study based on Louisiana administrative data found that about 55 percent of teachers observed in fall 2016 left the ECE sector by fall 2019.

Research shows a positive relationship between higher teacher wages and both program quality and lower turnover rates. One study based on experimental evidence shows that offering $1,500 in bonus payments over an eight-month period reduced turnover from 41 percent to 18 percent among assistant teachers and from 20 percent to 14 percent among lead teachers.⁶ While bonus payments reduced turnover rates, the rates remained quite high compared to the turnover rate of only 4 percent among school-based teachers. In this case, even larger bonus payments, wages, or benefits would be needed to further decrease ECE-teacher turnover rates.

Another approach to assessing ECE teacher compensation is comparing ECE teacher wages to those of other professions that work directly with young children. Authors of Transforming the Financing of Early Care and Education report that a 22 percent increase in wages is required to make wages for lead teachers with a bachelor’s degree equivalent to child-family social workers with a bachelor’s degree, and a 42 percent increase is required to reach the equivalence of elementary school teacher salaries.⁷

Among ECE teachers, there are differences in wages by program type. According to data from the 2012 National Survey of Early Care and Education, Head Start and public pre-kindergarten-funded centers would need to increase wages about 30 percent to reach parity with teachers at school-sponsored centers, while centers that do not receive public pre-kindergarten funds would need to raise wages 48 percent to reach parity (see Figure 2). Teachers at school-sponsored centers not only have higher salaries, sometimes at parity with elementary school teachers, but also are more likely to be offered health and retirement benefits.

The data above provide context about the size of wage increases that would effectively attract and retain high-quality teachers at ECE programs, recognizing that local labor market conditions also have an effect.

Child-teacher ratios

Reducing child-teacher ratios increases the amount of time teachers can spend with each child, but also increases the per-child cost of providing ECE. States consider this trade-off in setting licensing standards, which vary across states. One measure of quality is the ratios identified by the National Association for the Education of Young Children (NAEYC) in its national accreditation standards, which include the following child-to-staff ratios and group sizes:

Decreasing child-to-staff ratios at either a center-based or home-based provider increases the average cost per child served, with fixed and personnel costs spread over fewer children. Cost implications are largest for infant classrooms that have the lowest ratios. For a center operating with ratios of one child more than the NAEYC ratios, reducing any of the child-to-staff ratios by removing one child to align with NAEYC standards increases the average cost per child by about 4 percent. Reducing all three ratios by one child increases the average cost per child by about 12 percent.⁸

Education degrees and professional development

Providing the right mix of education and professional development is important for supporting ECE teacher interactions and relationships with children.⁹ A key policy question is whether ECE teachers should be required to attain a certain level of education credential or degree, particularly a bachelor’s degree.

While research indicates that teachers perform better when they have education in early childhood development, from a cost-benefit perspective, it doesn’t support a requirement that all ECE teachers have four-year degrees. Recent studies of ECE teachers in child care and Head Start centers did not find that a bachelor’s degree was associated with positive effects on child development outcomes after accounting for other program characteristics. Furthermore, a degree requirement could create a barrier to prospective teachers from entering the occupation. Also, a majority of bachelor’s degree holders in ECE don’t work at ECE programs but rather teach children older than kindergarten age. As an example of cost, the Child Trends Early Childhood Workforce Qualifications Calculator indicates that the one-time cost to raise all lead and assistant ECE teachers to at least a bachelor’s degree in Minnesota is about $1.3 billion.

In the current system, a variety of early childhood credentials and degrees, including bachelor’s degrees, play a role in workforce preparation, each relative to the responsibilities ECE teachers hold. For example, the Power to the Profession initiative’s Unifying Framework for the Early Childhood Education Profession describes how education attainment can be associated with a scope of practice, such as an ECE teacher with a bachelor’s degree serving as a lead teacher and guiding the practice of ECE teachers who have less education attainment.

Professional preparation is augmented by on-the-job coaching and training programs. Research shows that ECE coaching is associated with quality improvements in children’s language and literacy, math skills, and social behavior. Furthermore, an experimental study shows that individualized coaching and professional development can be more effective in improving quality than stand-alone training workshops.¹⁰

Facility costs

While ongoing facility costs are relatively stable for providers, new construction or renovations can be costly. However, such investments are opportunities to improve program quality. High-quality environments not only help keep children safe and healthy, they also facilitate concentration, ease of play, and more positive child-teacher and child-child interactions. Providing a high-quality environment includes ensuring such conditions as adequate space, ventilation, thermal comfort, and lighting.

As an example, a Massachusetts study shows costs for center renovations average $18,000 to come into regulatory compliance, $68,000 to comply with accessibility standards, and $154,000 to exemplify best practices, such as installing classroom sinks, building direct exits to expanded outdoor play spaces, or installing children’s bathrooms adjacent to classrooms.

Concerns about poor indoor air quality—which is linked to higher rates of absenteeism and illness—increased during the pandemic. Air ventilation and filtration systems can help mitigate these problems. Meanwhile, providing adequate outdoor play and green space, also a concern during the pandemic, is linked to positive child development outcomes and improved concentration.

Quality from parents’ and providers’ perspectives

In a forthcoming article, the Federal Reserve ECE Workgroup will analyze qualitative data from focus group discussions with parents and ECE providers. One finding is that parents’ definition of quality not only considers aspects that affect child development but also parental employment. Research shows that quality ingredients that support child development are consistent with providing reliable care, a key characteristic for boosting parental employment.

However, many parts of the country, particularly rural areas, have limited availability of child care providers, especially for infant and toddler care. Furthermore, parents whose jobs feature unstable work schedules or night and weekend shifts often cannot match their hours to those of child care providers. That is, even if ECE providers in the area are high-quality, they won’t help parents keep their jobs if they are not open during their working hours. In these situations, parents are more likely to use informal family, friend, and neighbor care; less is known about the quality of this care compared with licensed programs. Flexible hours are an important ingredient for parental employment, but they are also more costly for providers to offer, and may have become less accessible as home-based providers (which are often in a better position to offer nonstandard hours) have steadily decreased in numbers over the past ten years.

In the focus group discussions, ECE providers and parents both pointed to experienced ECE teachers as a key indicator of program quality, consistent with other research. Providers also observe in practice what data show: challenges in hiring and retaining staff strain their capacity to provide high-quality services and meet demand from families in their communities. Provider and parent experiences also point to a number of solutions, such as funding for providers to retain teachers and sliding-scale scholarships to help families pay for ECE.

Investing in quality has the potential to produce higher returns from ECE. Data show that a relatively large share of children arrive at kindergarten not fully prepared to succeed in school. Moreover, there are wide disparities in kindergarten readiness by race, ethnicity, and family income. Increasing ECE program quality could help boost kindergarten readiness and close these opportunity gaps, laying a foundation for future success.

Endnotes

1 In this article, ECE teachers refers to center-based staff who have regular interactions with young children, such as a lead teacher or an assistant teacher, and to home-based family child care providers.

2 An often-cited reference for program quality is the National Association for the Education of Young Children’s Early Learning Program Standards. Also see Quality 101: Identifying the Core Components of a High-Quality Early Childhood Program from the Center for American Progress.

3 This article does not assess the relative costs and benefits of potential funding sources or mechanisms to implement quality, nor does it focus on the impact of program dosage (the amount of time children spend in a program) on child outcomes. Cost estimates are informed by data from the Provider Cost of Quality Calculator. Another child care cost resource is CostofChildCare.org by the Center for American Progress, which simulates changes in monthly costs per child by state, child age, center or family child care, and eight program characteristics.

4 Providers also face upfront costs to onboard employees, such as background checks and some training costs.

5 Living wage data is from the Massachusetts Institute of Technology Living Wage Calculator, which draws on geographically specific expenditure data related to a family’s likely minimum costs for food, child care, health insurance, housing, transportation, and other basic necessities.

6 Among almost 600 ECE teachers in Fairfax, Va., one group determined by lottery received three $500 Recognition Program payments over an eight-month period while the comparison group did not. The bonus payment was equivalent to about a 10 percent increase in annual wages for teacher assistants and a 7 percent increase for lead teachers.

7 This reflects salaries elementary school teachers earn with a nine-month contract.

8 Authors’ calculations based on Minnesota data from Provider Cost of Quality Calculator.

9 See Transforming the Financing of Early Care and Education for a description of credential and degree options.

10 Coaching is generally conducted weekly or bimonthly for an average of six months to a year.