“The cost and impact of different approaches to ECEC wage increases”- A new report from the ACA

In the wake of the recent application to commence early childhood education and care (ECEC) wage negotiations submitted to the Fair Work Commission (FWC) the Australian Childcare Alliance (ACA) commissioned, and released a report that explores how a Government funded wage increase may be implemented. 

 

Created by Dandolo Partners and commissioned by the ACA, the report explores in detail two different mechanisms namely; a direct wage subsidy paid to providers and passed on to educators and an increase of the Child Care Subsidy hourly rate cap from the current $12.74 to a level that enables providers to claw back wage increases.

 

This article will provide a high level overview of the key findings of the report.

 

Option 1 – A direct wage subsidy paid to providers and passed on to educators

 

The direct wage subsidy option involves the actual cost of the required increase in wages being met by a Government subsidy that is paid to the employer with the expectation that it is passed on in full to employees. 

 

The amount of the subsidy would be equivalent to the mandated wage increase. By fully funding the wage increase providers would not be compelled to raise fees to recoup costs and in turn the out of pocket expenses for families would not be impacted. 

 

In addition, the universal application of the direct wage subsidy model ensures that all services, regardless of rostering preferences, current Award / above award mixes or educator experience differences would receive the same increase, ensuring equal impact across the sector. 

 

From an administrative perspective, the direct wage subsidy model would require additional administrative processes from a Government and provider point of view but previous iterations of similar direct funding initiatives, such as JobKeeper, make these both manageable and achievable. 

 

The three key design elements of this approach include:

 

1. Payments that fully cover the wage increase
2. Requirements to pass on the funding to educators in full
3. Periodic evidence declarations and submissions to demonstrate compliance

 

The main benefits include:

 

1. No increase in parent out of pocket expenses
2. Clear line of sight between Government spend and educator receipt
3. Manageable administrative and compliance obligations

 

The main shortcomings include:

 

1. Government set up costs are likely to be material

 

Option 2 – An increase of the Child Care Subsidy hourly rate cap

 

The Child Care Subsidy hourly rate cap model involves increasing the hourly rate cap by a predetermined amount which would in turn enable providers to pass a one off fee increase to fund higher wages without families having to shoulder the full burden of the increase itself. 

 

The funding mechanism is indirect in nature, and would therefore see providers using an existing funding channel designed to support ECEC affordability for parents to achieve a secondary objective, namely, compensation for higher wages via higher fees. 

 

A notable consequence of the hourly rate cap model to support funding of wage increases is that although the fee increase required to recoup wage increase costs may be the same across the sector, the impact it would have on the out of pocket expenses of families will vary very substantially depending on their individual circumstances. 

 

This unevenness of impact is also amplified by whether services fees are below, at or above the existing rate cap, whether, due to catchment constraints, the service can actually raise fees and what percentage of CCS a service receives anyway. 

 

The two key design elements of this approach include:

 

1. Hourly rate cap is increased 
2. The CCS funding architecture is updated to reflect higher rate cap

 

The main benefits include:

 

1. Existing process and systems already in place

 

The main shortcomings include:

 

1. Diluting the purpose of CCS with objectives other than affordability
2. Family out of pocket expenses will rise / Provider surpluses will fall
3. No clear line of sight to ensure wages actually increased 

 

Unfunded 15 per cent wage increase estimated to require average fee rise of 11 per cent

 

The report also explored the estimated cost of a wage increase of varying percentages and the consequent impact on families out of pocket expenses if the increase was not fully funded via some form of Government support. 

 

Using data largely from the National Workforce Census and the ECEC Modern Awards, the report concludes that a 15 per cent wage increase will require a one off boost to wage costs totalling between $0.9 billion and $1.3 billion. 

 

In order to recoup these costs, it was estimated that an 11 per cent fee increase, even after the new CCS funding measures to be passed in July 2023, is required, and that (assuming families access three days a week of ECEC), out-of-pocket costs could increase on average by between $9 and $19 per week.

 

Services with higher employment costs will need to increase their revenue by more leading to higher out of pocket expenses and financial pressure on families. 

 

Advantages of wage subsidy easily outweigh those of hourly rate cap model

 

As part of its summary commentary the report is conclusive in its evaluation that the wage subsidy model is preferable to the hourly rate cap model. 

 

“A wage subsidy is more costly and administratively burdensome but is otherwise efficient to operate. It results in no additional out- of-pocket costs to families, supports service viability and promotes attraction and retention of the workforce,” report authors note.

 

In reference to the rate cap model the authors state that whilst “increasing the hourly rate cap is comparatively easy to implement, its effects are highly variable, inequitable and inefficient.”

 

It is understood this new report will support information requirements for all stakeholders ahead of the upcoming wage negotiations which are due to commence in earnest in September 2023.