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The use of child care has expanded dramatically as maternal employment has increased. Recent estimates of children age 5 or younger in regular child care arrangements range from 60 to 75 percent (Hofferth et al. 1998; and Smith 2000). With the implementation of new welfare regulations, such as work requirements and time limits on cash assistance, the proportion of young children in out-of-home care, especially among low-income families, is likely to continue rising. Child care arrangements for these children encompass a broad spectrum of settings, including regulated center-based child care, Early Head Start and Head Start, public prekindergarten programs, early intervention programs, regulated family child care homes, after-school programs, and unregulated care by family and friends. As more mothers of young children enter the workforce, concern about the availability, cost, and quality of child care has become an increasing focus of public policy debate. Discussion about the extent to which the government could and should invest in the child care market has increased among policymakers.
To further discussion of these issues, the Assistant Secretary for Planning and Evaluation (ASPE) of the U.S. Department of Health and Human Services (HHS) sponsored an invitational conference on May 3, 2001, entitled "The Economic Rationale for Investing in Children: A Focus on Child Care." The primary purpose of the conference was to engage a multidisciplinary group of economists, developmental psychologists, child care researchers, and policy analysts in a dialogue about the rationale for public investment in quality child care(1). ASPE officials hoped that such a dialogue would generate fresh and innovative ideas and help ASPE set its future child care research agenda.
The conference built on a paper commissioned by ASPE — "Child Care Quality: Does It Matter and Does It Need to Be Improved?" — by Deborah Vandell and Barbara Wolfe(2). The paper reviews evidence on the effects of quality child care on children's health and development and sets out an economic rationale for public investment that emerges from that evidence. To explore further the arguments discussed in the paper and to identify other potential arguments, the conference addressed the following questions:
A summary of the main economic arguments identified during the conference for public investment in quality child care follows the overview of conference proceedings below.
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Barbara Broman, Acting Deputy Assistant Secretary for Human Services Policy at DHHS, opened the conference by welcoming participants and underscoring the conference goals of fostering dialogue across disciplines and eliciting new ideas about the rationale for public investment in quality child care. The aim of the conference was to solicit multiple points of view, raise issues, and identify areas in which further research is needed.
Next, to provide an overview of child care quality research and to set the stage for later discussions about the merits of government intervention in the child care market, Deborah Vandell and Barbara Wolfe presented highlights of their paper, "Child Care Quality: Does It Matter and Does It Need to Be Improved?" Their presentation addressed four key questions:
Vandell and Wolfe argued that the quality of child care does affect children's health and development and their readiness for school. They described two main ways that child care quality has been measured. First, researchers observe children in their child care settings — including their interactions with other children and adults and the activities in which they participate — to measure indicators of process quality. Second, researchers measure quality by examining the structural characteristics of child care settings, such as child-adult ratios, group size, and the level of caregiver education. Vandell and Wolfe reported that the process quality of child care in the U.S. is, on average, "fair" or "minimal." Moreover, structural quality in typical settings does not meet recommended standards. Finally, they argued that failures in the child care market — including imperfect information, the presence of externalities in the market, and an imperfect capital market, justify government intervention. Such intervention could improve the market's performance and ensure equality of access to quality child care across families at all income levels.
The remainder of the day consisted of three panels in which economists with expertise in labor, education, and health care summarized the arguments for investment in these markets and explored the extent to which they could be applied to the child care market. In the first panel, Robinson Hollister summarized the arguments for public investment in the labor market, with a particular focus on training programs, in his paper, "Rationales for Public Sector Training and Other Investments in Labor Markets and Their Applicability to Public Investments in Child Care" (see Appendix B). Hollister asserted that human capital, equality of opportunity, and merit good rationales for public investment in the labor market applied most directly to the child care market. According to human capital arguments, government intervention is needed because individuals or firms may not invest in developing human capital (such as paying for employment training or high-quality child care) when they do not have good information about the investment, ignore externalities, or are unable to finance the investment. Public investment may also be justified to ensure equal access to opportunity (such as the opportunity to participate in training or quality child care). Merit good rationales assert that public investment in quality child care is warranted because, like elementary education, it is in children's best interests. Hollister presented other arguments for public investment in training programs but found them less relevant for the child care market. These arguments included those related to macroeconomics (public investment in training produces more favorable market conditions, such as lower unemployment and low inflation), segmented markets (public investment in training prepares workers to move out of labor surplus markets into markets with labor shortages), and area redevelopment (public investment in training improves the labor force and thus the economic prospects of workers in a specific geographic area).
In his remarks on the paper, discussant Joseph Hotz said that care must be taken to ensure that these arguments address problems specific to the child care market. For example, he said that distributional rationales alone may not justify public investment in child care. If people are poor and do not have equal access to capital markets, then why invest in child care instead of giving them cash and allowing them to make their own consumption choices? Hotz argued that information problems in the child care market, such as parents' lack of information about child care quality and lack of information about the positive effects of high-quality child care on children's development, are better rationales for government intervention.
Hotz also pointed to parents as imperfect agents for their children as another failure of the child care market. He asserted that, because the buyer of child care (the parent) is not also the consumer of child care (the child), the buyer may not make decisions that fully reflect the position of the consumer. Parents may fail to take into account the potential long-term consequences of their child care decisions. For example, they may underestimate the benefits of quality care that could accrue to the child later in life. He also pointed to the possibility that parents sometimes may not make decisions based on what is best for their child. For example, parents may choose a conveniently located child care arrangement rather than a higher-quality one farther from work or home.
Steven Rivkin presented the second paper, "Public Investment in Education: Lessons for Child Care Policy," in which he summarized the main arguments for public investment in primary and secondary education (see Appendix C). Specifically, he reviewed rationales for public investment in education related to externalities associated with schooling, inadequate information about school quality, equity and fairness, and protection of minors. Rivkin asserted that, although the details may be somewhat different, the arguments for public investment in elementary and secondary education also apply to the education of younger children. Next, Rivkin discussed what is known about the determinants of elementary and secondary school quality, then identified several policy implications for early childhood education. He recommended that additional years of schooling (early childhood education) not simply be added to the existing public school structure. Instead, competition and choice should be encouraged, at least in pilot programs. He also suggested that the government has an important role to play in disseminating information about the quality of early childhood education providers and in conducting evaluation and research on early childhood education.
In her comments on Rivkin's paper, Ann Witte identified additional arguments for public investment in child care. These included use of child care as a way to socialize children and assimilate new immigrants into American society, externalities produced by quality child care, imperfect capital markets (parents cannot borrow money to pay for quality child care), and imperfect information about child care quality and the benefits of quality care. Her arguments also included inequality in accessing quality child care and the potential for producing two generations of more productive workers (parents who trust their child care arrangements and children who benefit from high-quality settings). She also said that parents, acting as agents for their children in the child care market, may prioritize meeting short-term goals over the long-term benefits that may accrue to children who experience high-quality child care. This could occur because parents are not aware of the long-term benefits, are focusing on meeting immediate needs such as food and shelter, or are pursuing their own self-interests.
Witte also raised questions about the efficiency and equity of current government interventions in the child care market. She noted that the government currently funds multiple programs — such as Head Start, public prekindergarten, child care subsidies, and early intervention services — that are not always well integrated and thus are less efficient. These programs have multiple — and, at times, conflicting — goals. Some programs, such as Head Start and public prekindergarten, focus on producing positive outcomes in children, while the child care subsidy system focuses on enabling low-income parents to work. In addition, Witte noted that the mechanisms in place to publicly fund child care may not be equitable. Middle-class families receive government assistance paying for child care through tax credits and deductions, while low-income families receive assistance through child care vouchers and partially funded Head Start and prekindergarten programs. Finally, Witte asked whether the public resources already dedicated to child care could do more to improve the well-being of children if they were distributed more efficiently and equitably.
Janet Currie presented the third paper, "What Can We Learn About Child Care Policy from Public Investments in Children's Health?" (see Appendix D). She reviewed lessons from the expansions of public health insurance for low-income children, drawing heavily on lessons from the State Child Health Insurance Program, and applied those lessons to the child care market. She stressed the importance of setting clear goals for child care policy. For example, she described a lack of clarity about whether the policy goal in children's health is to equalize access to care across socioeconomic groups or to improve child health outcomes. Similarly, conflicting goals (for example, supporting parents' ability to work versus promoting positive child outcomes) could hamper efforts to develop sound child care policy.
Next, Currie identified several potential arguments for government intervention in child care markets. These included liquidity constraints (the inability of some parents to finance quality child care), imperfect information about child care quality (parents' lack of information about the quality of child care settings), and externalities in the child care market (the positive and negative impacts on society of parents' child care choices). Drawing on the experience of public health insurance for children, she also pointed to the possibility that low utilization of means-tested programs, "crowd out" in universal programs, and the need for outreach may be important child care policy issues(3). Finally, she argued for rigorous evaluation of the long-term effects of high-quality child care on child outcomes. Because the family supplies most child care and family caregiving has the largest impact on children's development, she also argued for policies that support good parenting.
In her comments on Currie's paper, Genevieve Kenney concurred with Currie on the efficiency and equity arguments for public investment in the child health care and child care markets. She also agreed with her on the importance of clarifying policy objectives and then tailoring policies to meet those objectives. Kenney noted that current public investments in child care seem to be directed more at supporting parents' ability to sustain their employment than at enhancing children's developmental outcomes. Thus, characterizing child care as an essential work support for low-income parents could serve as a strong impetus for increased public spending on child care.
Kenney also cautioned that, in her experience in the health field, successful initiatives aimed at meeting specific policy objectives tended to be much more comprehensive and expensive than anticipated and involved more than removing financial barriers. Some problems with access to services can be readily addressed through program changes, such as greater outreach efforts and increased information about available services. In both health care and child care, however, family and parental characteristics (for example, parents' education levels) also affect the outcomes of interest, which makes it difficult for government subsidies aimed at reducing financial barriers alone to reduce gaps in access to services across socioeconomic groups. Finally, Kenney cautioned that the consensus among policymakers and the public that low-income children should have access to health insurance is not based primarily on failures in the health care market. Rather, it is based on societal expectations about providing access to health care for all children. With the exception of welfare mothers, the public is ambivalent about the extent to which mothers with young children should work and place their children in child care. Thus, while it is necessary to explore the economic rationale for public investment in child care, it is also important to recognize that arguments for public investment are likely to be driven by other factors, such as societal values about who should care for young children.
Next, John Love, Christine Ross, Deborah Vandell, and Barbara Wolfe reflected on the discussion that took place during the day and outlined a set of next steps for research that could help in formulating economic rationales for public investment in quality child care. Barbara Broman and Jeffrey Evans from the National Institutes of Child Health and Human Development made remarks to conclude the conference. The following sections describe the main issues and next steps that these speakers and other conference participants identified.
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Throughout the day, speakers and conference participants drew on the arguments for public investments in other markets to discuss the relevance of various arguments for public investment in quality child care. For the most part, conference participants agreed on the main types of failures in the child care market that could serve as arguments for government intervention, although they did not always agree on the relative strength of the arguments. The following sections summarize the main failures that participants identified in the child care market and present other economic arguments for government intervention.
Externalities. Quality child care may produce some benefits that accrue not only to parents and children, but also to society. When making child care decisions, however, individual parents may take into account only the benefits of quality care that accrue to the family and child. For example, participants cited such possible societal benefits as increased school readiness, lower school dropout rates, reduced crime, reduced substance abuse, and increased productivity as parents have fewer child-care-related absences from work.
Information Problems. Participants identified two failures in the child care market associated with information problems: (1) lack of information about the quality, cost, and availability of care; and (2) asymmetrical information among parents and child care providers. Because child care is offered by many small regulated and unregulated child care providers, parents have difficulty obtaining information about the availability of care and the relative quality and cost of available child care arrangements. In many communities, child care resource and referral agencies offer information about the availability and cost of regulated child care providers, but usually do not provide information about quality. Moreover, because quality is defined along multiple dimensions and is difficult to assess, parents do not know how to evaluate information that they are able to obtain about quality.
Furthermore, information about the quality of child care arrangements may not be equally available to parents and child care providers. The difficulties parents face in defining quality and identifying quality child care arrangements may create a disincentive for providers to reveal the quality of the care they offer. Because parents cannot identify quality, it is not reflected in the price of care. Thus, although the quality of available arrangements may vary, the price of care across these arrangements remains close to the mean price.
Imperfect Capital Markets and Liquidity Constraints. Low-income parents face severe income constraints. They cannot afford to purchase quality child care and many other goods that would benefit their children, nor can they borrow against a child's future income to pay for quality child care. Moreover, child care needs often occur when parents are young, and at one of the lowest points in their adult income streams. Some participants asserted that this argument was not sufficient to justify public investment in child care. They argued that, if the problem is poverty, the government should supplement parents' income, rather than provide goods in kind, and allow parents to make their own consumption choices. Others argued that, because child care consumes such a substantial portion of poor families' budgets — more than health care or college tuition — funding it is a good way to improve poor families' incomes.
Parents as Imperfect Agents. Related to market failures associated with imperfect information is the fact that parents act as agents for their children in the child care market. When the buyer of a good is not also the consumer, that buyer may not make decisions that fully reflect the interests of the consumer. Young children cannot make their positions on child care known, and parents may not take into account the potential long-term ramifications of their decisions on children's well-being. For example, parents may underestimate the benefits of high-quality child care that could accrue to the child later in life — either because they may discount the future too much or because they may not be aware of the potential long-term benefits of quality child care. In some cases, parents may not give enough weight to the best interests of their child when making child care decisions. For example, some parents may value convenience over quality — choosing to purchase child care that is closer to the parent's workplace rather than quality child care that is not conveniently located.(4)
Equality of Opportunity. Children in various socioeconomic groups do not have equal access to quality child care, because low-income parents often do not have the financial resources to purchase quality care. If high-quality child care can improve cognitive ability, school readiness, and social development, and if maximizing these outcomes for all children is an important goal, then low-income families should have the same opportunity as higher-income families to access quality child care. In that case, government intervention in the child care market through subsidies or direct provision of care may be necessary to ensure equal access to quality child care across socioeconomic groups. Some participants also argued that government interventions aimed at reducing inequality of opportunity may be more potent when they occur during the children's early years than when they occur later in life (through such interventions as remedial education or adult employment and training programs).
Child Care as a Merit Good. Some participants argued that quality child care is a merit good. In other words, it is a good (such as elementary education or seat belts) that the government should compel people to consume in certain circumstances for their own good. Through welfare reform, the government and the public have made a value judgment that work is good for low-income parents. Thus, society has already made an implicit judgment that children in low-income families should attend child care (while their parents work) rather than stay at home with their parents. Some participants thought that, if child care is a merit good that enables low-income parents to work, mandating quality child care for those children would be a natural extension of that argument. Others asserted that, because of society's ambivalence about the value of child care and arguments for parental choice, it would be difficult to make a case that government should mandate the type of care that children should receive.
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ASPE held the conference to generate new ideas about the economic rationale for investing in quality child care that could help the office develop its future research agenda. Throughout the day, participants identified areas in which additional research and policy analysis could be helpful. Speakers in the final session highlighted many of these ideas, which are summarized below.
Clarify objectives and priorities for public investment in child care. Several speakers and participants stated that current child care policy reflects multiple — and, at times, competing — objectives. For example, child care subsidies are viewed primarily as work supports for parents and are valued as a critical component of government efforts to help low-income parents make the transition from welfare to employment and self-sufficiency. However, the primary goal of several publicly funded early childhood programs — such as Head Start, public prekindergarten, and early intervention services — is to promote better child outcomes and enhanced school readiness. Some participants said that it may not be possible to achieve consensus about the priority that should be given to each child care policy goal. Nevertheless, participants agreed that further discussion and clarification of these goals is essential for continued policy development.
Define quality and disseminate clear information on how to measure quality. Several participants lamented the public perception that researchers do not know how to define and measure child care quality. Several child developmentalists argued strongly that child care researchers have indeed defined quality and developed reliable measures, including structural measures of child care settings and process measures related to children's experiences in care, that can be related to child outcomes. Nevertheless, most agreed that the measures are difficult to describe and complex and expensive to use. Participants agreed that child care researchers, for the most part, have not done a good job of communicating information on child care quality to policymakers and the public. Researchers need to look for ways to communicate their results in more concrete terms. Policymakers and the public need a clearer picture of what is "good or bad" about child care settings.
Conduct rigorous research that links high-quality child care to improved child outcomes. Although participants agreed that the child care research literature contains evidence that links the quality of child care to child outcomes, many participants said that more research in this area is needed. Policymakers need information about the impact of child care quality on child outcomes that is based on rigorous research designs and methods such as random assignment. Economists also would like to see analyses conducted on larger and more nationally representative samples, and with more controls for selection bias. Questions that researchers need to address include: How much difference does a particular increase in quality make for child outcomes? Which aspects of quality matter the most? Are different aspects of quality important at different ages? How does the impact of a quality child care intervention compare to the impact of a quality parenting intervention?
Identify proxy measures for process quality that are easier and less expensive to collect. Measuring process quality in child care is expensive and complex, because doing so requires trained observers to conduct reliable structured observations in child care settings. Several economists urged child care researchers to consider whether it would be possible to identify proxy measures of process quality whose collection would be less expensive and difficult. Such proxies have been identified to monitor quality in the health care sector. For example, less-expensive proxy measures in the health field include "percentage of children who receive immunizations on schedule" and "percentage of children with ear infections treated with the correct antibiotics." In the child care sector, proxies could be used as indicators for rating quality, communicating levels of quality to parents, and helping child care providers improve quality.
Conduct rigorous research on the costs and benefits of increasing child care quality. Several participants said that policymakers need more information about the levels of quality needed to produce positive child outcomes, as well as the cost associated with achieving those levels of quality. Questions raised about the costs and benefits of increasing child care quality include: How much does a given increase in quality cost, and how much does it improve child outcomes? Are the benefits of early, high-quality child care sufficiently great that shifting resources from care for older children to quality care for younger children would result in better outcomes? Can similar trade-offs be made by shifting resources from children in part-time care to those in full-time care? Are there thresholds such that increases from low quality to fair quality may be more cost-effective than increases from good quality to excellent quality?
Conduct research on whether public funds currently dedicated to child care could be distributed more efficiently and equitably. Participants noted that federal and state governments already invest in the child care market through tax credits and deductions; subsidies for low-income families; publicly funded Head Start, prekindergarten, and early intervention services; and other programs. These interventions are often not coordinated or integrated, nor is the impact of public investments on the quality of child care well understood. Several participants said that research and analysis are needed on whether the public funds already dedicated to child care and other out-of-home experiences that precede formal schooling could be used more effectively to provide high-quality experiences for children.
Design and test a comprehensive initiative to address information problems in the child care market. Participants identified information failures in the child care market as a key argument in favor of public intervention in the market. Several economists argued that a strong information intervention should be rigorously tested to determine the extent to which such an intervention could improve the child care market. Such an intervention could include aggressive outreach efforts to provide parents with information on the link between quality and child outcomes, the potential benefits of high-quality child care, and the quality of care that specific child care providers offer.
Consider child care in the broader context of children's experiences. In closing, several participants urged child care researchers to conduct their research on child care quality within the broader context of what makes children better off. Child care, parental care, health care, and other factors all contribute to child well-being. Policymakers need a broad understanding of these factors to make effective public policy that benefits children.
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Currie, Janet. "What Can We Learn About Child Care Policy from Public Investments in Children's Health?" Draft paper presented at the Conference on the Economic Rationale for Investing in Children: A Focus on Child Care, Arlington, VA, May 3, 2001.
Hofferth, S.L., K.A. Shauman, R.R. Henke, and J. West. "Characteristics of Children's Early Care and Education Programs: Data from the 1995 National Household Education Survey." Report No. 98-128. Washington, DC: Department of Education, National Center for Education Statistics, 1998.
Smith, Kristin. "Who's Minding the Kids? Child Care Arrangements." Current Population Reports P70-70. Washington, DC: U.S. Census Bureau, 2000.
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1. See Appendix A for a list of conference participants, a conference agenda, and brief biographical sketches of the conference speakers.
2. This paper is available on the Internet at [aspe.hhs.gov/hsp/ccquality00/index.htm]
3. "Crowd out" refers to the extent to which publicly funded services replace privately funded ones without increasing overall use by the target population. For example, despite increases in publicly funded child health insurance in recent years, the proportion of children without insurance coverage has remained constant, while the use of private health insurance has fallen by the same amount that the use of public insurance has risen. This suggests the possibility that public insurance is "crowding out" private insurance (Currie 2001).
4. This rationale elicited disagreement among some conference participants who argued that many parents struggle to balance multiple demands. In general, economists were more comfortable than those from other disciplines with viewing parents as potential imperfect agents.
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