The Economic Rationale for Investing in Children: A Focus on Child Care. Conclusions


The rationale for government involvement in child care policy is similar to that for investment in child health in that it rests on a commitment to equity as well as the existence of market failures such as liquidity constraints, imperfect information, and externalities associated with sub-optimal investment in children by parents. The two types of interventions share a fundamental goal, which is to improve short and long-term child outcomes. Moreover, quality child care may play a direct role in the promotion of child health by preventing injury, abuse, and neglect.

Given these similarities and the relatively long involvement of government in efforts to improve child health, some important lessons can be drawn for child care policy. First, it is important for the goals of particular policy recommendations to be explicit, since goals may conflict. Second, there is a tradeoff between the problems of takeup faced by means-tested programs, and the much larger amount of crowdout that is likely to be created by universal programs. Third, there is a great need for rigorous evaluation of all aspects of child care policy. That is, we need to know more about the long-term effects of child care as well as about issues surrounding takeup, crowdout, etc. Finally, we need to remember that just as the family is the most important mechanism for safeguarding child health, the family is likely to remain the most important supplier of child care. Hence, policies that support good parenting are likely to be an important component of sound child care policy.


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1.  Evaluations of public sector efforts to train low-skilled adult workers have generally found very small returns. Lalonde's (1995) survey of the training literature points out that most training programs for adult males and youths have been ineffective (the exception for youths being the costly Job Corps program). And among poor adult women, the evidence shows rapidly diminishing returns to training investments suggesting that it may not be possible to raise earnings a great deal.

2.  This point can be illustrated with reference to 11 of the largest states. As of January 1988, 8 of these states had taken advantage of the option to extend Medicaid coverage to previously ineligible children. By December 1989, all 11 of them had done so. However there was still a great extended coverage to children up to 6 years old in families with incomes below 100% of the poverty line, while New York only covered children up to one year old, but extended coverage to infants in families with incomes up to 185% of the poverty line.

3.  Pregnant women who are not automatically eligible for Medicaid may be required to show birth certificates and/or citizenship papers, rent receipts and utility bills to prove residency, and pay stubs as proof of income. Many states have a time limit on the number of days the applicant can take to provide documentation  for example, Georgia gives 10 working days. Applicants are often required to return for several interviews. The available evidence suggests that up to a quarter of Medicaid applications are denied because applicants do not fulfill these administrative requirements: They cannot produce the necessary documentation within the required time or fail to attend all of the required interviews (GAO, 1994).

4.  A possible drawback to this strategy is that since Medicaid is means-tested, the actual fraction eligible for Medicaid may depend on business cycle effects, or on omitted variables specific to states and years. It is possible to construct an eligibility measure that reflects only variations in state rules by using a nationally representative sample and calculating the fraction of women in this sample who would be eligible for Medicaid in each state and year. This "simulated eligibility" measure will be exogenous as long as state rules can themselves be treated as exogenous variables. The plausibility of this assumption is bolstered in this case by the fact that much of the change in legislation (though not all) was in response to federal mandates, and thus not directly under the control of state legislators. An additional advantage of this procedure is that sampling variation due to the fact that there are small cell sizes in some states and years is eliminated. This procedure was used to obtain the estimates discussed in this section.

5.  Head Start is a preschool program for disadvantaged children which aims to improve their skills so that they can begin schooling on an equal footing with their more advantaged peers. In addition to quality center-based care, Head Start offers training to parents and referrals to other community services. Currie (2001) provides an evaluation of the existing evidence regarding Head Start and other early intervention programs.