The Economic Rationale for Investing in Children: A Focus on Child Care. The Inevitability of Rising Costs


Between 1890 and 1990 real per student expenditure for elementary and secondary education (1990 dollars) rose from $164 per student to $4,622 per student, an almost thirty fold increase (Hanushek and Rivkin (1997)). While a longer school year and smaller classes contributed to the increase, a much larger portion of the change resulted from an increase in the price of teachers caused primarily by rising real wages. Because wages rise roughly in proportion to the average change in productivity, sectors with slow or nonexistent gains in labor productivity face steadily increasing costs.

One explanation for the stagnation of labor productivity in education is that the nature of the production technology limits substitution possibilities. Many argue that the link between school quality and the pupil/teacher ratio is quite strong and resistant to substitution of capital for labor. The plight of such slow productivity growth sectors such as education, as described by Scitovsky and Scitovsky (1959), Baumol (1967), and Baumol and Bowen (1965), is steadily rising costs resulting from increases in labor productivity in other sectors. Of course other factors may have discouraged potentially cost saving opportunities for capital substitution, in which case the failure to adopt new technologies would be an additional manifestation of inefficiency. Yet even if technological innovations exist at higher grades, it seems highly unlikely that they would be relevant for early education.

Two other changes have contributed to the cost increases in the education sector. One is the decline in discrimination against women that has raised wages and thus the price of teachers, roughly two thirds of whom are women. Rising opportunities for women probably have an even larger impact on education for younger children where females constitute a larger percentage of teachers and care-givers. A second development that has raised the price of teachers has been the increase in the return to education. Though many child care and early education workers do not currently possess a bachelors degree, an expanded program modeled on elementary schools might lead to increases in the education requirements. Importantly, the increase in the value of education also raises the value of pre-school and child care, so the return on the investment remains largely unaffected. These and other factors that adversely affect the labor market position of early education providers should be considered at the time policy decisions are made.