Need for Public Investment in Childcare

By Cecilia Elena Rouse and Lisa Barrow
Special to The Times Kuwait

This year’s winner of the Nobel Prize in Economics, Claudia Goldin, has been recognized for her work documenting women’s changing role in the US economy over the past several decades. Far from just an interesting historical account of social progress, the topic remains deeply relevant to economic outcomes today.

Between 1950 and 2000, the labor-force participation rate for prime-age women (25-54 years old) nearly doubled in the United States, increasing by 26 percentage points, compared with a ten-point decline for prime-age men. While prime-age women’s labor-force participation fell from 2007 to 2015, data through October indicate that it will reach a new record high in 2023. That means many children today are in households with a working mother. As of 2022, more than two-thirds of mothers with children under age six were in the labor force. While some are the sole earners in their households, others are in households that need two earners. In either case, the big question is: Who takes care of the children?

Recognizing women’s role in the labor market means also recognizing early childhood education and care as an essential market-based service. Without it, both the current health of the economy and future prosperity would be jeopardized. But ensuring ample provision of market-based care is complicated, and several challenges point to the need for a greater public-sector role.

The standard justification for a government role in any market is to address externalities, that is, costs or benefits to society that would not be taken into consideration by individual market participants. In this case, many economists agree that investing in children is one of the most productive investments a society can make. Support for child health and education has been shown to yield benefits (positive externalities) for society as a whole, not just for individual children. Among the long-term social benefits that researchers have documented are reduced crime, lower spending on public assistance, and higher tax receipts.

Despite these benefits, parents are unlikely to invest in the socially optimal level of high-quality early childhood education and care. Moreover, key features of this market suggest that the private sector will also under-provide it.

For starters, high-quality education and care for young children is expensive. Because young children need a great deal of human attention, childcare will always be labor-intensive, with high quality standards requiring low child-to-adult ratios. Unlike in other parts of the economy, such as manufacturing, childcare costs have not been significantly lowered through technological innovation. High-quality care will remain expensive for the foreseeable future.

Another challenge is the lifecycle mismatch in means and needs. Parents typically need early childhood education and care services early in their careers, before they have reached their peak earnings. But unlike with cars, houses, and college tuition, they typically cannot take out loans to pay for early childhood education and care. Such demand-side challenges are ample justification for the government to intervene, either with subsidies or direct provision of some early childhood education and care.

Nor is the supply side free of problems. Owing to the razor-thin profit margins in the childcare business, many providers barely get by. Most are small, low-budget operations that cannot afford to pay employees truly livable wages. According to one analysis, childcare workers in the US earn 23 percent less on average than workers in other occupations with similar demographic characteristics. And another study found that 53 percent of childcare workers receive some form of public assistance. No wonder staff turnover in the industry is high.

Since a stable, qualified workforce is essential to high-quality care, greater public-sector investments to support staffing levels and reduce turnover are sorely needed. Yet despite this obvious need, the US lags many other countries in terms of public spending on early childhood education and care. In 2019, it ranked 34th among OECD countries, spending just 0.5 percent of GDP on early childhood education and care, compared with the OECD average of 0.8 percent.

Some economists argue that low public support for childcare, combined with the lack of other family-friendly policies, has contributed to a decline in US women’s labor-force participation relative to other OECD countries. Again, this involves externalities that ultimately affect everyone. Any standard model of economic growth will show that human capital and the size of the labor force are important factors. A well-functioning market for high-quality early childhood education and care is thus essential for helping mothers who choose (or need) to work, and for sustaining socially beneficial investments in children.

Between the high costs of childcare, the absence of credit markets to help young parents pay for it, and the pressure on providers to contain costs by paying extremely low wages, the US public sector has more than enough reason to step in with support for both sides of the market. Not only would such investments help millions of families balance competing demands of work and care; they would also give children a strong start in life and support their future economic well-being, as well as our own.

Cecilia Elena Rouse
Cecilia Elena Rouse, former chair of US President Joe Biden’s Council of Economic Advisers, is Professor of Economics and Education and Professor of Economics and Public Affairs at Princeton University.

Lisa Barrow
Lisa Barrow is Senior Economist at the Federal Reserve Bank of Chicago.

Copyright: Project Syndicate

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