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3
Economic Perspectives on the
Early Childhood Care and
Education Workforce
M
arket forces shape the availability, quality, and price of early
childhood care and education (ECCE). Economic analyses illu-
minate the way this market operates and provides a context for
evaluating policies and interventions designed to improve and support
the workforce and improve the quality of care. Caregivers, teachers, par-
ents, and providers all respond to numerous interrelated market forces, as
well as other influences. Consequently, as policy makers decide whether
and how to intervene to achieve important goals—such as improving
school readiness, closing achievement gaps, reducing school failure,
reducing crime, and increasing graduation rates—economic analyses can
point to both intended and unintended consequences, and provide empir-
ical evidence to demonstrate the potential value gained from particular
types of investments in early childhood care and education. David Blau,
professor of economics at Ohio State University, provided an overview of
the way economists think about this market and identified some lessons
for policy makers. Lynn Karoly, senior economist at the RAND Corpora-
tion, described economists’ efforts to measure the short- and long-term
costs and benefits of investing in ECCE.
THE EARLY CHILDHOOD LABOR MARKET
The ECCE workforce has special importance in American society,
Blau noted, because policy makers, parents, and researchers care about
the development and well-being of young children. Compensation for the
27
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28 THE EARLY CHILDHOOD CARE AND EDUCATION WORKFORCE
ECCE workforce, as well as benefits, working conditions, training, educa-
tion, and opportunities for advancement, are important for this group—as
they are for workers in any occupation or industry. Blau observed that
although these workers have special importance because of the influence
they have on children, in the United States our society relies largely on
market forces to determine the quantity in which care is available, its
quality, and its price. As the ECCE field considers how to craft policies
that improve access, availability, and quality of care, researchers need to
understand the market factors that affect how parents select or change
their care arrangements.
Demand in the early childhood market is a function of how parents
select their child care arrangements. Many factors affect these decisions.
Parents’ beliefs, preferences, income levels, and constraints (e.g., working
hours or transportation) all influence their willingness and ability to pur-
chase child care at alternative prices. Parents will consider the type of
care arrangement (e.g., center, family child care, nanny); the develop -
mental quality of the care arrangement; and its convenience and reli -
ability. From an economic perspective, the key point is their willingness
to substitute different types and quality of care arrangements in response
to different prices. Thus, supply of education and care encompasses the
full range of types of care available, even if these types are regulated,
funded, or viewed separately by those in the field. Evidence suggests,
Blau explained, that parents have a “moderate willingness to substitute”
(Blau and Hagy, 1998). In other words, parents are not ready to abandon a
care arrangement in response to a small increase in price, but as the price
of developmentally appropriate and stimulating care increases relative to
alternatives, they are willing to make trade-offs.
The supply of child care, in turn, is influenced by what economists
call the “technology” of producing the care and the prices of the inputs—
primarily the cost of employing staff with particular levels of skill and
qualifications. These factors affect providers’ willingness to offer child
care at alternative prices according to quality, type, and location. A key
aspect of supply is the degree of flexibility of the technology: Is there more
than one way to produce a given level of quality of child care? Blau indi-
cated that considerable flexibility exists in this field: “Must you have, for
example, a director with a master’s degree in early childhood education,
a lead teacher with a bachelor’s degree, an assistant with a certain level
of education and training, a group size of a defined level, and a child/
staff ratio” in order to provide child care of high developmental quality?
Observational studies that compare child care centers that all meet cer-
tain defined levels of quality have shown that they meet these levels in a
variety of ways, Blau explained (Blau, 1997, 2000). International compari -
sons reinforce this point. In France, for example, the child care system is
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29
ECONOMIC PERSPECTIVES
very well-regarded, though group sizes and staff-to-child ratios would
violate regulations in most U.S. states (Richardson and Marx, 1989). For
example, group sizes of 3- to 6-year old children in France’s universal
preschool program averaged 25.5 students per class with 1 teacher and 1
assistant, as of 2001–2002 (OECD, 2006). French policy pays close atten -
tion to teacher training, however, which may be a less expensive way to
meet quality goals.
Another key determinant of supply is what economists call the
degree of input specialization—in this case the degree to which the
skills of ECCE workers are useful and in demand in other occupations.
Here the evidence suggests that the skills needed in early child care and
education are not highly specialized, and are valued in other occupa -
tions. As a consequence, the labor supply in the child care sector has
relatively high elasticity because the wages available are low compared
with wages in other sectors that require similar skills. For example,
early childhood teachers who possess the required qualifications may
choose to leave a preschool position for higher wages in a K–12 teaching
position.
Together, the supply of and demand for child care interact to deter-
mine the market equilibrium—the prices at which child care of alterna-
tive types and quality can be purchased. Thus, consumers’ willingness to
substitute one care arrangement for another and the flexibility of the tech-
nology jointly determine the outcomes observed in the market. However,
other forces may impinge on the child care market. Government policy, in
particular, may influence the demand for different types of child care or
levels of quality by imposing standards and regulations or by providing
subsidized care.
Labor is the main input in the production of child care, Blau observed,
and the demand by providers for child care workers with different skill
levels derives from the demand by parents for child care of different types
and quality. Empirical analyses of the labor market for child care show
that:
• High-quality (developmentally stimulating) care is costly, and
consumers are moderately sensitive to price. Many consumers
feel “priced out” of the market for high-quality care, which limits
the demand for skilled staff (Blau and Mocan, 2002);
• The supply of child care workers is relatively elastic, so an increase
in demand for child care does not exert much upward pressure
on wages for child care workers (Blau, 1993, 2001); and
• Skilled staff have good opportunities in other occupations and
sectors, so turnover is high (Blau, 1992, 2001).
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30 THE EARLY CHILDHOOD CARE AND EDUCATION WORKFORCE
Blau considered whether these findings show evidence of market
failure and thus provide a rationale for the government to intervene in
the market to improve outcomes. He defined market failure as a situation
in which the quantity of a service (or product) that is available based on
the equilibrium between supply and demand is not equal to the quantity
society would deem optimal—in this case the market would have failed if
the supply of high-quality child care was not sufficient to meet the needs
of children and families. Unfortunately, economists cannot identify the
socially optimal amount of high-quality child care. First, strong evidence
of the long-term benefits of child care is relatively scarce—even though
many studies exist (see Costs and Benefits of Investing in Early Childhood
Education in this chapter). In Blau’s view they do not yield sufficient
empirical support for firm or precise conclusions. Second, the socially
optimal level is determined in part by value judgments.
Data on outcomes could provide further insight into the issue of
market failure, Blau observed. Figure 3-1 shows trends in families’ expen-
ditures on child care, drawn from a household survey (the Survey of
Income and Program Participation [SIPP]). These data indicate that the
real (inflation-adjusted) average weekly expenditure on child care per
family that pays for care has increased by about 3.3 percent per year over
20 years. The total number of families paying for care has also increased,
by about 2.9 percent per year on average. Together, those two changes
imply an average annual growth rate of 6.3 percent per year in total child
care expenditures over a 20-year period.
Average Annual Rate of Growth in Expenditure on Child Care
120
100
80
60
40
1985 1990 1995 2000 2005
Year
Source: Survey of Income and Program Participation
Total weekly child care expense Average weekly child care expense
Number of families paying for child care
FIGURE 3-1 Trends in family child care expenditure.
NOTE: Total weekly child care expense in units of $10M; average weekly child
care expense in real inflation-adjusted dollars; number of families paying for child
care in units of 100,000; all dollar amounts in 2009 dollars.
SOURCE: Blau, 2011.
Figure 3-1, editable
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31
ECONOMIC PERSPECTIVES
Number of Child Day Care Establishments and Employees
200 400 600 800
Thousands
0
1980 1990 2000 2010
Year
Source: Census of Services
Establishments with payroll Establishments without payroll
Employees
FIGURE 3-2 Trends in the number of establishments and employees.
SOURCE: Blau, 2011.
Figure 3-2, editable
Child Day Care Services Receipts and Payroll
30
Billions of $2009
20
10
0
1980 1990 2000 2010
Year
Source: Census of Services
Receipts with payroll Receipts without payroll
Payroll
FIGURE 3-3 Trends in receipts and payroll.
SOURCE: Blau, 2011.
At the same time, data from the U.S. Census Bureau’s Census of Ser-
vice Industries for a recent 25-year period show that the number of child
Figure 3-3, editable
care establishments with payrolls has increased at an average annual rate
of 3.6 percent; the number of employees has increased 4.8 percent per
year; and the number of establishments without payrolls (individuals
caring for children at home) has grown by 9 percent per year (see Figure
3-2). Figure 3-3 shows rapid growth in the receipts taken in by these estab-
lishments and in their payroll expenditures.
The Occupational Employment Statistics (OES) published by the
Bureau of Labor Statistics (BLS) show that the number of child care
workers grew at an average rate of 4.6 percent annually during a recent
10-year period, compared to a lower (1.4 percent) annual growth rate
among the number of preschool teachers. Total employment in all occu -
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32 THE EARLY CHILDHOOD CARE AND EDUCATION WORKFORCE
pations grew by just 0.3 percent per year on average during that same
period. In contrast to rapid growth in the size of the child care sector,
hourly wages for child care workers have grown by just 0.5 percent per
year on average (0.8 percent for preschool teachers, as compared with
wages for all workers, which have grown by 0.7 percent).1
These data paint a consistent and surprising picture, Blau explained.
Why did the sharp increase in demand for child care not result in larger
increases in wages for the ECCE workforce? Blau suggested that the pri -
mary reason is the highly elastic supply of labor for child care work. For
example, he noted, many female immigrants from developing countries
have few good employment options in the United States and are willing
to work in child care for relatively low wages. Thus an increase in the
supply of these workers is likely to depress wages. One might expect
that this would apply mainly to the relatively low-quality segment of the
child care market, but because parents are moderately sensitive to price,
it is likely that more highly skilled child care workers’ wages would
also be depressed, as researchers Hock and Furtado (2009) found. They
report that low-skilled immigrants grew from 6.1 percent of the working
population in the United States in 1980 to 10.1 percent in 2000. This trend
contributed to the decline in child care wage rate, compared with what
might have occurred in the absence of an increase in immigration. The
decline affected child care workers throughout the skill distribution.
While frustrating to many, these trends alone do not imply market
failure, Blau explained. But he sees other significant problems in the child
care market. In his view, the failure is not on the supply side of the equa -
tion, but on the demand side. Parents do not have sufficient willingness
(or capacity) to pay for high-quality child care. High-quality care benefits
not only individual children, but also society in general (this point is dis-
cussed further below), yet parents tend not to consider the social benefit.
In response to participant comments, Blau acknowledged practical limits
to what some parents can pay. Although parents could take out loans to
pay for child care and education, for example, as they do for college, few
are likely to take that step, at least without substantial evidence that doing
so would be critical to their own children’s development.
Evidence of the benefits of high-quality preschool for disadvantaged
children provides strong reasons to suggest that society should pay the
cost of improving their access to high-quality care and education. The
case for supporting children and families who are not disadvantaged is
more difficult, Blau explained. The empirical evidence for the long-term
1 A participant suggested that the constraints of child care subsidies or the inclusion of
paid relatives in the analysis could potentially distort the nature of the overall picture.
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ECONOMIC PERSPECTIVES
benefits of high-quality child care, as compared with mediocre child care,
for typical middle-class children is more limited.
Making the case for specific types of public intervention is difficult
without strong empirical evidence, Blau noted. An issue from the K–12
education context illustrates the point. Abundant evidence exists that
effective teachers have a significant impact on student learning, Blau
explained. However, little evidence exists that specific qualifications, such
as degrees earned, training, and certification can identify the successful
teachers. Thus, proponents of the social benefit of increasing spending to
improve teacher effectiveness in schools encounter persistent skepticism
(Hanushek, 2011; Hanushek and Rivkin, 2007).
Blau’s conclusion is that market intervention will be most successful
if it targets the source of the failure, which he views as the relatively low
demand for high-quality care. Interventions such as subsidies for high-
quality care and public awareness campaigns could increase demand,
which could, in turn, raise wages for skilled staff. Addressing the supply
side by, for example, imposing more stringent education and training
requirements, or providing subsidies to encourage training and boost
wages, is less likely to be successful, he argued. Regulations that do not
come with financial support for improving quality often have unintended
negative consequences. For example, if a center is faced with the require-
ment to have smaller groups and more staff, it may only be able to achieve
that result by reducing wages. Wage or training subsidies do not work
well when the labor supply is very elastic, he explained, because workers
still have higher paying alternatives.
The realities of the marketplace, Blau concluded, show that the choices
that parents, caregivers and teachers, and employers make, as well as the
choices policy makers make by allocating public funding or imposing
regulations, all affect the child care market in both positive and nega-
tive ways. While the market may not have failed, in a technical sense, he
suggested, the problems with available child care options could be more
easily resolved if all actors in the system had a better understanding of
the nature and benefits of high-quality care.
COSTS AND BENEFITS OF INVESTING IN
EARLY CHILDHOOD EDUCATION
Interest in the empirical evidence of the short- and long-term returns
to investments made in early childhood care and education is increasing,
Karoly explained. Resources are scarce, both for foundations and other
private entities that could contribute in this area, as well as for public
agencies. Funders in all categories are increasingly emphasizing results-
based accountability. Thus, these groups benefit from data that not only
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34 THE EARLY CHILDHOOD CARE AND EDUCATION WORKFORCE
demonstrate immediate program benefits, but also show how long-term
benefits translate into specific savings to governments, including data that
estimate the dollar value of benefits to society. Data that indicate that a $1
investment will yield a return of $X can be very powerful in providing a
basis for choosing one program over another or making decisions about
current or future program spending in general, she noted.2
Karoly described several different analytic approaches to this
challenge:
• Cost analysis, which measures only costs, not outcomes;
• Cost-effectiveness analysis, in which the impact for one outcome
is measured, in natural units, relative to costs;
• Cost–savings analysis, in which the benefits (and costs) to the
government of all outcomes are valued in dollars and compared
with costs; and
• Benefit–cost analysis, in which the benefits (and costs) for
society—for both program participants and nonparticipants—of
all outcomes are valued in dollars and compared with costs.
Each approach begins with careful calculation of program costs,
relative to the status quo or to some other option. The next step, cost-
effectiveness analysis, asks what it costs to achieve a particular degree of
change in one particular outcome. This could be done separately for more
than one outcome, but it does not involve assigning a dollar value to the
outcomes. Cost–savings analysis and benefit–cost analysis both entail
assigning a dollar value to the full range of program outcomes, which is
a more difficult challenge (see NRC and IOM, 2009).
These tools have been used only to a limited degree in the early
childhood context, Karoly explained. Recently, however, researchers have
begun to use them to examine the economic returns on investments in
specific programs for children from birth to age 5. A 2005 RAND Corpo -
ration study (Karoly et al., 2005) examined 20 interventions for this age
group and found that 19 of them showed favorable outcomes for partici-
pating children or their parents. These programs are listed in Table 3-1,
where they are arranged to distinguish between programs that focused
on home visiting and parental education and those that provided early
childhood education.
Karoly presented the results of benefit–cost analyses for six of these
programs (Karoly, 2011a). The ratios of benefits to costs shown in Figure
3-4, some based on short-term follow-up data and some on long-term
2 Karoly noted several sources of further detail on these issues: Karoly (2011a); Karoly et
al. (2005); Kilburn and Karoly (2008).
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ECONOMIC PERSPECTIVES
TABLE 3-1 Early Childhood Interventions with Demonstrated
Favorable Outcomes
Six Effective Programs Have Associated Benefit–Cost Analysis (BCA)
Early Childhood Education/
Home Visiting/Parent Education Combination
Dare to Be You Abecedarian Program*
Developmental Supporting Chicago Child-Parent Centers (CPC)*
Care: Newborn Individualized
Developmental Care and Assessment
Program (DSC/NIDCAP)
Home Instruction for Parents of Comprehensive Child Development
Preschool Youngsters (HIPPY USA)* Program (CCDP)
Incredible Years Early Head Start
Nurse Family Partnership (NFP)* Early Training Program
Parents as Teacher Head Start
Project CARE (Carolina Approach to Houston Parent-Child Development
Responsive Education) Center (PCDC)
Reach Out and Read Infant Health and Development
Program (IHDP)*
Oklahoma Universal Preschool
Perry Preschool Project*
Syracuse Family Development
Research Program
* Programs for which benefit–cost analysis has been conducted.
SOURCE: Karoly, 2011b. Based on Karoly et al., 2005.
results, range from no positive economic returns (Infant Health and
Development Program [IHDP]) to 16.1:1 (Perry Preschool Project at the
age 40 follow-up). Karoly drew several conclusions from these data. First,
regarding the IHDP, the one program in the analysis that did not show
positive economic returns, she cautioned that such results can occur for
several reasons. “Many of the benefits that come out of these programs,
particularly when you’re looking at the early stages of the follow-up …
are harder to quantify in economic terms,” she observed. Longer term
benefits to which the analyst did not assign a dollar value may emerge
later. She also noted that it was not just the small-scale demonstration
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36 THE EARLY CHILDHOOD CARE AND EDUCATION WORKFORCE
1.8:1
HIPPY USA
2.9:1
NFP
NFP (high-risk sample) 5.1:1a
1.1:1a
NFP (low-risk sample)
IHDP n.a.
2.5:1
Abecedarian
7.1:1
Chicago CPC—Age 21
10.8:1b
Chicago CPC—Age 26
3.6:1
Perry Preschool—Age 19
4.1:1a
Perry Preschool—Age 27
8.7:1b
Perry Preschool—Age 27
16.1:1b
Perry Preschool—Age 40
7.1:1b,c
Perry Preschool—Age 40
Perry Preschool—Age 40 12.2:1b,c
0 2 4 6 8 10 12 14 16 18
Bene t–Cost Ratio
FIGURE 3-4 Results of benefit–cost analyses for six programs.
NOTE: A benefit–cost ratio is the ratio of the present discounted value of total
benefits to society as a whole (participants and the rest of society) divided by
present discounted value of program costs. The discount rate is 3 percent unless
otherwise noted. The value of reducing intangible crime victim costs are excluded
Figure 3-4, new type
unless otherwise noted. CPC: child-parent centers; HIPPY USA: Home Instruc -
tion for Parents of Preschool Youngsters; IHDP: Infant Health and Development
Program; NFP: Nurse-Family Partnership.
a Discount rate is 4 percent.
b Includes value of reduced intangible crime victim costs.
c Reported range of estimates under alternative assumptions regarding the eco -
nomic cost of crime.
SOURCE: Karoly, 2011b. Based on Karoly, 2011a.
programs that generated positive economic returns. Critics sometimes
dismiss the economic benefits shown by the Perry Preschool Project, for
example, on the grounds that it would be difficult to replicate. The results
for HIPPY USA: Home Instruction for Parents of Preschool Youngsters
(1.8:1) and the Chicago Child-Parent Centers program (7.1:1 at age 21
and 10.8:1 at age 26) counter that point, however. Moreover, it is not just
the most expensive, intensive programs that show favorable benefit–cost
ratios, as HIPPY USA also demonstrates. On the other hand, it may be that
programs that target children with the greatest needs show larger returns
compared with those that serve more advantaged children. Perhaps most
important, she noted, is that effective programs with longer term follow-
up tend to show larger returns than those that only had shorter term
follow-up results. That is, the more data that are accumulated, and the
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ECONOMIC PERSPECTIVES
greater the time for benefits to emerge, the greater the quantifiable value
of the return on investment.
Karoly cautioned that these results cannot be used to compare the
programs directly because they include a mix of types of interventions,
as well as of lengths of follow-up, outcomes measured, target popu -
lations, and analytic methods. These results are important, she noted,
because they demonstrate that investments in early childhood programs
that are of high quality and are implemented well provide concrete ben-
efits. Indeed, she observed that the researchers were conservative in their
long-term estimates of benefits, and that it is probable that the economic
value of a number of these programs is greater than the analyses indicate
at this point.
Karoly enumerated significant challenges to this type of analysis,
however. First, it requires rigorous analysis of the incremental costs,
in comparison to a baseline, and programs do not always keep careful
records of all of the costs of implementing a new program. The costs of
the alternative approaches that would have been used in the absence of
the new program may also be difficult to capture. Second, rigorous evalu-
ations—either experimental or rigorous quasi-experimental studies—are
needed to establish program effects.3
The benefits of these types of programs may include effects for both
parents and children and for society at large in a broad range of domains
(e.g., education, employment, mental and emotional health, involvement
with the justice system), some of which are easier to measure than others.
Placing a dollar value on benefits in these areas poses challenges as well.
The field is just beginning to develop standardized methods that will
make comparisons more valid, she added.
Despite these challenges, Karoly advocates greater use of benefit–cost
analysis and cost-effectiveness analysis in the early childhood sphere,
and she highlighted areas where this approach could be especially valu -
able. Cost-effectiveness or benefit–cost analysis of marginal changes in
program features, policy alternatives, and specific interventions could
all be very useful. For example, if a state legislature wishes to improve
early learning and considers increasing spending by $500 per child, one
could use cost-effectiveness analysis to determine whether a particular
outcome for children could be produced for that price. Alternatively, one
could assess a variety of interventions—such as changing group sizes or
ratios, or increasing education requirements for teachers—to determine
which approach would provide the most valuable benefit. Another pos-
3 Quasi-experimental designs are those used where randomized controlled designs are
not possible, practical, or ethical. They use alternate statistical procedures to isolate causal
effects.
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38 THE EARLY CHILDHOOD CARE AND EDUCATION WORKFORCE
sibility would be to compare several possible approaches to improving
professional development for teachers to see which would produce the
largest gains, either in terms of child development or quantified dollar
benefits. Producing this type of information for supporting policy deci-
sions, Karoly believes, will require that cost-effectiveness and benefit–cost
analysis be incorporated into the next generation of research on early
childhood program design and interventions.
SUMMARY
In summary, Blau indicated that despite the tremendous increase in
the demand for child care, wages for workers have remained relatively
flat, due in part to the elastic supply of people willing to work in ECCE for
relatively low wages, as well as their high rates of turnover. These factors
coupled with relatively low demand for high-quality care make increasing
wages difficult. This dilemma has led some to consider whether and how
government might play a role in addressing the cycle of low compensa -
tion and high turnover. As Karoly’s presentation showed, one reason that
governments might elect to play a role in addressing these problems is
because of the demonstrated positive economic returns of high-quality
care and education, particularly for disadvantaged children. Effective care
and education depends in large part on having a workforce with the right
combination of skills, attitudes, behaviors, and characteristics that func -
tions within supportive workplaces (topics examined in further detail in
Chapter 4). According to Karoly, new approaches to calculating the costs
and benefits of child care are promising and may prove particularly useful
for policy makers in weighing the most effective investments in the early
childhood care and education workforce.
