Weighing the Costs and Benefits of Preschool and Childcare Policies

Researchers over the years have debated the benefits of preschool education and childcare programs. A research brief released last week by the Penn Wharton Budget Model (PWBM) takes forward those debates by identifying the specific macroeconomic costs and benefits of those programs for the U.S. economy between now and 2051.

Titled Economic Effects from Preschool and Childcare Programs, the analysis studies two scenarios: one, if they were targeted to reach specific sections of the population; and two, if they were to be universal programs available to all. The programs it considered are similar to those proposed by the Biden administration in the American Families Plan released in April. The analysis was conducted by PWBM economist Daniela Viana Costa and research associates Maddison Erbabian and Youran Wu under the direction of Efraim Berkovich, director of computational dynamics.

The key findings of the analysis:

  • By 2051, a combination of targeted preschool and targeted childcare programs increase GDP by 0.1% as debt rises by 2.9%. But universal versions of those programs reduce GDP by 0.2%; they increase government debt by 5.9% and are thus costlier.
  • Universal public childcare produces immediate gains in aggregate labor productivity and boosts GDP by 0.2% in 2031. But by 2051, additional public debt crowds out private investment, and GDP is 0.2% below the current baseline even at low borrowing rates.
  • Means-tested targeted childcare reduces the program’s cost while still increasing labor supply and productivity. Consequently, GDP increases by 0.3% in 2031, but that growth is smaller at 0.1% by 2051.

Earlier studies have focused on the long-term effects of preschool programs on children and on the short-term effects on parental labor supply, and a few on public childcare for younger children, Erbabian noted. The PWBM analysis finds connections between those studies and forecasts the effects of widescale programs on “[not just] enrollees and their parents, but also on entire cohorts and on the macroeconomy,” she said.

In addition to the aggregate effects of preschool and childcare policies, PWBM also considered the welfare effects on various demographic subgroups. The analysis explores the effects at a granular level “by age cohort and income quintile to examine who benefits most and least from targeted childcare and preschool policies,” she added.

Why Invest in Preschool and Childcare?

The brief explained how investments in preschool and childcare programs work their way up to economic growth. “An individual’s labor productivity is determined by factors such as innate ability, work experience, network effects and opportunities, and human capital investments such as education and job training,” PWBM noted. Higher labor productivity enables that individual to earn more and accumulate more wealth. When those effects play out across a significant portion of the workforce, they raise overall wages in the economy.

“That effect occurs because a more productive workforce increases the marginal returns to capital and thus incentives to invest,” the brief stated. “Greater investment and a larger capital stock make labor even more productive and thus raise wages.” PWBM’s model incorporates those “positive feedback effects” to show higher GDP outcomes than those predicted by “static analysis” of labor productivity improvements, it pointed out.

Preschool education improves later educational outcomes and therefore increases an individual’s expected lifetime labor productivity, the brief stated, citing earlier research. A public preschool program would help households that cannot afford to pay for them, and it would attempt to “increase the prevalence of preschool education in the population,” it added.

Similarly, in households that cannot afford childcare, some members may be forced to provide that instead of pursuing “more economically productive work,” the brief noted. Public childcare would relieve that constraint and allow for greater labor force participation, it added. For targeted programs, the study defined economically disadvantaged households as those with income below 185% of the Federal Poverty Line.

Investment in early childhood education provides “a high rate of return,” the brief stated. PWBM estimated that “high quality preschool education increases schooling by 0.65 years on average;” the actual results would vary by the number of effective school days within one year. It applied a 5% return for each additional year of education, based on estimates by previous research to determine the average increase in labor productivity.

“Preschool tends to raise treated students’ test scores in elementary school, probability of high school completion, skills, and productivity in work,” the brief stated. “Early childhood education also reduces future incidence of criminal activity and use of public assistance among enrolled students.”

Labor productivity gains follow. Children that are newly enrolled in preschool gain an average 3.3% increase in lifetime productivity, PWBM noted. Full-day preschool also allows some children’s caregivers to pursue work outside the home. A public childcare policy will lift by 48% the average labor productivity of mothers of economically disadvantaged children aged 1 to 4, it estimated. The study noted that childcare and preschool programs have large costs, financed through debt, which reduce output gains from their benefits to labor productivity.

“The decision to enroll the child in a program is up to the family, and naturally, many other practical factors will be taken into consideration in this household-level decision-making process.” –Youran Wu

Both universal and targeted programs see a 0.4% increase in effective labor supply in 2051, Wu said. While the targeted program results in higher aggregate output and a smaller increase in debt in the long term, the universal program with a larger increase in enrollment rates can directly benefit more families, she noted. “Policymakers should consider the tradeoff between boosted labor supply and increased debt, as well as the one between equity and the efficiency of public spending.”

Costs and Benefits

A combined universal childcare and preschool program will lower GDP by 0.2% between now and 2051 while increasing government debt by 5.9%, the study estimated. But a targeted combined childcare and preschool program increases GDP by 0.1% in 2051 and increases government debt by 2.9%, it added. “Childcare programs raise GDP initially, but the effect declines in time as the cost of these programs drives debt higher,” it noted.

Expansions of government-funded preschool programs have raised enrollment rates over the years to 47% for 4-year-olds and 16% for 3-year-olds in 2019-2020. The average per-child cost of government-funded preschool programs was about $8,000 in the 2019-2020 school year. But for “full-day high quality preschool,” that cost will be $12,500 for a 180-day school year, the study estimated.

If enrollment rates remain at current levels, the study estimated that in 2022, 2.3 million 3-year-olds and 4-year-olds will be enrolled in public preschools, with another 2 million paying for private programs and the remaining 3 million having no preschool education at all.

Based on recent studies, it estimated that a nationwide universal expansion would result in 0.4 million 3- and 4-year-olds shifting from private programs to public ones; another 0.9 million, who would otherwise not have formal preschool education, would also enroll in the public programs. Consequently, 61% of 4-year-olds and 37% of 3-year-olds – 49% on average – would be enrolled in preschool programs in 2022. Total government spending on those programs would be $48 billion, of which $28 billion would be the cost of universal expansion of the programs, it added.

A program targeted specifically at economically disadvantaged students would increase enrolment by 0.4 million among 3- and 4-year-olds and provide access to public preschool to 38% of those children. The total government spending on public preschool would be $37 billion, with the targeted expansion accounting for $17 billion, the study estimated.

Wu explained why the enrollment projections are not higher even under nationwide universal programs. “The decision to enroll the child in the program is up to the family, and naturally, many other practical factors will be taken into consideration in this household level decision-making process,” she said. She noted that even in Georgia, where the first universal preschool program in the U.S. was implemented more than two decades ago, the enrollment rate of the eligible 4-year-olds was no higher than 65% in 2019. Currently, the state-funded universal preschool program with the highest enrollment rates is in Washington, D.C., where 84% and 73% of the 4- and 3-year-olds, respectively, are enrolled in public preschools.

“Policymakers should consider short- and long-run effects on the aggregate scale, as well as the welfare of various demographic groups as they design the policy.” –Maddison Erbabian

According to Wu, most universal preschool programs will likely not reach 100% enrollment. “Some parents whose kids were previously enrolled in private preschools are not willing to shift to public preschools because they are skeptical about the public preschools’ education quality, or they may want their kids in programs with peers from similar economic backgrounds,” she explained. “And there are always some families who choose to not send their kids to any preschool because they do not think education at such an early age is necessary, they live too far from a preschool, or they feel their children would fare better under the watch of an attentive family member, which is more commonly the case with younger children.”

PWBM pegged the cost to provide childcare at $20,439 for a single 1- or 2-year-old child and $17,152 for a single 3- or 4-year-old child for 247 days per year. The cost of government spending on the universal childcare program is $74 billion in 2022, and $37 billion on a targeted program, the study estimated. PWBM clarified that its estimates understate the actual cost of both the preschool and childcare programs since it did not factor in the capital costs of building new facilities.

The childcare and the preschool policies benefit young poor workers and retirees, according to the study. Young poor workers will get opportunities to join the labor force or improve their productivity, while retirees benefit from “the short-run modest macroeconomic improvements” and do not live long enough to bear the consequent debt increase, it noted. Middle-aged workers will lose out at both ends. First, they may not have young children now or in the future to gain any direct benefit from the programs; they will also “live long enough to be exposed to slower growth from higher government debt,” it added.

Erbabian said the PWBM analysis is timely because policymakers are considering implementing universal preschool for 3- and 4-year-olds and a means-tested childcare program for children under age 5, as proposed in Biden’s American Families Plan and in the reconciliation bills from the House and Senate. “Policymakers should consider short- and long-run effects on the aggregate scale, as well as the welfare of various demographic groups as they design the policy and determine whether one should be implemented,” she added.

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