Posted: January 2nd, 2024

The Economics of Early Childhood Education

# The Economics of Early Childhood Education

Early childhood education (ECE) is not only a vital service for children and families, but also a strategic investment for the economy. Research from various disciplines, such as neuroscience, developmental psychology, and economics, has shown that high-quality ECE programs can have lasting positive effects on children’s cognitive, socio-emotional, and health outcomes, as well as on their future educational attainment, earnings, and social well-being. Moreover, ECE programs can generate significant benefits for society by reducing public spending on remedial education, health care, and criminal justice, and by increasing tax revenues from higher incomes.

## Human Capital Theory and Skill Formation

One of the main contributions of economics to the ECE field is the application of human capital theory to explain how early experiences shape children’s skill formation and human potential. Human capital theory posits that individuals invest in their skills and knowledge to increase their productivity and earnings in the labor market. Skills are not only acquired through formal education, but also through informal learning at home and in the community. Skills are also multidimensional, encompassing cognitive abilities (such as literacy, numeracy, and problem-solving), socio-emotional competencies (such as self-regulation, motivation, and social skills), and physical health.

According to human capital theory, skill formation is a dynamic and cumulative process that depends on the interaction of nature and nurture. Children are born with different genetic endowments that influence their initial skill levels and their responsiveness to environmental stimuli. However, these genetic factors are not deterministic; they can be modified by environmental influences, such as parental inputs, nutrition, health care, and ECE programs. The quality and quantity of these environmental inputs affect the development of neural connections in the brain, especially during sensitive periods in early childhood when the brain is most plastic and receptive to learning.

Human capital theory also suggests that skill formation is subject to two important principles: complementarity and self-productivity. Complementarity means that skills acquired at one stage of development enhance the acquisition of skills at later stages. Self-productivity means that skills acquired at one stage of development increase the productivity of future investments in skill formation. These principles imply that early investments in skill formation have higher returns than later investments, especially for children from disadvantaged backgrounds who face more barriers to skill development. Therefore, investing in high-quality ECE programs can be an effective strategy to boost human capital and reduce inequality.

## Economic Returns to ECE Programs

Another contribution of economics to the ECE field is the estimation of the economic returns to ECE programs using rigorous methods of program evaluation. These methods aim to measure the causal effects of ECE programs on children’s outcomes by comparing the outcomes of program participants with those of a counterfactual group that did not participate in the program but is otherwise similar to the treatment group. The counterfactual group can be constructed using different techniques, such as randomized controlled trials (RCTs), natural experiments, or statistical matching methods.

The economic returns to ECE programs can be estimated by comparing the costs and benefits of the programs over time. The costs include the direct expenditures on program provision (such as staff salaries, materials, facilities, etc.) and any indirect costs (such as opportunity costs of parents’ time or displacement effects on other children). The benefits include the improvements in children’s outcomes that can be monetized (such as higher earnings, lower public spending on remedial education, health care, or criminal justice, etc.) and any spillover effects on parents or society (such as increased labor force participation, reduced poverty, or improved social cohesion).

Several studies have estimated the economic returns to different types of ECE programs in different contexts. Some examples are:

– The Perry Preschool Project: This was an intensive preschool program for low-income African American children aged 3-4 in Michigan in the 1960s. The program was evaluated using an RCT design that randomly assigned 123 children to either receive the program or not. The program cost about $19,000 per child (in 2017 dollars) and lasted two years. The program had positive effects on children’s IQ scores, school achievement, graduation rates, employment rates, earnings, crime rates, and health behaviors. The estimated rate of return was 7-10% per year and the benefit-cost ratio was 6-12.

– The Abecedarian Project: This was an intensive center-based program for low-income children aged 0-5 in North Carolina in the 1970s. The program was evaluated using an RCT design that randomly assigned 111 children to either receive the program or not. The program cost about $90,000 per child (in 2017 dollars) and lasted five years. The program had positive effects on children’s IQ scores, school achievement,

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