Academic Articles Labor Economics

The Productivity Argument for Investing in Young Children

When constructing policy, we are often faced by an equity-efficiency tradeoff. For instance, increasing welfare benefits will increase equity but may reduce a poor individual’s incentive to work if the welfare benefits are tied to having low income. A recent NBER working paper by the nobel laureate James Heckman and co-author Dimitriy Masterov (“…Investing in Young Children“) claims that programs which increase the standard of living of young children do not face this tradeoff; the programs both increase equity and are economically beneficial for society as a whole.

Heckman documents three of the major social problems in the U.S.

  1. Low skills: “The U.S. has a thick lower tail of essentially illiterate and innumerate persons, who are a drag on productivity and a source of social and economic problems.â€?
  2. High crime rate: Compared to international standards of other developed countries, the U.S. has a high crime rate. A paper by Anderson (J Law Econ 1999) finds that crime creates huge expenses in the U.S.: $4818 per capita per year in 2004 dollars. This expense is calculated to include the cost of incarcerating criminals, the cost of police and private security, forgone wages of the incarcerated and additional injury/death risks of high crime levels.
  3. Single Parenthood: The decrease of two-parent children has been widely documented. In 2003, 68% of children lived in a two-parent household while in 1980 that number was 77%. On average, single parents have lower education than married parents; children of parents with more education have more cognitive and emotional stimulation [Armour 2003].

According to the 1966 Coleman Report, the family environment is more important for school success than school spending, teacher quality, class ratios, etc. “Successful schools build on the efforts of successful families.â€? One way of improving the home environment is separating the child from a ‘bad’ parent, but generally these programs have had disastrous results. Another option is to have school-based early life programs. Three programs have used this later philosophy to try to improve outcomes for underprivileged children by interventions early in these children’s lives.

  • The Abecedarian Project: This randomized control trial used full-time year round classes for children from infancy through preschool. There was no affect on crime rates and a mild increase in IQ levels.
  • The Perry Preschool Program: This randomized trial involved weekly home visits with parents, and intensive, high quality preschool services for 1-2 years. The program cost $19,000 per child per year but arrests by age 27 were 2.3 in the treatment group but 4.6 in the control. Only 7% of individuals in the treatment group were arrested more than 5 times compared to 35% in the control group. Test scores and literacy rates were consistently higher for treatment group.
  • Chicago Parent Child Centers: This was a non-experimental, large-scale program. “…the center provided halfday preschool program for 3- and 4-year-olds during the 9 months that they were in school. The program provided an array of services, including health and social services, and free meals. It also sought to include the parents, including helping the parents complete school, home visits and field trips.”

While the Abecedarian project was not very successful, the Perry and Chicago programs had benefit-to-cost ratios of 9.11 and 7.77 respectively. The benefits include increased earnings, decreased crime, lower welfare payments. The authors, however, only use a 3% discount rate when discounting the future benefits which may be low.

The main conclusions to take from this paper are that generally intervention programs early in the child’s life are the most beneficial in terms of rate of return. Also the paper makes a point of the following:

“Schools can only work with what families give them. Successful schools are those that teach children from functioning families.â€?