Market failure is defined as a “a situation in which a market left on its own fails to allocate resources efficiently” (Mankiw, 1998, p. 10). Wherever market failure exists, public sector intervention may improve the performance of that sector of the economy. In the child care sector, market failure stems from two sources: lack of information and the existence of externalities (effects beyond the primary consumers). Regarding the first, a major problem is the absence of information on the part of parents, including information on the quality of child care, sometimes on the availability of care, and often on the net costs of alternative arrangements. Related to this lack of information is the difficulty in capturing process quality by measuring observable differences in structural quality. Even information on the structural quality differences is not easily obtained a priori, and the cost of acquiring information can be high.
One difficulty in providing information to parents is that much of this market is made up of small providers. Parents may know something about the child care used by their neighbors, but very little about other types or providers of care. Parents report being unsure about how to go about evaluating child care quality. Child care convenience also is of considerable concern to parents limiting their search to care in particular small geographical areas. This way of thinking about market failure is quite similar to that of medical providers. The problem may be particularly acute for lower-income families and for families who need care for evening or weekend employment (Vandell, 1998).
The second major cause of market failure is the existence of externalities. The benefits of quality care accrue not just to the parent(s) but also to the child and to society more generally. Parents may take all or part of the benefit to their child into account, but not benefits that are external to the family. Such benefits include lower costs for subsequent schooling (reduced probability of grade retention and special education, for example), future reductions in crime, increased productivity that results in higher productivity for others, payment of higher taxes, and possibly lower costs for social services. Improving child care quality may affect grade school classrooms by increasing the proportion of children in the class who have strong language and cognitive skills. By the same token, poor-quality child care may undermine grade school classrooms by increasing the numbers of children with academic and social deficits. Unsafe and unhealthy child care may result in reduced productivity for others, when parents are absent from their jobs, caring for injured or ill children. Adding these benefits to the parent’s demand for higher-quality care should shift the demand curve for quality care to the right (that is, increase demand for higher-quality care at every price).
There may also be a third cause of market failure, an imperfect capital market. Parents of young children tend to have low incomes relative to their permanent income, but may face borrowing constraints that reduce their ability to pay for high-quality care.
Justification for government intervention may also be based on distributional or equality-of-opportunity goals. This may be especially relevant today, in view of the requirement that most low-income single parents work. The core argument here is that if high-quality child care can provide gains in cognitive ability, school readiness, and social behavior, children in low-income families should be given an opportunity to benefit from such experiences just as high-income children benefit. Parents with limited earnings do not have the private means to purchase high-quality child care for their children. Government subsidies are necessary if equal opportunity for high-quality care is to be afforded children in low-income families. The other side of this argument is that if subsidies are not provided, parents with limited incomes will use poor-quality care, including multiple arrangements, which may be detrimental to the safety of their children, may increase family stress, and may result in children with reduced opportunities. A subsidy (or direct provision of care) for children in low-income families could also complement the Earned Income Tax Credit and serve as an employment-related income subsidy (see Council of Economic Advisers, 1997).
There are additional issues regarding availability of child care for families with very low incomes and/or unusual and nonflexible hours of work. According to several studies:
“The structure of low-wage work and its lack of fit with the structure of more formal child care options restricts the access of low-income families to child care centers and many family day care homes. Data from the National Child Care Survey indicate that one-third of working-poor mothers (incomes below poverty) and more than one-fourth of working-class mothers (incomes above poverty but below $25,000) worked weekends” (Hofferth, 1995).
Yet only 10 percent of centers and 6 percent of family day care homes reported providing weekend care. Almost half of working-poor parents worked on a rotating or changing schedule, further restricting these families’ child care options to more flexible arrangements made with relatives, friends, and neighbors.
The features of low-wage work appear to promote reliance on multiple providers as a way of patching together child care to cover parents’ nonstandard and shifting work hours (Siegel and Loman, 1991). Meyers added that irregular and unpredictable work schedules led to disruptions in child care for the families in her study of the California GAIN program (Meyers, 1993). Deborah Phillips wrote (1995)
“In sum, when selecting child care, many working-poor and low-income families must choose from a seriously constrained set of options. They face a set of obstacles that derive primarily from the structure of low-wage jobs and from the meager incomes that these jobs provide. Their low incomes enable them to afford only free care by relatives and friends or very inexpensive care; their nonstandard and often rotating work hours restrict them to arrangements with flexible and weekend or evening hours of operation. These factors may also lead to greater reliance on multiple providers and expose young children to shifting child care arrangements.”
This lack of stability and frequent changing is itself a measure of poor quality of care.3
The market failure components argue for government intervention in improving child care. They all lead the authors of this report to believe that the demand for high-quality care is too low. And because demand is too low, compensation is too low, resulting in better-trained providers tending to seek employment in other spheres. This results in a decline in quality unless intervention occurs. Intervention can take many forms.
The arguments behind the need for a role for government (including subsidies for child care) is quite similar to those for primary schooling. Traditionally, the amount of schooling provided has heavily depended on the public sector. For children up to the age of 16, or older in some states, schooling is mandatory, and is provided by the public sector. In the cases of elementary and secondary education, public colleges and universities, the price charged tends to be far below the marginal cost of schooling. Evaluation of the appropriate level of public investment in education requires an analysis of all returns to schooling, including nonmarket and external effects. For example, greater education may lead to social cohesion and may enable one to use new technologies; it may reduce the probability of criminal acts, reduce the probability of application and receipt of transfers, and it may increase savings rates. (For more on this see Wolfe and Zuvekas, 1997 and Michael, 1982.)
Many of the benefits of child care are like those of primary schooling, because child care is early childhood education. These early childhood educational experiences affect children’s readiness for primary schooling in the same way that primary schooling affects children’s readiness for secondary schooling. In both cases many benefits are external to the child and family. The community at large would benefit from the cognitive, language, and behavioral competencies that are associated with higher-quality child care. The argument for equality of opportunity is similar as well.
A high-quality child care system also is needed if welfare reform is to succeed. The recent change in welfare policy, establishing work requirements, means that more parents, particularly single parents, are working, because work is their only potential source of income. Requiring work means that more parents must find child care for their children. Given this increase in demand, the issue of child care quality becomes even more important. Unfortunately, as described in earlier sections, much of the child care in the United States is not of high quality. Over 60 percent of children under the age of 3 are receiving care in which positive caregiving is not characteristic. Only 10 percent are in care settings that are described as excellent.
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