Why preschool should be universal

On Tuesday, May 5, I was asked to speak at a forum in Minnesota, on why I think that preschool should be universal rather than income-targeted. Below are my prepared remarks:

My main reason for arguing that publicly supported preschool should be universal is that the research evidence suggests that preschool’s benefits are universal. Preschool benefits for middle-class children are almost as large as benefits for lower-income children.

For example, the research evidence in a study I co-authored of Tulsa’s universal preschool program suggests that test score effects of pre-K for middle-income children are 90% as large as those for low-income children. Based on available studies of the relationship between early test scores and later earnings, we would also expect the dollar effects of Tulsa pre-K on future earnings for middle-class kids to be 90% as great.

These estimated earnings effects, for both middle class and low-income kids, are that for each dollar invested in pre-K, the present value of future earnings for those kids increases by about $5. This is a very favorable benefit-cost ratio for investing in both low-income and middle-class kids.

Even though the benefit-cost ratio is about the same for preschool for both middle-class and low-income kids, a universal preschool program would still significantly redistribute income. Because low-income children on average have lower baseline levels of future career earnings, the same dollar boost to earnings will cause a larger percentage boost to future earnings.

For example, in my work for Tulsa, I’ve calculated that a full-day preschool program costing $10,000 per year would boost the present value of future career earnings by about the same $50,000 for both low-income and middle-income children. But because expected future income is lower for low-income kids, this same $50,000 boost is about 10% of baseline career earnings for low=income kids, twice the 5% effect on career earnings for middle-class kids.

This evidence from Tulsa is backed up by similar evidence from Boston’s universal pre-K programs, and from random assignment experiments in both Utah and Rhode Island. The Boston and Rhode Island results for universal preschool programs suggest that preschool’s benefits for middle class children are 70% as great as for low-income children.

In contrast, the available evidence for earlier age interventions, such as parenting programs and child care programs for ages 0 to 2, suggests that they only pay off for low-income groups. For example, a study of one early child care program for ages 0-2, co-authored by Aaron Sojourner at the business school here, suggests that this program only helps children from families below 180% of the poverty line.

Why is there this pattern of benefits, in which preschool benefits all income classes, but earlier interventions in child care and parenting only benefit the poor? I think the most plausible explanation is the middle-class families are generally able on their own to provide adequate parenting or child care services. But high-quality preschool is hard for both middle-class parents and low-income parents to provide on their own. Preschool provides various skills, in particular social skills, that are best provided in a group setting. And quality preschool costs a lot: one school year of full-day high-quality preschool costs around $10,000, which is hard for many middle class families to afford on their own.

This interpretation of the research evidence is not my own unique view. A November 2014 “Consensus Letter” signed by over 500 early childhood researchers attempted to define the research consensus on early childhood education. Among other things, the letter stated that for programs such as preschool, and I quote, “benefits outweigh costs for children from middle-income… families.”

The economic research argument for universal preschool is backed up by some practical considerations. Universal programs are easier and cheaper to administer, without dealing with the complexities of income determination and recertification. Universal programs are less stigmatizing to the poor. Universal programs find it easier to encourage income mixing of children in preschool, which provides positive peer effects for low-income children. As argued in a recent report for The Century Foundation, economic diversity in a preschool program should be considered an important element of preschool quality – no-one thinks that running preschool in an income-segregated manner, as we do with Head Start, is ideal.  Finally, universal programs tend to have more persistent strong political support for maintaining access and program quality over time.

So in sum, I think that the research supports providing universal preschool at age 4, and income-targeted parenting and child care services for low-income children from the prenatal period to age 2. This combination of universal preschool services and targeted early age services will provide valuable benefits to all income classes, and boost the entire economy, while also providing an extra percentage boost to the poor and reducing income inequality.

Posted in Distribution of benefits, Early childhood program design issues | 1 Comment

The importance of neighborhoods for child development

On Monday, May 4, the New York Times gave prominent coverage to two recent papers that provide strong evidence that better neighborhoods or local areas for young children make a large difference in increasing future adult earnings and income for these children. This research was conducted by Harvard economists Raj Chetty, Nathaniel Hendren, and (on 1 of the 2 papers) Larry Katz.

One paper (by Chetty, Hendren, and Katz) concludes that providing housing assistance to low-income families, combined with a requirement that the family move to a low-poverty neighborhood, increases future earnings of a young child in these families by around 30%. This result only holds for children who are between the ages of 4 and 12, with an average age of 8.  In contrast, for children 13 and over, forcing a move to a better neighborhood appears to be counter-productive, possibly because the disruptive effects of the move outweigh any benefits of the better neighborhood.  For children under the age of 4 at the time of the move to a better neighborhood, the authors do not have data.

The other paper (by Chetty and Hendren) suggests that children from low-income families do much better in adult income and earnings due to growing up in some local areas (counties or local labor markets) compared to other local areas, and that this is a true causal effect of the local area. Because of data limitations, the study can only look at where the child grew up back to age 9. But the study finds that the more years during childhood the child spends in a “good” local area, compared to a “bad” local area, the higher are the child’s future adult earnings. At least from age 9 on, each extra year in a “good” local area yields the same predicted improvement in the child’s future percentile rank in the adult income distribution.

My initial reactions to these two papers include several points:

First, these estimated effects of either the child’s “neighborhood” or “local area” are quite large. For example, the 30% boost to the child’s future earnings from housing subsidies tied to neighborhood quality exceeds the 26% boost found in studies of the effects of the Abecedarian program, which provided full-time child care and preschool to low-income children from birth to age 5. As another example, a quality full-day preschool program for one-year might reasonably be predicted, based on current research, to increase future earnings for children from low-income families by 10%.

Second, the gross fiscal costs of realizing these gains from better neighborhoods might be quite high for some families. As Chetty, Hendren, and Katz point out, for families who would have received low-income housing subsidies anyway, the fiscal costs of tying housing subsidies to moving to better neighborhoods are not great, perhaps about a one-time cost of $4,000 in extra counseling costs of facilitating the move to a better neighborhood.  Therefore, there is a very strong argument for trying to use existing housing subsidies for low-income families to facilitate family moves to better neighborhoods.

But most low-income households do not currently receive large housing subsidies.  If we wanted to help all low-income families move to better neighborhoods, this would be quite expensive. Typical low-income housing vouchers in the U.S. cost around $8,000 per year per recipient family. The exact cost per child depends on how many children are in each family, and the relative ages of the children. But paying for better neighborhoods for all low-income children from birth to age 18 could be quite expensive. For a one-child family, this would be a per child cost of over $140,000 over these 18 years, although the average cost per low-income child would be lower, sometimes considerably lower, in families with more children.

These large costs might well be worth it, solely in terms of benefits for children. For example, Chetty, Hendren, and Katz estimate that the 30% increase in future earnings would amount to an increase in the present value of earnings for the typical child in their sample of $99,000, discounted back to age 8. As the typical child in their study moves to a better neighborhood at age 8, maintaining that better neighborhood would require spending $8,000 per year for 10 years, from age 8 to 17. The present value of this would be around $70,000. Even if the family only has one child, the earnings benefits exceed the costs.

However, the point is that facilitating better neighborhoods for the poor through housing subsidies for better neighborhoods would not be a cheap program if pursued as a comprehensive program.  For example, if we provided $8,000 per year in housing subsidies to all families below twice the poverty line, which is around 23 million families, the annual costs would be over $160 billion. In contrast, interventions such as universal pre-K education for all 4-year olds would cost around $30 billion annually. Benefits for low-income children from a comprehensive housing subsidy program might well exceed costs, but it is unclear whether the benefit-cost ratio for such a comprehensive program would be greater than the 5 to 1 or greater ratio that is sometimes achieved for preschool programs.

(Note to policy wonks: this ignores entirely the value to parents of the housing subsidies, which could be considered an offset to the costs of housing subsidies.  The value to parents of early childhood programs is also sometimes ignored in benefit-cost analyses. Furthermore, determining this value is not straightforward. Finally, it often seems that the political system in the U.S. places little value on what income transfers can do for low-income adults, but does place some value on what income transfer programs can do for low-income children.)

Third, if better neighborhood quality is pursued solely through moving low-income households to more income-integrated neighborhoods, this requires an enormous social rearrangement. This necessarily implies as well that middle-income and upper-income households would usually be living in neighborhoods with more lower-income households. These middle-income and upper-income households would likely fear that this would lead to a loss of neighborhood quality that might damage their prospects and their children’s prospects.  In the paper by Chetty and Hendren, they argue that current evidence suggests that upper-income households are less sensitive than low-income households to features of the local area that are related to the income segregation  of the area. The argument is then that the children of the poor benefit from greater neighborhood income integration, but the children of the middle-class and the upper-class do not suffer from greater neighborhood income integration. But whether this finding is robust to more detailed analysis of the effects of specific neighborhoods, rather than overall area traits, is unclear.

Fourth, the limitations of a housing subsidy approach to improving neighborhood quality increases the importance of improving neighborhood quality through a variety of mechanisms, and not limiting the neighborhood improvement mechanisms to housing subsidies. In both these papers, what exactly constitutes the “quality” of a neighborhood or larger “local area”, from the perspective of improving a child’s future prospects, is still to a large extent a black box. Some correlations are presented that relate different local area characteristics to the child development effects of the local area, but the relative importance of these different neighborhood or local area characteristics is unclear. We are a long way from defining with any great assurance what aspects of the neighborhood and area child environment are most crucial in shaping child development and the child’s adult outcomes.

Fifth, it is reasonable to infer from these results that some early childhood interventions will help directly improve local neighborhood quality. Income transfers to families with very young children will raise average income in low-income neighborhoods, which we would predict would lead to higher overall neighborhood quality. Preschool and other early childhood education programs will raise school test scores, which is suggested in Chetty and Hendren’s paper to be one of the area characteristics associated with better adult prospects.

These spillover benefits from better neighborhood and area quality due to early childhood interventions may add to the overall benefits of early childhood interventions. One implication of this work by Chetty and Hendren is that many social interventions may have important neighborhood spillover benefits. If educational and social interventions are pursued on a large scale, they may improve neighborhood quality enough to add considerable economic and social benefits.

Posted in Distribution of benefits, Early childhood program design issues, Economic development

Economic diversity in pre-K, peer effects, and universal versus targeted programs

A recent report by Jeanne Reid and Sharon Lynn Kagan of Columbia University, written for The Century Foundation, argues for greater consideration of economic diversity as a feature that helps determine quality in pre-K programs.

The report documents that low-income children not only have lower rates of attendance in preschool, but also are disproportionately enrolled in lower-quality preschool programs. Moreover, preschool classrooms are overwhelmingly likely to be highly segregated by income. As they point out, Head Start programs, by their very design, are largely restricted to children from families below the poverty line.

This economic segregation is troubling for many reasons. In a diverse, democratic society, it is important that families and children learn to live together, which depends upon common experiences.

In addition, as Reid and Kagan point out, research suggests that low-income children experience significantly greater learning gains if the preschool classroom is income-integrated. This greater learning is thought to occur due to peer effects from being exposed to middle-class children who, on average, tend to enter preschool with higher literacy and math skills.

At the same time, Reid and Kagan argue that the research evidence suggests that these peer effects are asymmetric: middle-class children’s learning seems not to be as subject to such peer effects. This means that integrating preschool classrooms by income contributes to greater learning for low-income children, without sacrificing the learning of middle-income children.

The report goes on to discuss policy implications. The authors argue for policies that include:

  • Encouraging programs to enroll both publicly-funded and tuition paying students;
  • Encouraging Head Start programs to make greater use of their flexibility to enroll 10% of their students from above the poverty line;
  • Locating more preschools where they are accessible to a variety of income groups;
  • Providing greater financial support for transportation to preschool programs;
  • Adding more professional development for preschool teachers in how to deal with diversity in preschools.

I was surprised that the authors omitted discussion of the hot political issue of universal versus income-targeted preschool programs. (Witness the recent debate in Minnesota.) In principle, government programs that only subsidize preschool for low-income children can include middle-income children who pay tuition. But in practice, income integration with private tuition charged to the middle-class is more difficult to arrange. Among other factors, some middle-class parents have some reluctance to enroll their child in a more diverse setting, despite the research.

In contrast, if a preschool program is universal in that it is free to all students, then middle-income families have more incentive to participate. Of course, full income integration in individual preschool classrooms will not happen automatically with universal preschool, any more than it does in public K-12 education. Procedures for allocating preschool slots, recruitment efforts, transportation availability, and preschool locations may all need to be arranged in a manner that encourages diversity of children in preschool classrooms. But universality is helpful in encouraging greater income integration.

Reid and Kagan have made a valuable contribution by arguing that greater economic and racial diversity in preschool classrooms is a goal worth pursuing, as it contributes to preschool quality. In my opinion, that goal will be more easily pursued if we begin with government support for universal preschool, rather than income-targeted preschool.

Posted in Distribution of benefits, Early childhood program design issues | 1 Comment

The challenges posed by “short-termism” in corporate decision-making, and what it implies for policies to promote broader prosperity

Professor William Lazonick of the University of Massachusetts Lowell has a provocative recent paper, written for the Institute for New Economic Thinking, outlining his views on how some of the adverse trends in income inequality in the U.S. are due to changes in corporate decision-making incentives. The paper is entitled “Labor in the Twenty-First Century: The Top 0.1% and the Disappearing Middle-Class”, thus implicitly referring to Thomas Piketty’s recent celebrated book, “Capital in the Twenty-First Century”.

(Lazonick previously wrote an award-winning book for the Upjohn Institute on the same themes, “Sustainable Prosperity in the New Economy”. His new paper further develops his thinking and is shorter, but the previous book presents more in-depth research evidence.)

The brief summary of Lazonick’s argument is as follows. In recent years, U.S. corporations have become overly focused on boosting their short-term stock prices. This is in part due to the structure of the compensation of corporate executives, which is increasingly weighted towards stock options. Corporations boost their stock options by such measures as using their profits to buy back their own company’s stock. As a result, corporations under-invest in R&D, physical capital, and their own workers, and have incentives to excessively lay off workers. The consequence of this process is a redistribution of income to the top 0.1% of the income distribution, which is dominated by corporate executives, and a reduction of good jobs for the American middle-class. Furthermore, this process weakens the long-run competitiveness of the U.S. economy and long-run growth.

What implications does this paper have for how public policy might boost broadly-shared prosperity for all Americans? This particular Lazonick paper does not outline specific solutions, but the obvious implication is to consider policies that would seek to reform corporate governance, corporate pay, and the stock market to encourage long-run thinking. As Lazonick argues in another paper, written for the Brookings Institution, public policy might discourage excessive reliance on stock options in corporate executive pay, and discourage companies from trying to buy back their own stock. We might consider changes in corporate governance, for example encouraging more corporations to include workers on their boards, and to have goals other than maximizing short-term stock prices, as has for example been discussed in Thomas Geoghegan’s recent book.  For example, we might give more favorable tax treatment to corporations that were reorganized under such broader corporate charters. As Bob Lerman has argued, we might consider measures that would encourage the stock market to place a greater value on a corporation’s human capital, by encouraging better measurement of the “human capital” of a corporation’s workers. As Larry Summers has argued, we might make it more difficult for activists to threaten a takeover or restructuring of companies that are in their view failing to maximize short-run shareholder value.

How does this issue relate to other policies that promote broadly-shared prosperity? For example, how does this issue relate to early childhood education programs that seek to promote broadly-shared prosperity by better development of skills for all children? I don’t think that any of these arguments mean that “labor supply” policies – policies that attempt to improve the labor market by boosting the quantity or quality of labor supply – are ineffective or unneeded. There is research that shows not only that more education helps individuals, but also showing that improving educational attainment will help overall wages, employment rates, and per capita income, for example research by Enrico Moretti on how more skills has spillover benefits for everyone in a metro area’s economy.  Existing research on how businesses respond to increased skills can be used to estimate how more skills will help those getting skills and improve income equality, for example see this recent report by Hershbein, Kearney, and Summers.

In other words, even if corporations are more reluctant than they should be to make long-term investments in their workforce and their competitiveness, corporations will still show some response to an increased skill level of the workforce. Labor supply policies still will make a difference.

However, it is the case that labor supply policies will be more effective if we also work on the labor demand side, that is we also work directly to affect the behavior of businesses.  For example, preschool programs would have even greater aggregate effects on the U.S. economy if U.S. corporations could be encouraged to be more willing to complement these preschool investments with their own investments in workers’ skills.

The converse is also the case: labor demand policies that affect business decision-making will be more effective in advancing broad prosperity if accompanied by well-designed labor supply policies such as preschool. Even if we restructure corporate incentives so that corporations are significantly more interested in investing in their workers, these investments are likely to go mainly to workers who start out with good hard skills and soft skills. Preschool and other educational reforms will help corporate governance reforms to be more successful in broadening opportunities.

Labor demand and labor supply policies go together. (I have argued this before, including at book length.) Both types of policies are needed to improve broadly-shared prosperity.

Posted in Business incentives, Economic development

Review of Robert Putnam’s new book, “Our Kids”: strong on vivid individual stories illustrating the problems; weaker on showing solutions

Robert Putnam’s new book, “Our Kids”, does an excellent job of telling individual stories of the American poor, and in particular recounting how their lives are affected by their experiences in childhood and adolescence.  (Robert Putnam is a political science professor at Harvard, perhaps best known for his work on the importance of social capital in societies, most famously in his book “Bowling Alone“.) These stories encourage insight and empathy with the constraints that inhibit equal opportunities for all Americans. Among the constraints are family and parenting problems, troubled neighborhoods, bad schools, and lack of sufficient quality job opportunities. But these constraints are illustrated through individual stories more than through the usual social science data presentation.

The book is weaker on providing solutions. The book does outline some policy solutions to enhance opportunities for persons growing up in low-income families, including: income transfers for low-income families, parenting improvement programs, preschool, and school improvements. However, these solutions are only relatively briefly outlined in one chapter. The book does not present detailed enough program proposals that allow the specific costs and benefits of the various proposals to be discussed.

As a result, I think many readers will not believe that these solutions will come close to solving the overwhelming problems that are made so vivid in the individual stories presented in the bulk of the book. I think it is important for policy wonks to make clear what specifically their proposed policies will do to solve the problems identified in their policy analysis , as I have tried to do in my own work, for example in my recent book on preschool, outlining both benefits and costs.

In addition, the book spends relatively little time on outlining how policy solutions might address the overall structure of opportunities in the American economy. In other words, the book is more concerned with improving the quality of the poor’s labor supply, rather than addressing labor demand: the number of good jobs available to all Americans including the poor. A more comprehensive anti-poverty strategy for helping all our kids should include both labor supply and labor demand approaches, as I have argued before.

However, in a society that seems to become more divided over time, “Our Kids” will help many readers empathize with the children of the underclass, and better understand the challenges they face in growing up and succeeding. This increased empathy may help motivate some readers to support finding better solutions to improve opportunities for all of “Our Kids”.

Posted in Distribution of benefits

Head Start impacts: the importance of the counterfactual

Two recent research papers, by Kline and Walters, and by Feller et al., suggest that Head Start has much larger impacts when it is compared to the alternative of “no preschool”. This finding tends to increase the likelihood that Head Start has benefits greater than costs.

The Kline/Walters and Feller et al. papers are in part responding to an important research puzzle: how to reconcile the results of the randomized Head Start experiment with prior Head Start research. The Head Start randomized experiment found relatively small immediate effects of Head Start on test scores, and these effects quickly faded. In contrast, prior Head Start research has tended to find larger short-term effects, and more persistent effects on other outcomes, including adult outcomes.

For example, a meta-analysis (by Shager et al.) of numerous studies of Head Start found short-term test score effects that were around twice the effects estimated in the Head Start experiment (0.27 standard deviations versus effects generally between 0.1 and 0.2 standard deviations). In addition, while  the Head Start experiment’s results faded by over 70% by grade 3, and were no longer statistically significant, , other research (for example, by Deming) has found  predicted effects on adult earnings that exceed the earnings effects that would be predicted based on early test score effects (Figure 4.1 in my recent book, From Preschool to Prosperity ).

How can these results be reconciled? One possibility, raised by numerous researchers, is that the alternative preschool options to Head Start have expanded and improved over time. Most Head Start studies are estimating the effects of Head Start relative to whatever choice would otherwise be made by Head Start participants, whether that choice is home care or preschool. Over time, non-Head Start preschool options have expanded, and may have improved in quality. This would tend to reduce Head Start’s net impact in newer studies compared to prior studies. This is particularly important for studies of Head Start’s long-term impact, as these studies necessarily are analyzing Head Start as it existed some time ago.

In the Head Start experiment, it appears that in many cases, assignment to the “treatment group” shifted children from other preschool programs to Head Start.  For example, Kline and Walters estimate that among the 4-year-old participants in the Head Start experiment, 41% of the families induced by the treatment assignment to enroll in Head Start would have otherwise enrolled their 4-year-old in some other preschool. The net impact of the Head Start experiment on child outcomes will be a weighted average of Head Start’s effects relative to preschool, for families who otherwise would have enrolled their child in preschool, and relative to home care for families who would have chosen that option. If the other preschool is similar in its effects to Head Start, this reduces the estimated net effects of Head Start.

The new research by Kline and Walters, and by Feller et al. al. , explicitly analyze the choice by families among options of Head Start versus other preschool versus home care, and how this is affected by treatment group assignment in the Head Start experiment. These studies explicitly estimate how this choice might be influenced by a wide variety of variables. For example, if a state has invested more in state preschool programs, we would expect the counterfactual alternative to Head Start to be state-funded preschool for more families (and this is found in both the Kline/Walters and Feller et al. studies). In addition, if the child has younger siblings, we expect (and we find in Feller et al.) that a greater proportion of the Head Start treatment group would have enrolled their 3-year old or 4-year old in some preschool anyway.

These two new studies, after explicitly trying to control for what alternatives parents would have chosen to Head Start, find much larger effects of Head Start versus home care than for Head Start versus other preschools. Both Kline and Walters, and Feller et al., find very small or non-existent effects of Head Start on test score outcomes when those Head Start effects are compared to the test score effects of other preschools that would have been chosen. In contrast, the effects of Head Start versus home care on test score outcomes are much larger.

As a result, Feller et al. estimate short-run test score effects of Head Start versus no preschool that are about 60% greater than the average impact of simply being assigned to the Head Start treatment group (0. 23 standard deviations versus 0.14 standard deviations when using the same test measures).  Kline and Walters also find short-run test effects of Head Start versus no preschool that are about 60% greater than the average effect of simply being assigned to the Head Start treatment group (0.37 standard deviations versus 0.23 standard deviations using the same test score measures).

Both Feller et al and Kline/Walters also conclude that for longer-term Head Start analyses, when proper controls are done for the alternatives facing families, estimates of test score impacts become much more imprecise, and cannot rule out more sizable outcomes. Therefore, it is not true that the Head Start impact study definitely showed that Head Start impacts quickly faded.

How is all of this important for public policy? In two ways. First, for public policy, the most important analysis is of the net benefits and costs of preschool compared to its alternatives. This will be a weighted average of: Head Start’s benefits versus no preschool compared to Head Start’s costs; Head Start’s net benefits, if any, over other preschool programs, compared to Head Start’s extra costs, if any, over other preschool programs.  Kline and Walters present some analyses that when benefit-cost analyses properly adjust for the reality that Head Start substitutes for other government-financed preschool programs, which have some costs and benefits, then Head Start probably has benefits that are 15% greater than costs.

Second, this suggests that policy analysis of the benefits and costs of any preschool program, Head Start or otherwise, needs to consider who will be drawn into the program, and the program’s relative benefits and costs compared to the alternatives that families would otherwise have chosen for their child. What the preschool program substitutes for may vary with how the program is designed and promoted, or where program sites are located. For example, Kline and Walters present evidence that some of those who are least likely to sign up for Head Start may be least likely to sign up for it, so expansions of the programs may have greater benefits. Similarly, another recent analysis of the benefits and costs of Head Start, by Bitler et al., finds that children who otherwise would have had very low test scores benefit the most from Head Start.

Finally, a more technical note. The recent research by Feller et al. and Kline/Walters reaches different conclusions compared to some other research on Head Start’s impacts versus no preschool, but I find the Feller et al. and Kline/Walters methodologies to be more convincing on this topic. First, the recent research’s conclusions differ from those of a dissertation by Peter Bernardy, which compares Head Start treatment group members with control group members not in any preschool by matching on observables, and finds no evidence of lasting Head Start impact from this comparison. But Kline and Walters show that simply controlling for observable variables does not make as much of a difference as actually looking at variations in the alternatives facing families due to different state preschool programs or different family circumstances. Second, in the recent Bitler et al. paper, they do not find that Head Start’s net impacts vary with the variation in alternatives to Head Start chosen by different demographic groups. (This is a side point in the Bitler et al. paper, which mainly focuses on the distribution of test score impacts.) But the Feller et al. and Kline/Walters paper show that controlling for the alternatives that would be selected by families probably requires controlling for a larger set of potential selection variables than demographic characteristics, such as the local availability of preschool and family circumstances.

The bottom line is that the conclusion that the recent Head Start experiment shows that preschool does not work is a misinterpretation of the results. We do need to think about how we can structure expansions of Head Start or other preschool programs so that those who may benefit the most are reached by these expansions. This may require that these program expansions be structured to help attract families who otherwise would not be enrolled in any preschool.

Posted in Distribution of benefits, Early childhood program design issues, Local variation in benefits

What are the best paths to prosperity for localities and the nation?

I have a new paper published that bears on the following important issue: when will local economic development incentives – various types of customized tax breaks or services to individual businesses – be most effective in helping improve economic well-being?

In trying to improve local prosperity, state and local governments, and the federal government, face a choice between labor demand policies – policies that directly try to increase job creation by businesses, the non-profit sector, or government – and labor supply policies, which seek to improve the quantity or quality of local labor supply, which will indirectly encourage the creation of more or better jobs. Of course, governments can also pursue both labor demand and labor supply policies, and in most circumstances both types of policy are needed. But there is a question of which type of policy deserves more emphasis.

Even once we have decided whether local or national circumstances justify more of an emphasis on labor demand versus labor supply policies, there is the important issue of which specific labor demand or labor supply policies will be most effective. There is a wide variety of labor demand policies, and a wide variety of labor supply policies, and not all policies classified in each category will have equal effectiveness in raising employment rates and wages for local residents. (For example, labor demand policies might include both tax breaks for private business, and public employment; labor supply policies might include attracting the “creative class”, attracting other immigrants, and improving the educational system from early childhood through adulthood) But the issue of when to emphasize labor demand or labor supply policies is the initial issue we must address, and that is what I am considering in this new paper.

It might seem intuitively plausible that labor demand policies make the most sense when local economies are constrained by lack of labor demand, and labor supply policies make the most sense when local economies are constrained by lack of labor supply. But these intuitively plausible statements have not, up until now, been backed by much empirical evidence.  To guide wide public policy, we must make sure that we check to see whether our intuitions are still warranted when we look at the data.  In addition, we need to make our intuition more precise with numbers: how much of a difference does the local balance between labor demand and supply make to the relative effectiveness of different policies.

In this new paper, I conclude that policies to boost labor demand will do much more to boost local prosperity if the local unemployment rate is initially high than when local unemployment rate is initially low. Specifically, I estimate that if local unemployment is initially near full employment, at around 4% unemployment, labor demand policies that create local jobs will mostly lead to in-migration. Less than 1 in 4 of these new jobs will boost the employment of local residents.  In addition, because of the in-migration, local governments will face fiscal strains, as in many cases the new infrastructure and public service costs from new residents will significantly exceed the tax revenues generated.

This “leakage” of new jobs away from benefitting local residents, and towards benefitting in-migrants, enormously reduces the benefit-cost ratio of any labor demand policy, whether it is a tax break for a manufacturing plant, or customized job training, or a public works jobs program.

In contrast, when local unemployment is initially high, for example at close to 10%, then about half of new jobs created by labor demand policies will go to local residents. Furthermore, because there will be less in-migration, the job creation will have much greater fiscal benefits for local governments.

These findings obviously have implications for local policymakers: local labor demand policies should be more aggressive when local unemployment is high, and be far more restrained when local unemployment is low. But these findings also have implications for state governments and the federal government. Many federal and state government policies have implications for the distribution of labor demand across different local labor markets. From a labor market perspective, these findings imply that such job redistribution policies should, where possible, lean towards redistributing more job creation towards high-unemployment local economies.

What about local labor supply policies? There is no good evidence on how their effectiveness varies with local economic conditions. Many local labor supply policies, such as preschool and other education policies, are long-term policies. Economists usually assume that in the long-run, labor demand will adjust to match the quantity and quality of labor supply. If so, then in the long-run, local labor supply policies will pay off similarly in a wide variety of local economic circumstances. But there actually is not much in the way of empirical evidence to either support or refute this supposition. This is an area that deserves more research attention.

Posted in Business incentives, Economic development, Local variation in benefits, National vs. state vs. local, Timing of benefits