Elsevier

Journal of Urban Economics

Volume 83, September 2014, Pages 18-33
Journal of Urban Economics

Does state preschool crowd-out private provision? The impact of universal preschool on the childcare sector in Oklahoma and Georgia

https://doi.org/10.1016/j.jue.2014.07.001Get rights and content

Abstract

Universal preschool policies introduced in Georgia and Oklahoma offer an opportunity to investigate the impact of government intervention on provision of childcare. Since Georgia used a voucher-like program and Oklahoma utilized its existing public schools, the two states offer a case study of how government provision compares to government subsidization alone. Using a synthetic control group difference-in-difference estimation framework, we examine the effects of universal preschool on childcare providers. In both states there is an increase in the number of formal childcare centers. With the voucher-like program in Georgia, the overall increase in care is partly driven by an increase in the supply of formal childcare in the private sector and partly driven by new publicly-provided preschools. However, there is substantial crowd-out of private consumption of preschool. In Oklahoma, where universal preschool is publicly provided, the increase in the number of childcare providers occurred only in the public sector. The expansion of publicly-provided care seems to be driven largely by movement of employees from private centers to public settings. As such, this case-study comparison suggests that government subsidization through funding was more effective at expanding preschool than government provision.

Introduction

In both the 2013 and 2014 State of the Union addresses, President Obama put forward a proposal for Preschool-for-All, a federal program to incentivize state universal preschool programs like those in six states, including Georgia and Oklahoma. In 2012, over 40 states had state-funded preschool programs and collectively these states spent over $5 billion on preschool programs (Barnett et al., 2012). Proponents argue that, by providing equal access to high-quality preschool for all children regardless of their families’ income, universal preschool will equalize early childhood development opportunities and improve life outcomes for children. Opponents are concerned that a universal program will serve mostly to supplant private spending on preschool and that publicly provided preschool programs will crowd-out private providers from the childcare market (Burke, 2010, Whitehurst, 2014).

In this paper, we examine the effects of a state’s introduction of universal preschool policy on the number of childcare providers. To answer this question we use a differences-in-differences framework, incorporating both traditional and synthetic control group methods. We utilize two unique administrative datasets, one drawn from tax records on businesses operating in the childcare industry and the other from reported state spending and enrollment in universal preschool in Georgia and Oklahoma. Identification stems from comparing the supply of formal childcare in states with universal preschool to that in states without universal preschool before and after the universal preschool policies were introduced.

These two states’ universal preschool policies offer a novel and rich opportunity to investigate the impact of government subsidies on the private sector (Levin and Schwartz, 2007). The programs are large in scope, generally providing preschool services to all families with age-eligible children who want to enroll. Importantly, the programs we study, those in Georgia and Oklahoma, were introduced suddenly and widespread care quickly became available. In both cases the universal program was a distinct shift from the previously existing government subsidized preschool programs providing care to low-income families on a much smaller scale. Moreover, the childcare market is an interesting setting to examine how public subsidization affects private provision because the childcare sector is a mixed market (with public formal providers and both private formal and private informal providers), has low barriers to entry, and is relatively less concentrated than other industries.

Although the universal preschool policies in the two states are generally similar, they differ in one important dimension. Georgia’s program operates much more like a voucher system, where any type of provider can apply to run a universal preschool classroom (provided they meet certain requirements) and will receive funding directly from the state. The Oklahoma system, on the other hand, operates largely through the public school system because the funds flow through the local school districts, which can either provide preschool themselves or contract out with local providers. Although there are other differences between Georgia and Oklahoma that may also lead to differential effects of a universal preschool program, we use the comparison of effects in the two states as a case study for comparing government provision (as in Oklahoma) to government funding alone (as in Georgia).

Basic economic theory predicts that government provision of a good should result in decreased private expenditures on the good and may result in less overall consumption than government subsidization through funding alone (Peltzman, 1973). This is because when the government provides a specific amount or type of a particular good or service, there may be additional costs to consumers (above the market price) of purchasing additional units. Consider the case we study here, universal preschool, where the government provides a set amount of care (3 or 6 h a day). In order to obtain daycare for a full workday shift (8 h), parents have to piece together multiple arrangements, which may be more costly than the hourly cost of childcare (e.g. because of transportation costs). On the other hand, if the government only provides partial care, the private sector may survive if parents demand full workday care and private centers adjust to the new environment (e.g. by providing transportation or operating for different hours). Moreover, with government provision a new competitor to the private sector is introduced. This addition may crowd out private provision of a good relative to an environment where the good is provided through private consumption and government funding. Therefore, despite being partly motivated by the goal of increasing the supply and use of a good, government provision may result in less use of a good, in part because of its effects on private providers.1

We find that in Georgia, there is an increase in the number of childcare centers and employees. Of interest is whether the increase is driven by pure expansion of the sector or if there is crowd-out, i.e. displacement of childcare that would have been provided in the absence of government intervention.2 We find that the overall increase in care is partly driven by an increase in the supply of formal childcare in the private sector and partly driven by new publicly-provided preschools.3 This makes sense, given that the government allowed both public and private providers to receive universal preschool funds. However, even though the formal childcare sector expanded, we estimate that at least 60% of the publicly funded universal preschool in Georgia took place in pre-existing private childcare settings. As such, there is substantial crowd-out of private consumption of preschool, a finding that is corroborated by evidence on enrollment (Fitzpatrick, 2008, Cascio and Schanzenbach, 2013).

Meanwhile, in Oklahoma, universal preschool increases the number of formal childcare centers, but has little effect on the number of employees. The increase in the number of childcare centers is driven by expansion in the public sector only, which concords with the flow of funds from the state to public schools. Our results suggest that the resulting competitive pressure of this public sector expansion leads to little decrease in the number of private providers, but may have pulled workers from the private childcare providers into public preschools.4 Using the results for employees, arguably a more direct measure of the size of the childcare market given caregiver-to-child staffing requirements, our estimates suggest that government provision crowds out about 10% of the market. These results are consistent with the Peltzman (1973) hypothesis that government provision will result in less expansion of a market (relative to government subsidization).

In the next section, we describe the universal preschool programs in Georgia and Oklahoma. In Section 3, we detail the data we use to answer each of the above questions. In Section 4, we describe our research design and the results for each question in turn before concluding the paper in Section 5 with a discussion of the implications of our results for policy.

Section snippets

What is universal preschool?

Before detailing our analyses, it is worthwhile to describe the universal preschool programs that we study in more detail, particularly because the implementation of universal preschool has been somewhat different across states. Georgia’s Lottery for Education Act, passed in 1992, instituted a lottery which funds both the HOPE scholarship program and a pre-kindergarten initiative for four year olds.

Data on the supply of childcare

To examine the effects of universal preschool on childcare providers, we utilize two data sources. First, to measure the number of and size of childcare centers, we use data compiled by the US Census Bureau from Internal Revenue Service tax return data: the Longitudinal Business Database (LBD). These data include information on firms that have employees on payroll from 1990 to 2009.

Identifying the effects of a statewide universal pre-kindergarten policy

We are interested in identifying the effects of a state government’s introduction of a universal preschool policy on the supply of childcare in the state. Note that universal preschool introduced in these states was layered on top of an existing network of state and federal child care and early education programs, such as Head Start. For this reason, the question we answer is: what is the effect of the introduction of a universal preschool policy on the supply of childcare above and beyond the

Conclusion

In this paper, we have detailed the effects of both publicly funded and publicly provided preschool using the natural experiment provided by the introduction of universal preschool in Georgia and Oklahoma. Some consistent patterns emerged that are likely linked to the design of the governments’ intervention into the early childhood care and education market. First, government funding of universal preschool in Georgia led to increases in the number of childcare providers in the formal sector

Acknowledgments

This research was supported by a grant from the Institute of Education Sciences (R305A100574). We are grateful to Nathaniel Nakashima for providing excellent research assistance. Erica Greenberg provided invaluable help with Georgia Pre-K program data. We would also like to thank Angela Andrus and the other Census Bureau employees for their help with the restricted access Census data used in this project. The research in this paper was conducted while Bassok and Fitzpatrick were Special Sworn

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