Early Childhood: High Return on Investment - Center for High Impact Philanthropy (2024)

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A common argument for supporting early childhood is that it is a good “investment.”Often, the term is used colloquially, meaning that early childhood is an area in which funders can make a positive difference, and that support is broadly beneficial for children.While the colloquial meaning of investment is certainly valid, when business people andeconomists talk about investment and return on investment in early childhood, theygenerally mean something more specific. This brief explores the notion of return oninvestment, and the rationale behind the economic and business case for spending onearly childhood.

For more on the return of early childhood programs from an economist and researcher in the field, see .

What does it mean to “invest” in early childhood?

In the strictly financial sense, aninvestment is an outlay of money from which one expects a return of some kind, inaddition to the original amount allocated. The return on investment, or ROI, is a commonperformance measure used to evaluate and compare the efficiency of financialinvestments. Early childhood programs cost money, of course, but studies show that thebenefits associated with such programs also come with monetary gains and savings.When the projected benefits exceed the projected costs, then these programs can be seenas “paying for themselves” and then some over time. In other words, the originalinvestment generates a financial return.

Who benefits from early childhood programs?

We all do. The primary beneficiariesare children and their parents. For example, if a low-income parent is able to secure aplace for her child in a high quality daycare program, that child is likely to benefit fromexposure to a wider array of learning opportunities than he or she might have at home.Enrolling her child in daycare may also open the door for the parent to take onemployment or further her education in order to improve her career prospects. Thoseindividual benefits can be substantial, and life-changing.

Other beneficiaries from such high quality daycare programs may include state and localgovernment, and more broadly, taxpayers and society at large. Because high qualityearly childhood programs promote healthy development, they can generate savings byobviating the need for more expensive interventions later in a child’s life. For example,studies show that participation in high-quality early care can help children avoid specialeducation, grade repetition, early parenthood, and incarceration – all outcomes that implylarge costs for government and for society. Furthermore, children (over the long term)and parents who participate in such programs are more likely to be employed; thusrevenue from their taxes and enhanced buying power can positively contribute to theeconomy.

How big are the returns to early childhood programs?

They can be large.For example, the National Forum on Early Childhood Policy and Programs has found that high quality early childhood programs can yield a $4 – $9 dollar return per $1 invested. A 2009 study of Perry Preschool, a high-quality program for 3-5 year olds developed in Michigan in the 1960s, estimated a return to society of between about $7 and $12 for each $1 invested (see Figure 1 below).¹ It is important to note that different assumptions can shift estimates and that different studies often rely on different assumptions, limiting comparisons across studies and programs. That said, early childhood stands out as a particularly notable area for investment precisely because so many interventions appear to save money in the longer term.

Do all early childhood programs provide the same benefits and returns?

No, there is a range. A landmark study of early childhood programs found that five out of seven programs for which they calculated costs and benefits had a positive cost-benefit ratio, but there was variance both in the benefits tracked and in returns among the five.²

There is also a school of thought that argues that investing earlier in a child’s life yieldshigher returns on investment. Nobel Prize-winning economist James Heckman haswritten extensively on investments and early childhood, arguing (based on his ownanalysis of a range of programs) that returns on unit dollar invested are at leasttheoretically higher earliest in a child’s life (See Figure 2).³

While earlier programs may generate the highest potential returns, donors that supportchildren beyond age three nonetheless play an important role in sustaining and extendingbenefits, and there is good evidence that programs that target older age groups can alsogenerate positive returns.

How are benefits or returns calculated?

There are different ways to estimate the benefits associated with social programs (for more information, see papers from Melinda Tuan and Kilburn and Karoly linked below). Almost all rely on underlying program evaluation information that distinguishes the outcomes or results for participants in a program from outcomes typical of a similar group. Estimating the return on investment involves putting prices on actual or predicted outcomes, in an attempt to link costs and benefits. In other words, these studies take often non-economic outcomes, and decide what they are “worth” in dollar terms. That said, some things are hard to put a price on, and there is often disagreement on how best to “monetize” non-economic benefits. For example, what is the “value” of a child’s love of reading (a benefit of some programs)? Other program outcomes may be easier to assign a price tag to. If a program reduces emergency room visits over a period of time by a certain percentage, for example, those cost savings can be fairly easily calculated.

How should I think about return on investment in choosing programs to support?

It can be helpful to compare potential programs based upon a common measure (e.g., cost benefit analysis or similar) when applied consistently.⁴ Organizations working towards unified metrics across programs include the Robin Hood Foundation in New York, as well as the Washington State Institute for Public Policy. Because underlying program goals and evaluation information available are often so varied, however, such comparisons are sometimes inappropriate. Here are some things that donors should keep in mind:

• Different programs often track different outcomes or benefits. One program mayfocus on improving children’s health, for example, while another looks primarilyat education outcomes. Considering returns alone does not guarantee that you aregetting the specific outcomes you may be looking for.
• When a program does not show a positive rate of return, it could be because: a)the program doesn’t work: it doesn’t generate the benefits it promises; b) theprogram does indeed produce the benefits promised, but at a sufficiently high costthat the benefits do not outweigh the costs; or c) the underlying assumptions abouteither costs or benefits are faulty, or the evaluation data that might support a moreaccurate assessment of benefits are missing. The last point, (c), could also be thecase for a program claiming a positive rate of return, so investors should look carefully at the assumptions made and the quality of the evaluation data;
• Even the same program may have different returns based on the location orpopulation targeted. For example, the returns on investment for the Nurse FamilyPartnership program are much higher for low-income, at-risk families than for thepopulation generally (see Figure 3). Depending on what group you wish to serve,results from one study of a program may not be generalizable to a differentcontext or group.

Keeping these caveats in mind, it is important for donors to consider the cost involved indifferent ways to tackle a problem, and looking at return on investment is one way ofdoing that. The Center’s use of a cost-per-impact analysis in the models we profile ismeant to help donors get a sense of “bang for buck” while still distinguishing betweendifferent programs’ impact.

Additional Resources

Heckman Equation:Nobel Prize winning economist James Heckman has researched and written extensively on investments in early childhood. His website has a wealth of resources, both video and print, accessible to a general audience.

Towards Standardization of Benefit-Cost Analysis of Early Childhood Interventions: In this paper, RAND analyst Lynn Karoly discusses in detail some of the difficulties inherent in comparing costs and benefits of early childhood programs, provides an updated analysis of the cost and benefit of a subset of programs, and makes recommendations for the field for increasing the standardization of approaches.

The Economics of Early Childhood Policy: This paper from RAND outlines differing approaches to estimating economic returns, written for a more general audience of policy makers and others interested in early childhood.

Early Childhood Interventions: Proven Results, Future Promise: This RAND study from 2005 remains the most thorough review of impact and return on investment for 20 early childhood programs with good evaluation data.

Measuring and/or Estimating Social Value Creation:This paper, prepared by Center for High Impact Philanthropy senior fellow Melinda Tuan for the Bill and Melinda Gates Foundation in 2008, reviews eight approaches to integrating costs and benefits associated with social programs, including the Center’s use of cost-per-impact analysis.

TEDx talk by Professor Larry Schweinhart on returns to high quality preschool: Dr. Schweinhart, President of the High Scope Educational Research Foundation, leads the evaluation of Perry Preschool, one of the most thoroughly studied high quality preschool programs.

The Business Case for Early Childhood Education: In this New York Times op-ed, John E. Pepper, former CEO of Procter & Gamble, and James Zimmerman, former CEO of Macy’s, write about early childhood education benefits from a business perspective.

Georgia Early Education Alliance for Ready Students (GEEARS) video: This short animated video makes a great overall case for investment in early childhood, including return on investment.

Ready Nation:This is a national-level association of business leaders and others specifically concerned with early childhood and is a source for news and business perspectives on the issue.

America’s Promise Alliance:This is a national alliance of companies with a particular focus on lowering high school dropout rates. Ready Nation is also a partner, in recognition of the link between effective early education and high school completion.