Measurement of Output and Quality Adjustment When Hedonics Cannot Be Used: An Illustration for the Day Care Industry

In this paper, we develop time series estimates of the output and quality of output for day care centers in the U.S. for the 1970s and 1980s. As far as we are aware this is the first time that a time series for day care output and quality has been published. Our results using both physical and dollar measures of output show very rapid growth in output, particularly during the 1980s. We find that both the real price of care in centers and the staff/child ratio in day care centers declined between 1974 and 1988. These declines may reflect either improved productivity or a decline in the quality of care provided by day care centers. Clearly, these declines merit further investigation. We illustrate a method that may be used to adjust physical measures of output for changes in quality when, as is true in the case of day care, no single market clearing price is available. The method involves the estimation of cost functions and the calculation of marginal costs for producing quality.