How teacher pay schemes affect the quality of education

In April 2024, the American Economic Association once again selected the best articles published in the American Economic Journal. The awards are presented annually in four categories: "applied economics," "economic policy," "macroeconomics," and "microeconomics."

One of these articles written by Barbara Biasi (Yale School of Management ) is dedicated to studying the impact of teacher pay schemes on the quality of education. We present to you a brief overview of Biasi’s article "The Labor Market for Teachers under Different Pay Schemes" prepared by NES Professor, Director of “Master of Arts in Economics” Program Sergei Izmalkov .

In 2011, the Wisconsin state legislature changed the principles of determining school teachers' compensation. Before the reform, it was based on the collective bargaining agreements between teachers' unions and school districts' administrations and was determined solely by teachers' experience and education. After the reform, districts received full autonomy to determine compensation, in particular, to pay more to good teachers.

Barbara Biasi evaluated the impact of the reform on the labor market for teachers. Due to the different terms of previous collective agreements, different districts switched to new compensation schemes at different times. This fact allowed carrying out econometric analysis of the case.

Districts that switched to a flexible compensation scheme began to pay good teachers more, rewarding the quality of their professional work. In response to the new terms, high-quality teachers began to change jobs, moving from districts with the old payment scheme to districts with the new one, and to earn significantly more. Less sought-after teachers, whose students showed relatively worse results, began to move in the opposite direction more often and without a significant change in their salary.

The quality of education in the districts that have switched to the new pay scheme has increased due to both stronger and higher-quality teachers and the introduction of additional incentives for them. Those teachers began to create more value (compared to the average teacher; which can be estimated by evaluating different schools and classes/grades where teachers changed), expecting that their salary would depend on their effort. Of course, all these results were obtained in comparison with the districts that kept the old pay scheme.

Biasi's research is unique in that it evaluates the results of large-scale changes in a developed market, tracking precisely market shifts – both in pay levels, teacher migration, and student tests. The findings may appear quite predictable: teachers, like other workers, vote with their feet for higher salaries. However, firstly, it is important to assess the impact of the reform. Secondly, the study shows the overall positive impact of pay schemes' changes on education, which is a new achievement. Previous research did not provide unambiguous findings about this effect.

"Behind the scenes" effects are also important. The actions of the other side of the market – employers, district administrations – are not directly observable. The study shows that the district administrations care about the quality of local school education because they opt for a more incentivizing pay scheme, although they could have avoided any changes. Indirectly, this shows that local administrations are able to evaluate teachers: they understand the quality of teaching, and can attract and motivate good teachers. And this is the very reason for the overall positive impact of the reform on the quality of education. Moreover, Biasi’s research findings indirectly show that teachers' unions did not care about the quality of education and did not want to use a more flexible, quality-based pay scheme.