Approximately all public school teachers are paid according to a salary schedule that dif- ferentiates pay by experience, seniority, and credentials, but not generally by observed performance. Education reformers have long viewed this as problematic for two reasons. First, the classroom environment presents a classic case of moral hazard: it is difficult for a principal to observe the collective set of actions taken by a teacher over the school year and to know what the optimal set of actions would have been. Second, the characteristics that do differentiate pay under the salary schedule have little correlation with teacher performance.
As a consequence, and in conjunction with the advent of modern standardized testing, policy makers have increasingly sought to tie teacher pay to student test performance. A comprehensive review of the literature by Neal (2011) finds that when teachers receive bonuses tied to their own students’ scores on a specific test, their students’ scores on that test generally increase. But, there are three major reasons to be skeptical of such analyses: (1) test scores can be manipulated by teaching to the test or by orchestrated cheating, (2) test scores do not reflect many important skills that can be taught, and (3) test scores are measured on ordinal scales which makes over-time or across-group comparisons unconvincing.
In this paper, we avoid these concerns by estimating the effect of teacher performance pay programs on wages and other adult outcomes. We find that one year of exposure to a teacher performance pay program in the United States leads to an increase in adult wages of 1.9 percent, a 0.5 percentage point reduction in unemployment, and a 0.6 percentage point increase in labor force participation. Each year of exposure is estimated to increase the likelihood of graduation from high school by 1 percentage point. These estimates are obtained from a specification in which we include birth-year-by-state fixed effects which controls for all other state-specific education reforms that may be correlated with the decision to implement teacher performance pay.
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