Examining The Link Between Wages and Quality in the Teacher Workforce: The Role of Alternative Labor Market Opportunities and Non-Pecuniary Variation

Although school policy discussions often focus on the relationship between school resources and student performance, empirical studies have failed to produce systematic evidence that such a relationship exists. In particular, there is little evidence that teacher salaries affect teacher quality or student outcomes. Most studies use cross-sectional variation to identify the impact of teacher wages; we suggest that this approach may not adequately isolate the elasticity of interest. We develop a model of the teacher labor market that highlights the importance of identifying wage-quality effects using demand variation. Our model indicates that if alternative labor market opportunities and non-pecuniary school district characteristics affect potential teachers' utility and vary across geographic areas, then they must be incorporated into regression analyses in order to produce accurate estimates of the ceteris paribus affect of teacher wages on student outcomes. Most cross-sectional datasets do not contain information necessary to account for these factors. Motivated by our model, we use an alternative empirical strategy to estimate the effect of teacher wages on students' educational attainment. We find that raising teacher wages by ten percent reduces high school dropout rates by between three and six percent and increases college enrollment rates by two percent. We also employ the methodology used in previous studies and are able to replicate their results. Our approach provides evidence that those studies have failed to produce robust estimates because of problems associated with the use of cross-sectional data: namely, the lack of adequate controls for both district differences in the non-pecuniary aspects of teaching and market differences in alternative occupational opportunities.