Economics of Education Review 30 (2011) 466–479

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Economics of Education Review

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The economic value of higher teacher quality夽

Eric A. Hanushek a,b,c,d,∗
a
Hoover Institution, Stanford University, Stanford, CA 94305-6010, United States
b
University of Texas at Dallas, Dallas, TX, United States
c
National Bureau of Economic Research (NBER), Cambridge, MA United States
d
CESifo, Munich, Germany

a r t i c l e i n f o a b s t r a c t

Article history: Most analyses of teacher quality end without any assessment of the economic value of
Received 15 December 2010 altered teacher quality. This paper combines information about teacher effectiveness with
Accepted 16 December 2010
the economic impact of higher achievement. It begins with an overview of what is known
about the relationship between teacher quality and student achievement. This provides the
JEL classification: basis for consideration of the derived demand for teachers that comes from their impact on
H4
economic outcomes. Alternative valuation methods are based on the impact of increased
I2
achievement on individual earnings and on the impact of low teacher effectiveness on
J3
economic growth through aggregate achievement. A teacher one standard deviation above
Keywords: the mean effectiveness annually generates marginal gains of over $400,000 in present value
Performance pay of student future earnings with a class size of 20 and proportionately higher with larger class
Teacher labor markets sizes. Alternatively, replacing the bottom 5–8 percent of teachers with average teachers
Salaries could move the U.S. near the top of international math and science rankings with a present
value of $100 trillion.
© 2010 Elsevier Ltd. All rights reserved.

1. Introduction policy deliberations seldom include even the most rudi-

mentary economic analyses or evaluations. The focus of
It has become widely accepted that high quality teach- most educational policy research and of the majority of
ers are the most important asset of schools, but this public discussions of school policy is simply whether or
recognition has not led to any consensus on the appro- not some school input has a significant positive impact on
priate policies that should be followed to ensure that we student achievement and not what it might cost or the eco-
have a good stock of teachers. The policy proposals range nomic benefits it might produce.1 This paper focuses on
quite broadly, although generally they call either for closer the demand side of the teacher labor market in the United
regulation of quality or for more use financial incentives States and provides baseline estimates of the economic
with little in between these two poles. Remarkably, these value of improving teacher quality.
Much of the discussion about the potential demand
for teachers is framed in terms of ensuring sufficient
夽 This paper benefitted from extensive and insightful comments by
Martin West. Valuable research assistance was provided by Lorra de la
Paz. This is a revised version of a paper originally prepared for the Confer- 1
One notable exception is the long term emphasis by Henry Levin and
ence on “Merit Pay: Will it Work? Is it Politically Viable?” sponsored by his co-authors on comparing benefits and costs, although this has not
Harvard’s Program on Education Policy and Governance, Taubman Center developed much traction in policy debates. See, for example, Levin and
on State and Local Government, Harvard’s Kennedy School, 2010. McEwan (2001) and Belfield and Levin (2007). An early attempt at benefit-
∗ Corresponding author at: Hoover Institution, Stanford University, cost analysis in the case of class size reduction is found in Krueger (2002),
Stanford, CA 94305-6010, United States. Tel.: +1 650 736 0942. following a conceptually similar approach to one part of the analysis
E-mail address: hanushek@stanford.edu below.

0272-7757/$ – see front matter © 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.econedurev.2010.12.006
 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479 467

numbers of trained teachers. This, however, is not really 2. The central importance of teachers
the issue, because the U.S. has have for a long time trained
considerably more teachers than the number of posi- Literally hundreds of research studies have focused on
tions that annually become open in schools. For example, the importance of teachers for student achievement. Two
in 2000 86,000 recent graduates entered into teaching, key findings emerge. First, teachers are very important; no
even though 107,000 graduated with an education degree other measured aspect of schools is nearly as important in
the year before (see Provasnik & Dorfman, 2005; U.S. determining student achievement. Second, it has not been
Department of Education, 2009).2 At the same time, many possible to identify any specific characteristics of teachers
have noted shortages of teachers in particular geographic that are reliably related to student outcomes. Understand-
regions or subject areas, such as math, science, or special ing these findings is central to the subsequent discussions
education.3 What usually gets left out is anything to do with of policies and their underlying economics.
quality.4 The general finding about the importance of teachers
The analysis presented below is built on a simple comes from the fact that the average gains in learn-
premise: the key element defining a school’s impact on stu- ing across classrooms, even classrooms within the same
dent achievement is teacher quality. In turn, the demand school, are very different.5 Some teachers year after year
for teacher quality is derived from just this impact of teach- produce bigger gains in student learning than other teach-
ers on student outcomes. Both existing academic studies ers. The magnitude of the differences is truly large, with
and the related policy discussions devote little thought to some teachers producing 1.5 years of gain in achievement
the economic value of outcomes, generally relying on the in an academic year while others with equivalent students
vague notion that higher scores on tests are better than produce only 1/2 year of gain.6 In other words, two stu-
lower scores. This analysis puts outcome gains in economic dents starting at the same level of achievement can know
perspective. vastly different amounts at the end of a single academic
Consideration of the economic value of teacher quality year due solely to the teacher to which they are assigned.
is especially relevant for the debates about performance If a bad year is compounded by other bad years, it may not
pay for teachers and administrators. Until recently, teacher be possible for the student to recover.
salary policies have given low priority to any considera- No other attribute of schools comes close to having
tion of merit pay, generally viewing it as a small add-on this much influence on student achievement. The avail-
to salaries. As such, it was generally viewed as an add-on able estimates for, say, class size reduction do not suggest
to the basic pay system and one of the first items to be any leverage past the earliest grades of school, and then
eliminated at any sign of budget pressure (see, for exam- the expected effects are small. Most of the controversy
ple, Cohen & Murnane, 1986). In this context, it is useful about the impacts of class size focus on whether there is
to understand the value of keeping high quality teachers any discernible impact on student achievement (see, for
as it provides some bounds on the funding of potential pay example, Ehrenberg, Brewer, Gamoran, & Willms, 2001;
policies to attract and retain effective teachers. Hanushek, 1999; Mishel & Rothstein, 2002). Much less
Estimates of the relevant achievement and pay-off attention has focused on the magnitude of any effects or
parameters are in fact available in the literature. More- the costs of any reductions. The largest commonly available
over, the key parameters have been consistently estimated estimate for class size reduction comes from Project STAR,
across different studies and with considerable precision. where Krueger (1999) estimates that there is a one-time
The innovation of this paper is to draw on those parameter increase in achievement of approximately 0.22 standard
estimates to produce plausible ranges for the underlying deviations from reducing class size by one-third. Clearly,
demand for teacher quality. reducing class size by this much (eight students per class
This paper begins with a general research overview of in the Tennessee STAR experiment) would be very expen-
what is known about the relationship between teacher sive, and the comparison must be to alternative policy
quality and student achievement. It then discusses the pol- approaches.7 These issues come back into the discussion
icy alternatives that have been pursued as a motivation below.
for considering performance based policies. The central The related issue is what makes for an effective or inef-
part of the paper is consideration of the derived demand fective teacher. The extensive research addressing this has
for teachers that comes from their impact on economic found little that consistently distinguishes among teach-
outcomes. ers in their classroom effectiveness. Most documented has
been the finding that master’s degrees bear no consis-
tent relationship with student achievement (see Hanushek

2
Note that the recently graduated group entering teaching also
includes a number of people who graduate with degrees other than in
5
education, making the excess supply of education graduates even larger. A summary and evaluation of value-added studies that look at the
Similar differentials existed throughout the 1990s, implying that the stock influence of teachers on achievement gains is found in Hanushek and
of trained teachers not in the teaching profession is substantial. Rivkin (2010b) and discussed more thoroughly below.
3 6
Interestingly, these discussions have occurred over a long period of Hanushek (1992) finds differences of this magnitude for disadvan-
time. See Kershaw and McKean (1962). taged students found in Gary, Indiana. For an overview of the results of
4
The one possible exception is attention to teachers lacking full certifi- similar studies, see Hanushek and Rivkin (2010b).
7
cation. On the other hand, teacher certification has not been shown to be Krueger (1999) provides an economic analysis of class size reduc-
closely related to student achievement; see, for example, Goldhaber and tion, suggesting that it is marginally cost-effective. These estimates can
Brewer (2000), Kane et al. (2008), and Boyd et al. (2008). be compared to the estimates for teacher quality provided below.
468 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479

& Rivkin, 2004, 2006). But other findings are equally as 3. Problems with current teacher policies
interesting and important. The amount of experience in
the classroom – with the exception of the first few years Existing policies on the demand side of the teacher labor
– also bears no relationship to performance. On aver- market combine regulations on entry into the profession
age, a teacher with five years experience is as effective and political bargaining over salaries. These policies have
as a teacher with 25 years of experience. But, this gen- not proved effective in ensuring uniformly high quality
eral result about measured characteristics of teachers teachers, and there is little evidence that the extensions
goes even deeper. When studied, most evidence indi- of these that have been proposed will be more effective.
cates that conventional teacher certification, source of Most discussion of teacher policies includes very lim-
teacher training, or salary level are not systematically ited attention to costs except where salary is itself the
related to the amount of learning that goes on in the focus of discussion. In these latter discussions of salaries,
classroom. For example, two recent high quality studies moreover, little attention is given to teacher effectiveness.
of different preparation and entry routes into teaching Performance pay has not received extensive evaluation,
compare the impact on student achievement of Teach for because the limited use of such schemes has until recently
America (TFA) and other alternative routes into teach- constrained researchers’ ability to study alternative pay
ing with traditional teacher training (Boyd, Grossman, systems.
Lankford, Loeb, & Wyckoff, 2006; Kane, Rockoff, & Staiger, Information about alternative performance pay
2008).8 They find little differences by teacher training back- approaches is beginning to accumulated. The use of
ground. performance pay has been increasing in the United States
The exception as noted is that during the first one to (Podgursky & Springer, 2007). This increased interest has
three years of teacher experience the typical teacher will also led both to experimental studies (Springer et al.,
get better at her job (see, for example, Staiger & Rockoff, 2010) and new research efforts. Additionally, international
2010). She will develop her craft, learn her tasks, learn experimentation has led to more recent analyses (see,
classroom management, and find ways to help students for example, Lavy, 2009; Muralidharan & Sundararaman,
learn. The existing evidence does not, however, suggest any 2009). For a direct cross-country analysis assessing the
clear way to provide this experience before entry into the impact of different institutions, see Woessmann (2011).
classroom or to reduce the adjustments that will need to Given the level of activity in this area, information about
be made once in the classroom. For example, changes in the supply side of the market is likely to increase rapidly,
teacher preparation or more extensive induction and men- but for now still remains rudimentary.
toring programs, while plausibly effective policies, have yet
to be shown to significantly alter the early-career learn-
3.1. Current certification policies
ing of teachers.9 Similarly, even very intensive professional
development to help teachers become more effective after
Today’s teacher policies begin almost everywhere with
they are already in the classroom has shown little impact
regulating who can enter teaching through a certification
on student achievement.10
process that specifies entry requirements.12 Yet, existing
The fundamental impact of teacher quality has led
evidence indicates that using regulatory approaches to
many policy makers to focus on the implications for the
obtaining “good teachers” is extraordinarily difficult, if not
form and level of pay of teachers. The most common
impossible. The analyses of teacher characteristics give us
expression of this focus is that we should pay sufficient
little reason to believe that we know enough about consis-
salaries to ensure that there are high quality teachers in
tent characteristics or backgrounds of good teachers to set
all classrooms.11 Higher salaries are viewed as a way of
appropriate training and hiring standards. Specifically, the
providing incentives to attract and retain the teacher force
underlying idea behind most certification requirements is
that we need as a country. This conclusion, however, is not
that we can ensure that nobody gets a bad teacher, i.e., that
as straightforward as it sounds, given the current struc-
is possible to put a floor on quality. But doing this requires
ture of schools and labor markets for teachers and given
knowledge of characteristics that systematically affect per-
limitations on understanding of how to identify effective
formance. As noted above, however, credentials, degrees,
teachers.
experience, and even teacher test scores are not consis-
tently correlated with teaching skill.13 Thus, requirements
that only fully certified teachers can enter the classroom
– such as included in federal accountability legislation (No
8
Teach for America has attracted a large amount of attention for its
ability to attract very high quality entrants from the most competitive
U.S. colleges and universities (see below).
9 12
See the experiments in Isenberg et al. (2009). This study compares a For a general discussion of teacher licensing and certification, see
comprehensive induction and mentoring program to “business as usual” Goldhaber (2011).
13
and finds no gains. Some attention has focused on teacher test scores as a potential indi-
10
Garet et al. (2008) and Garet et al. (2010) present results of random- cator of teacher quality. The existing empirical evidence suggests that
ized evaluations of intensive professional development programs for early these scores, when available, are more correlated with student achieve-
reading and for middle school math, respectively. Neither finds that this ment than other explicit measures of teacher characteristics (Hanushek,
professional development even when combined with classroom coaching 2003). Nonetheless, the relationship is modest with less than half of the
significantly affects student learning. estimated parameters of teacher tests on student outcomes being statis-
11
In an international context, see for example Dolton and Marcenaro- tically significant and with little of the underlying variation in teacher
Gutierrez (2011). effectiveness being accounted for by test scores.
 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479 469

Child Left Behind Act or NCLB) – may have little impact on ing teacher quality by building on the existing certification
student performance, even if achieved. requirements.
Nonetheless, some policy proposals argue for strength-
ening credentials, i.e., for making the standards higher 3.2. Current salary policies
and more rigorous. For example, some propose ensuring
that all certified teachers have a master’s degree (National The second important aspect of teacher labor markets is
Commission on Teaching and America’s Future, 1996). compensation. Standard economic models suggest that, in
Indeed, five states including New York currently require a competitive economy, individuals’ salaries will generally
teachers to have an earned master’s degree in order to be aligned to their productivity. If one firm does not pay a
receive permanent certification; an additional 11 states worker a salary that matches her value in terms of output,
require master’s for optional advanced licenses (National another competitive firm would pay that amount. If the
Council on Teacher Quality, 2009). But, since past evi- firm pays the worker too much for her value, it will not be
dence shows teachers with a master’s degree are not competitive with other firms and will be prone to going out
on average more effective than teachers lacking such a of business.
degree, these proposals would raise the cost of becoming Teacher labor markets, however, differ. Salaries are
a teacher without a strong expectation that quality would determined by collective bargaining between teachers’
improve. organizations and their employing school districts. School
Heightened screens for entry into teaching are also districts are not prone to going out of business if they
likely to be very costly. Tightening up on entry require- pay the wrong amount.16 Being public activities, schools
ments typically involves increased undergraduate course are always subject to political forces, and the goals for
requirements, perhaps requirements for a master’s degree school quality depend on governmental decision making
before entering into teaching, and higher test score require- about how much quality is desired. As a result, teacher
ments for entry into teacher training or for certification. salary decisions are only partially driven by the economic
Each of these makes entry into teaching relatively more forces that underlie salary determination in private, com-
costly. Other things equal, this would reduce the supply petitive industries. Demand for school quality is filtered
of potential teachers by altering choices among existing through the political process and may or may not accu-
potential teachers. Of course salary increases could offset rately represent the true benefits and costs of varying
any alterations in supply. The magnitude of the needed amounts of quality, including possible externalities from
increase would depend on the responsiveness of prospec- quality.17
tive teachers to salary changes—something about which we Perhaps the most notable recent pattern in teacher
currently have only rudimentary knowledge. salaries is that they have fallen dramatically in relation to
A variety of experiments with alternative routes the rest of the economy. The changing position of teach-
to teaching have gone beyond traditional certification. ers is clear in salary trends since the beginning of World
Indeed, a large portion of current teachers do not come War II. Compared to the earnings of male college gradu-
through traditional teacher training institutions (Walsh & ates, the average male teacher was slightly above the 50th
Jacobs, 2007). While these programs and their require- percentile in 1940. The average female teacher was close
ments vary widely, they do open the door to a broader to the 70th percentile among college-educated females. But
range of individuals. The existing evidence on their suc- then male teachers fell precipitously to the bottom third of
cess or failure is nonetheless limited. Some evidence does the earnings distribution for college graduates, and female
come from the Teach for America (TFA) program that teachers were below average during the 1960s and close
recruits high performing graduates from generally elite to the relative male position by 1990. In 2000, less than 30
colleges and universities and places them in hard-to- percent of young males and less than 40 percent of young
staff schools even though they lack traditional preparation females with a bachelor’s degree earned less than the aver-
and certification.14 Three careful studies of the perfor- age teacher (age 20–29).18 (Note, however, that these data
mance of the TFA teachers show generally positive results do not include deferred compensation for teachers, which
for math and equal results for reading when compared appears to have grown faster in teaching than in private
to traditionally trained teachers (see Decker, Mayer, & sector employment; Podgursky, 2011.)
Glazerman, 2004; Raymond, Fletcher, & Luque, 2001; Xu, This decline in salaries is mirrored by other measures.
Hannaway, & Taylor, 2009). Further, Boyd et al. (2006) and While it is somewhat difficult to trace general measures of
Kane et al. (2008) compare New York City teachers who achievement and ability over time, it appears that teach-
entered through different routes including Teach for Amer- ers are drawn from deeper in the group of people going to
ica and other alternative certification programs and find
little average difference in effectiveness.15 These results
do, however, cast further doubt on the idea of improv- 16
Additionally, there are questions about whether the negotiations
between school boards and teacher unions are arms-length transactions.
See the various discussions in Howell (2005) and particularly Moe (2005).
14 17
For a description of the program, see The public demand considerations are also influenced by the fact that
http://www.teachforamerica.org/. aggregate importance of school quality appears to exceed the private ben-
15
Kane et al. (2008) additionally provide some idea of the cost trade-off efits – probably reflecting externalities through the development of ideas
of different teacher selection policies. Staiger and Rockoff (2010) evaluate that influence economic growth. See Hanushek and Woessmann (2008,
much more stringent retention programs based on value-added informa- 2011).
18
tion. Hanushek and Rivkin (2006).
470 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479

college and that the best college graduates are not the ones Certainly higher levels of salaries would tend to increase
going into teaching.19 the pool of potential teachers, but the impact of that on
Some analysts have focused on the current position of overall teacher quality depends on the ability of princi-
teachers in the wage/ability distribution as a fundamen- pals and human resource teams in districts to choose the
tal issue driving student outcomes. Barber and Mourshed best teachers. Existing evidence, while not definitive, sug-
(2007), for example, identify the fact that Finland and South gests that schools are not very effective at choosing the
Korea attract top graduates into teaching as a key ingre- best teachers among the pool of eligible applicants (Ballou,
dient to their success on international tests. The source 1996; Ballou and Podgursky, 1997; Staiger and Rockoff,
of this recruiting success is, however, unclear, because 2010).
Finnish teachers are not paid high salaries (though Korean A variant of policy discussions about salaries is to argue
teachers are). Mourshed, Chijioke, and Barber (2010) fur- that the right way to set the salaries of teachers is to use
ther emphasize the importance of high level recruitment the market salary for professionals in the open economy
in their analysis of school systems around the world that as a guide. At its heart this is simply one notion of how to
have shown substantial improvement. determine a salary level, but it is generally unrelated to any
The costs of returning U.S. teachers to their former posi- arguments about the productivity of people in alternative
tion in the salary structure are clearly enormous. While occupations or about the relative attractiveness of different
some have suggested that this would be a reasonable pol- occupations. To the extent that the overall compensation
icy, no analysis is available to indicate what gains in teacher levels of teachers would be raised by such calibration to
quality would result. other professions without affecting the distribution of pay
Two factors appear to be important in evaluating these across teachers, it is subject to the same questions as the
salary trends. First, by most accounts the skills needed to previous arguments about restoring relative pay.
be an effective teacher are not necessarily those needed to There is one aspect of this that has specific relevance,
be successful elsewhere in the economy.20 While there is however. It is unclear precisely which professional occu-
uncertainty in this statement because we do not have any pations would provide the appropriate comparison. If
clear description of what skills are needed to be an effective the standard is privately employed professionals – say,
teacher, we do not find for example that standard measures lawyers, doctors, and accountants in private employment
of teacher achievement or ability are closely related to stu- – a feature of the comparison is the overall structure of
dent outcomes even though it is closely related to earnings employment. Most private professionals have their salaries
elsewhere in the economy.21 set much more in line with their individual productivity,
Second, the current structure of teacher pay enters into so that these occupations have much large discrepancies in
the political determination of salaries and appears to hold salaries and have noticeably higher employment risks than
down teacher salaries. The single salary structure that pays are found in teaching. Thus, even if the comparison set of
all teachers (with the same experience and degree level) alternative professions were clear, the appropriate way to
the same amount quite likely acts to restrain the pay of compare salaries under different employment conditions
teachers. The argument from a very simple political econ- is not.
omy model, while not fully tested, is straightforward. Since A significant feature of virtually all existing discussions
salary contracts are negotiated politically with little disci- of teacher salaries, however, is the absence of any link-
pline from the market, politicians negotiating salaries must age to quality as seen through student outcomes. Certainly
be able to defend the idea that salary increases are related discussions of quality are used to motivate salary consid-
to improved student outcomes. But, under the single salary erations, but little of the existing analysis is very relevant.
schedule, teachers (with the same experience and gradu-
ate training) receive the same pay and increase, regardless 4. What is the economic value of quality teachers?
of the teacher’s effectiveness. This situation makes large
salary increases difficult because the factors that determine An alternative way to think of the salaries for teach-
pay are unrelated to teacher effectiveness in the classroom, ers is to consider the derived demand for quality teachers,
and effective teachers would see the same salary increases because that is a way to assess the range of salary options
as ineffective teachers. that politicians might reasonably consider. The simplest
way to value effective teachers is to note that the demand
for teachers can be derived from the demand for their
19
Hanushek and Pace (1995), Corcoran, Evans, and Schwab (2004), product—educated students. For the most part, teacher
Bacolod (2007). demand has never been evaluated in terms of the potential
20
The relative earnings of teachers who leave teaching have not been gains for students implied by the economic value of bet-
thoroughly investigated. Scafidi et al. (2006) suggest that teachers do not
in general move to higher paying jobs when they leave teaching. On the
ter performance. Such evaluations, however, provide some
other hand, Chingos and West (2009) find that more effective teachers are idea of the social value of highly effective teachers, even if
likely to leave for better jobs. they do not necessarily pinpoint the efficacy of particular
21
The relationship between measures of teacher test scores and student salary structures.22
achievement proves to be very imprecise, with teacher tests generally
being statistically insignificant in educational production functions and
with variations in teacher tests explaining little of the variance in teacher
22
effectiveness; see Hanushek (2003). At the same time, as discussed below, Chetty et al. (2010) note the analogy to pay for CEOs, where their
there are strong rewards to individual achievement in the general labor ability to create or destroy significant value does not dictate the optimal
market. form of contract incentives.
 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479 471

4.1. The demand side based on expected student earnings Altonji and Pierret (2001) consider the possibility of sta-
tistical discrimination that leads to increased returns to
Consider the economic returns to a student that follow cognitive skills over time. Specifically, when young work-
having greater cognitive skills. In fact, these returns have ers first go to an employer, it is difficult for the employer
been frequently estimated through empirical analyses of to judge the skills of the worker. Over time, the employer
the earnings gains from increased skills. The most common can more accurately assess the skills of the worker, and, if
estimation begins with a standard Mincer earnings model worker skills are related to cognitive skills as measured by
with the addition of a measure of cognitive skills (CS) such the tests, the returns to test scores will rise with experi-
as: ence. Their analysis supports the idea that these estimated
returns to skills could be an understatement, with the
ln Yi = ˛0 + rSi + ˛1 Experi + ˛2 Experi2 + CSi + εi (1) returns to cognitive skills rising and the returns to school
where Yi is earnings of individual i, S is school attain- attainment falling with labor market experience. When the
ment, Exper is potential labor market experience, and ε is model was tested across countries, however, it seemed
a random error. When cognitive skills are standardized to most important for the United States but not for other
mean zero and standard deviation of one,  is interpreted countries (see Hanushek & Zhang, 2009).
simply as the percentage increase in annual earnings that In a different set of estimates using data on a sample
can be attributable to a one standard deviation increase of workers for the U.S., Hanushek and Zhang (2009) pro-
in achievement. This will understate the full impact of vide estimates of returns () of 20 percent per standard
achievement to the extent that higher achievement leads deviation. One distinguishing feature of these estimates is
to higher levels of schooling, but that is generally not that they come for a sample of workers throughout the
considered.23 career, as opposed to the prior estimates that all come from
Three parallel U.S. studies provide very consistent esti- early-career earnings.26
mates of the impact of test performance on earnings Using yet another methodology that relies upon inter-
() for young workers (Lazear, 2003; Mulligan, 1999; national test scores and immigrants into the U.S., Hanushek
Murnane, Willett, Duhaldeborde, & Tyler, 2000). These and Woessmann (2009) obtain an estimate of 14 percent
studies employ different nationally representative data per standard deviation. That analysis begins with a stan-
sets that follow students after they leave school and enter dard Mincer earnings model but estimates the returns to
the labor force. When scores are standardized, they suggest skills from a difference-in-differences formulation based
that one standard deviation increase in mathematics per- on whether the immigrant was educated in the home coun-
formance at the end of high school translates into 10–15 try or in the United States. They find that skills measured
percent higher annual earnings.24 by international math and science tests from each immi-
Murnane et al. (2000) provide evidence from the High grant’s home country are significant in explaining earnings
School and Beyond and the National Longitudinal Survey of within the United States.
the High School Class of 1972 (NLS72). Their estimates sug- Finally, Chetty et al. (2010) look at how kindergarten test
gest that males obtain a 15 percent increase and females scores affect earnings at age 25–27 and find an increase of
a 10 percent increase per standard deviation of test per- 18 percent per standard deviation. These estimates do not
formance. Lazear (2003), relying on a somewhat younger control for any intervening school attainment differences
sample from National Educational Longitudinal Study of but do control for a rich set of parental characteristics.
1988 (NELS88), provides a single estimate of 12 percent. The finding that moving a standard deviation in cogni-
These estimates are also very close to those in Mulligan tive skills yields 10–20 percent higher income may sound
(1999), who finds 11 percent for the normalized AFQT small, but these increments apply throughout the lifetime.
score in the National Longitudinal Study of Youth (NLSY) In 2010, the average present value of income for full-
data. Note that these returns can be thought of as how time, full-year workers age 25–70 is $1.16 million.27 Thus,
much earnings would increase with higher skills every year one standard deviation higher performance even at a low
throughout the persons’ working career. The estimates do, return of 13 percent per standard deviation amounts to
however, come early in the worker’s career, suggesting the over $150,000.
impact may actually rise with experience.25 These estimates of the labor market returns to higher
cognitive skills can be merged with evidence about vari-
ation in teacher effectiveness to calculate the derived
23
Murnane et al. (2000) is an exception for tracing through the indirect
demand for teacher quality. The basic approach to
effects. See also the discussion of the form of estimation in Hanushek and
Zhang (2009).
24
It is convenient to convert test scores into measures of the distribution
26
of achievement across the population. A separate review of the normalized The data from the International Assessment of Adult Literacy (IALS)
impact of measured cognitive skills on earnings by Bowles et al. (2001) provide both tests of reading and numeracy skills but also assess a range of
finds that the mean estimate is only 0.07, or slightly over half of the specific adult workers. The estimates in Hanushek and Zhang (2009) come, like the
studies here. previously mentioned studies, from adding cognitive skills to a standard
25
These estimates are derived from observations at a point in time. Mincer earnings function. But that paper also discusses alternative ways
Over the past few decades, the returns to skill have risen. If these trends to obtain estimates of the schooling gradient (r in Eq. (1)).
27
continue, the estimates may understate the lifetime value of skills to indi- Calculations use average income by age for all fulltime, full-year work-
viduals. On the other hand, the trends themselves could change in the ers in the labor force in the first quarter of 2010. It is assumed that incomes
opposite direction. For an indication of the competing forces over a long rise 1 percent per year because of overall productivity improvements in
period, see Goldin and Katz (2008). the economy and that future incomes are discounted at 3 percent.
472 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479

Table 1
Estimates of within school variation in teacher effectiveness (w ).

Study Location Test subject

Reading Math

Rockoff (2004) New Jersey 0.10 0.11

Nye, Konstantopoulos, and Hedges (2004) Tennessee 0.26 0.36
Rivkin, Hanushek, and Kain (2005) Texas 0.15 0.11
Aaronson, Barrow, and Sander (2007) Chicago 0.13
Kane et al. (2008) New York City 0.08 0.11
Jacob and Lefgren (2008) Undisclosed city 0.12 0.26
Kane and Staiger (2008) Los Angeles 0.18 0.22
Koedel and Betts (2009) San Diego 0.23
Rothstein (2010) North Carolina 0.11 0.15
Hanushek and Rivkin (2010a) Undisclosed city 0.11

Average 0.13 0.17

Source: Hanushek and Rivkin (2010b).

Note: All estimates indicate the standard deviation of teacher effectiveness in terms of student achievement standardized to mean zero and variance one.
All variances are corrected for test measurement error and except Kane and Staiger (2008) are estimated within school-by-year or within school-by-grade-
by-year. Corrected reading estimates are included for Rivkin et al. (2005).

estimating teacher effectiveness begins with a model of tiveness is measured in terms of standard deviations of
student achievement (A) for student i in grade g as a func- student achievement. Thus, a teacher who is one standard
tion of lagged achievement, a fixed effect for each teacher deviation above the mean to the distribution of teachers
(ıj ), and other factors (X) that might affect performance as in terms of quality (i.e., comparing the 84th percentile
in: teacher to the 50th percentile teacher) is estimated to
produce marginal learning gains of 0.2–0.3 standard devi-
Ait = (1 − )Ait−1 + ıj + ˇXi + it (2) ations of student achievement compared to the average
teacher.31
A central issue in past estimation has been identifying
As a base case, consider a teacher who is 0.5 s.d. above
the standard deviation of teacher effectiveness from varia-
average in the teacher effectiveness distribution (i.e., at
tions in ıj . A key additional parameter is , which indicates
the 69th percentile), and this level of effectiveness is
the depreciation rate on prior learning, because this indi-
maintained across school years. She would, according to
cates how much of the learning attributable to a teacher
the above estimates, annually lead to a 0.1 s.d. average
carries over after the student leaves the classroom.
improvement in cognitive skills of her students (assum-
Hanushek and Rivkin (2010b) review recent estimates
ing that the standard deviation of teacher effectiveness in
of the standard deviation in teacher quality (w ), and their
units of student achievement is 0.2 s.d.).
estimates are reproduced in Table 1.28 These estimates,
The implication for earnings depends on the persistence
however, look at the variations in teacher effectiveness
of this learning into the future and how this increased
found within schools (hence the subscript w) and do not
learning in any given year carries through into the labor
include any differences between schools.29 The average
market. The baseline calculations presume that 70 percent
within school variation in recent studies is 0.17 s.d. for math
of the added learning persists into the future, i.e., that 
and 0.13 s.d. for reading. The focus on within school vari-
in Eq. (2) is 0.3. The 70 percent persistence of the annual
ance reflects a concern about identifying teacher quality
growth in achievement comes from standard estimates of
as opposed to unobserved differences among students and
depreciation of learning in educational production func-
families who have selected their school, largely through
tions, but this is subject to uncertainty. First, the estimates
residential location.
of  can be directly influenced by differences in tests across
For the subsequent estimation of the impact of teacher
grades, by test measurement errors, and by other nonlearn-
quality, an estimate of the total variation of quality ( T )
ing matters. Second, while estimates of  are not always
is used. In reality, because of difficulties in identifying the
reported in the relevant empirical literature, there is a clear
between-school variance in quality, the subsequent analy-
distribution of estimates in the literature.  = 0.3 is roughly
sis relies on bounds the plausible values of total variation.
consistent with estimates in Hanushek (1971, 1992), Armor
A lower bound of 0.2 s.d. is used and is matched with a
et al. (1976), and Boyd et al. (2006). Hanushek, Kain, and
plausible upper bound of 0.3 s.d.30 In this, teacher effec-
Rivkin (2009) find estimates closer to 0.4. Kane and Staiger
(2008) find estimates of depreciation near 0.5 (with large
standard errors) for math, but lower in language arts. The
28
Estimation of  is actually done in a variety of ways and frequently
estimates of Jacob, Lefgren, and Sims (2010) for the teacher
makes some effort to eliminate biases and measurement error. See
Hanushek and Rivkin (2010b).
component of persistence are significantly lower than this
29
Note that all estimates are corrected for measurement error and,
except for Kane and Staiger (2008), rely on just the within school variation
in teacher effectiveness.
30 31
Comparisons of estimated variations within and between schools can In terms of the student achievement distribution, this would move a
be found in Hanushek and Rivkin (2010a). student from the 50th percentile to the 58th to 62nd percentile.
 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479 473

Table 2
Baseline marginal annual economic value based on student lifetime incomes ( T = 0.2;  = 0.13;  = 0.3).

Class size Teacher effectiveness in standard deviations from mean (percentile in parentheses)

0.25 (60th) 0.5 (69th) 0.75 (77th) 1.0 (84th) 1.25 (89th) 1.5 (93rd)

5 $26,458 $53,036 $79,735 $106,556 $133,500 $160,566

10 $52,915 $106,071 $159,470 $213,113 $267,000 $321,132
15 $79,373 $159,107 $239,205 $319,669 $400,499 $481,698
20 $105,830 $212,143 $318,941 $426,225 $533,999 $642,264
25 $132,288 $265,179 $398,676 $532,781 $667,499 $802,831
30 $158,745 $318,214 $478,411 $639,338 $800,999 $963,397

Note: , depreciation rate;  T , standard deviation of teacher quality; , labor market return to one standard deviation higher achievement.

Fig. 1. Impact on student lifetime incomes by class size and teacher effectiveness (compared to average teacher).
Source: Author calculations.

with  in the range of 0.7–0.8. Chetty et al. (2010) find that s.d. above average) raises individual earnings by $5292, and
kindergarten scores carry through to young adult earnings this translates into a present value of $105,830 for a class
– suggesting a much higher persistence of early skills – even size of 20 students. A teacher who is one standard deviation
though later test scores for students do tend to fade. As a above the mean (84th percentile) produces over $400,000
result of this imprecision, the impact of larger deprecia- in added earnings for her class of twenty.33
tion than that in the baseline is also investigated in the The first thing to note is that this is an annual increment
subsequent sensitivity analysis. by the teacher. Any teacher who stays at the given level of
It is now possible to calculate the value of an above performance produces such an amount each year.
average teacher in terms of effectiveness. Combining the The second thing to note from the bottom half of Fig. 1 is
improvement in scores for an individual with a conserva- that a below average teacher leads to a similar decrease in
tive estimate of a impact on future individual earnings of lifetime earnings.34 Thus, having an effective teacher fol-
13 percent per standard deviation of achievement yields lowed by an equally ineffective teacher will cancel out the
a present value of $10,600 over a lifetime of work for the gains.
average worker. The precise marginal economic value depends crucially
But this is not yet the full impact of the above average on the three parameters of the teacher distribution and of
teacher. The impact on one student is replicated across all how achievement evolves over time and affects earnings:
of the other students in the class. Thus, calculation of the
impact of a teacher depends directly on class size. Table 2
provides the calculated economic value of teachers at dif-
controversial and does not readily permit explicit analysis; see, for exam-
ferent points in the distribution and with different class ple, Hanushek (1999), Krueger (1999), Mishel and Rothstein (2002).
sizes. Fig. 1 displays the impact of different quality teach- 33
Chetty et al. (2010), extrapolating from their data on early career earn-
ers according to class sizes at varying percentiles of the ings, estimate the impact of a high quality teacher at about $214,000 per
class of 20 for a teacher one s.d. above the mean. This is very close to the
distribution.32 A teacher who is at the 60th percentile (0.25
lower bound estimate in Table 3.
34
The decrease is slightly different because the estimates come from
Mincer earnings functions which relate the logarithm of earnings to the
32
None of these estimates introduce any possible offset that would come level of cognitive skills and thus to a slight different percentage change
from direct class size effects. The magnitude of any such effects has been when evaluated at a different place in the distribution.
474 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479

 T = 0.2;  = 0.13; and  = 0.3. It is useful to see how the spe- factors—including compensatory behavior of parents and
cific baseline parameters affect the results when we use schools, the cumulative nature of skills, the specific
alternative but plausible values. attributes valued in the labor market, and the nature of
The impact of the different parameters is straightfor- peer-classroom interactions come into play in determin-
ward. A lower depreciation rate (higher persistence of ing the long run impact of specific teachers. But even twice
achievement), a wider distribution of the teacher effective- the depreciation of achievement that was used in the base-
ness distribution, and a larger labor market payoff to skill line yields very large estimates of the value of an effective
lead to a larger economic value of teacher effectiveness. All teacher—say, $150,000 per year present value for a 75th
of the prior estimates were based on rather conservative percentile teacher with a class of 20 students.
estimates of  T , the variation in teacher effectiveness; one
standard deviation in teacher effective translates into 0.2 4.2. The demand side based on aggregate economic
standard deviations in annual student growth. As indicated, growth
a plausible upper bound on the variations in effectiveness
would be 0.3 standard deviations in annual student growth, An alternative way of estimating the derived demand
which would be consistent both with the larger estimates for effective teachers focuses on the impact of student
in Table 1 and with a more significant between-school vari- performance on economic growth. Recent analysis has
ation in effectiveness. Additionally, the return to skill of demonstrated a very close tie between cognitive skills of
 = 0.13 most closely mirrors the labor market estimates a country’s population and the country’s rate of economic
for young workers and for time periods in the past when growth (see the review in Hanushek and Woessmann,
the demand for skill was less. More recent estimates and 2008). In particular, countries that perform better on inter-
consideration of the full age range of workers yields larger national math and science tests have stronger growth of
estimates, suggesting that  = 0.2 is a plausible upper bound their economies. These analyses suggest that the aggre-
on the estimates. The baseline estimates do use a depreci- gate impact of increased skills is noticeably larger than the
ation rate of 0.3, whereas a subset of existing production individual impact from the prior calculations.35
function estimates suggest larger depreciation, particularly The magnitude of the effects is truly large. For the United
of achievement gains induced by the teacher. We thus also States, Hanushek and Woessmann (2011) calculate that the
look at  = 0.6, or a depreciation rate that is twice as large. present value of increased Gross Domestic Product (GDP)
Table 3 presents alternative estimates of marginal from improving scores by 0.25 standard deviations would
impacts evaluated at one point in the teacher be $44 trillion.36 To get some idea of what a difference of
distribution—one standard deviation above the mean, 0.25 s.d. on the international tests means in substantive
or the 84th percentile. Compared to the baseline, a higher terms, it is useful to note that Canada is approximately 0.4
depreciation rate on achievement obviously lessens s.d. ahead of the U.S. and that Finland – the current world
the impact of teacher quality on earnings, because this leader – is approximately 0.58 s.d. ahead.37
effectively reduces the impact of different teachers. Now consider what would be possible if we could elimi-
Nonetheless, even at the lower bound in column (1) of nate the bottom end of the teacher quality distribution and
the table defined by the previous quality and earnings replace these teachers with average teachers. Following the
parameters ( T and ) but higher depreciation (), a good estimates in Hanushek (2009), it is possible to bound the
teacher with a class of 15 annually produces $182,000 increases in overall performance that could be expected
more in present value than the average teacher. If we
scan across the marginal annual economic value of a good
teacher (compared to the average) evaluated at a given 35
The precise reasons for the larger estimates of aggregate effects com-
class size – say 20 students per class – we see that the pared to the micro effects from individual earnings are not clear. These
parameters do make a large difference in the estimated estimates are consistent with substantial externalities from higher cogni-
impact. The annual economic value with class size of 20 tive skills, but independent estimates of these are unavailable. The macro
estimates reported here assume an endogenous growth formation such
ranges from a quarter of a million dollars to a million
that increased cognitive skills translate into permanently higher rates of
dollars at the top of the range for the three parameters long run growth in GDP per capita. An alternative neoclassical version
together. (The final column is an upper bound on estimates would relate increased skills to increased factor endowments, leading to
based on current empirical work.) movement to a higher level of income but one with the pre-reform rate of
While the difference in estimates across the parameters long run growth. This latter model yields somewhat smaller estimates of
the economic gains, but they remain at 70 percent of endogenous growth
is large, the more striking feature of the table is the mag- model and still considerably above what would be estimated from the
nitude of the lower bound. A teacher in the top 15 percent individual earnings parameters. The alternative approaches to estimation
with a class of 20 or more students yields at least $240,000 are discussed in Hanushek and Woessmann (2008, 2011).
36
in economic surplus each and every year compared to an The key assumptions, described in detail in Hanushek and
Woessmann (2011), are that future growth follows the patterns of growth
average teacher.
for 1960–2000, that school improvement takes 20 years and that the
As suggested, the persistence of the annual teacher higher skilled people replace existing workers as they retire after a 40
effects implied by these estimates is an open question. year career, and that present values are calculated through 2090 using a
All of the calculations in Fig. 1 presume that 70 per- 3 percent discount rate.
37
cent of a teacher’s addition to knowledge carries over These variations come from math performance on the 2006 tests in the
Programme for International Student Assessment, or PISA (see summary
permanently (except as modified by subsequent school data in Organisation for Economic Co-operation and Development, 2010).
and family inputs). In reality, maybe all carries over, or There are some variations in average country scores over time and across
maybe only a small part carries over. A host of unknown subjects, but these do not affect the calculations here.
 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479 475

Table 3
Sensitivity of demand based on earnings to key parameters (marginal annual economic value of teacher one standard deviation above mean).

Class size  = 0.6  = 0.3

 T = 0.2  T = 0.3  T = 0.2  T = 0.3

 = 0.13  = 0.2  = 0.13  = 0.2  = 0.13  = 0.2  = 0.13  = 0.2

5 $60,652 $93,573 $91,215 $140,923 $106,556 $164,741 $160,566 $248,858

10 $121,303 $187,145 $182,430 $281,847 $213,113 $329,482 $321,132 $497,715
15 $181,955 $280,718 $273,645 $422,770 $319,669 $494,223 $481,698 $746,573
20 $242,607 $374,290 $364,860 $563,693 $426,225 $658,964 $642,264 $995,431
25 $303,259 $467,863 $456,075 $704,617 $532,781 $823,706 $802,831 $1,244,288
30 $363,910 $561,435 $547,290 $845,540 $639,338 $988,447 $963,397 $1,493,146

Note: , depreciation rate;  T , standard deviation of teacher quality; , labor market return to one standard deviation higher achievement.

from school improvement. Using the reasonable estimates the end of their schooling, depending on the bounds of the
(above) of variations in teacher effectiveness as measured teacher quality estimates.
by achievement growth – specifically, 0.20–0.30 s.d. – it is These estimates of the importance of teacher quality
possible to see the impact of the least effective teachers. permit some calculations of what would be required to
Fig. 2 plots the impact on overall student learning of yield various improvements in student performance. To
“deselecting” (i.e., moving out of the classroom) varying begin with, consider what magnitude of teacher deselec-
proportions of ineffective teachers and replacing them with tion might yield an improvement in student performance
an average teacher. These calculations come from using the to the level of Canada (0.4 s.d. of student achievement).
prior variance estimates to judge the impact of truncating Fig. 2 shows that eliminating the least effective 5–8 percent
the distribution. The analysis applies to all teachers, so it of teachers would bring student achievement up by 0.4 s.d.
can be thought of improving the effectiveness of teachers If the upper bound on teacher effectiveness, correspond-
throughout the system. As such, it is assumed that the qual- ing to larger differences in effectiveness, is appropriate,
ity of teachers reinforces any gains that students make and replacing the bottom 8 percent of teachers with an average
the impacts of good instruction are not assumed to die out teacher would bring the U.S. up to the level of Finland.
as the student progresses to a higher grade. Instead later The estimates of the growth impacts of bringing U.S.
teachers build upon the stronger average achievement of students up to Finland imply astounding improvements in
all children and set their instruction accordingly. the well being of U.S. citizens. The present value of future
The figure shows upper and lower bounds on the increments to GDP in the U.S. would amount to $112 trillion
improvements corresponding to standard deviations of 0.3 (Hanushek & Woessmann, 2011). These returns dwarf, for
and 0.2, respectively. The wider the distribution of teacher example, all of the discussions of U.S. economic stimulus
effectiveness the greater is the improvement from elimi- packages related to the 2008 recession ($1 trillion).
nating the bottom tail of the distribution. As an example, The estimates are so large for two reasons—the U.S.
consider what would happen to average student perfor- is currently far from Finland in achievement and the U.S.
mance if we could eliminate the least effective 5 percent of economy is very large. The increase in achievement for the
teachers from the distribution. The estimates of the impact U.S. would, according to historic growth patterns, lift the
of teachers on student achievement indicate that students annual U.S. growth rate by over one percent.38
would on average gain 0.28–0.42 s.d. of performance by
5. Costs and the timing of benefits

It is clear from the prior calculations that improvements

in teacher effectiveness would lead to very large economic
gains. The estimates of the economic gains are all put in
terms of present values, but they do not accrue for some
years into the future. The estimates of individual earnings
gains cover the entire work life of a current student. The
estimates of the economic gains to the nation consider
gains across the entire lifetime for somebody born today.
But it is not appropriate to presume that these changes
occur without cost. At a very simple level, if 5–10 percent

38
These estimates, particularly for the U.S., are sensitive to the assump-
tions about the form of the growth model. Under the neoclassical model,
the low achievement of the U.S. is consistent with its currently being above
its long run income level. The U.S. is presumed to be one of the prime con-
Fig. 2. Alternative estimates of how removing ineffective teacher affects tributors to the growth of the technological frontier, but the lower implied
student achievement. growth under this model would still yield a present value of economic
Source: Author calculations. improvement from achievement at the Finnish level of $62 trillion.
476 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479

$70,000 substantial amounts of funds that could be re-directed

$60,000 toward policies to improve the quality of teachers. The
$50,000 national expenditure in 2007 on bonuses for advanced
$40,000 degrees amounted to approximately $19 billion.42 The total
$30,000 Bachelor's degree bonuses for teacher experience are roughly three times as
$20,000
Master's degree large.
$10,000 The larger problems may nonetheless revolve around
$0 the political costs of any reforms. The previous calculations
0 5 10 15 20 25 30
Years of Experience suggest that considerable value could accrue to improving
Source: U.S. Department of Educaon (2010), Table 74 the quality of teachers. Yet the pattern of benefits imply
that they are achieved far in the future, long after much
Fig. 3. Average Teacher Salary by Degree and Experience, 2007.
of the initial costs for reform must be paid and beyond
Source: U.S. Department of Education (2010), Table 74.
the electoral period for most politicians. Many politicians
have in fact pursued school improvement, and spending on
of teachers were deselected, the risk of entering a teach- schools has risen sharply over the five decades (Hanushek
ing career would increase, and it is natural to presume that & Lindseth, 2009). The policies introduced have, however,
salaries would have to rise to offset this increase in risk. been ones that have direct benefits to current school per-
More generally, it is necessary to consider how it might sonnel, such as reduced class size or higher overall salaries,
be possible to finance monetary incentives for altering the although these policies have not been ones that have led
current teacher workforce. If there are fiscal restraints on to higher student achievement. Moving to alternate poli-
governments, say from lowered tax revenues during reces- cies such as differential retention and performance pay of
sionary periods, it would be important to find financing teachers involves greater political costs because these poli-
within the current operating budgets for schools. cies are generally not supported by the teacher unions.
The current structure of salaries for teachers pays
bonuses for advanced degrees and for added teaching expe-
6. Policy conclusions
rience. Over time, the teachers with advanced degrees have
increased as a proportion of the teacher force. Less than a
The key to interpreting the prior calculations is to rec-
quarter of all teachers having a master’s degree or more
ognize that they flow directly from increasing teacher
in 1960, but in 2007 over half of all teachers had some
effectiveness. They do not flow from increased teacher
sort of advanced degree.39 Against this increase, as indi-
salaries unless such salaries are used to attract and retain
cated previously, few studies have suggested that having
more effective teachers.
a master’s degree implies higher effectiveness. Similarly,
This paper has concentrated on the demand side of the
median experience has progressively increased since 1960,
teacher labor market. The underlying idea is that knowing
and currently over 85 percent of teachers have more than
the impact of teacher quality on economic outcomes pro-
three years of teaching experience. Again, little evidence
vides immediate information about what kind of rational
indicates that experience after the first few years has any
changes in teacher incentives and salaries are economically
systematic impact on performance.40
desirable.
The important thing about this increase in teacher edu-
Unfortunately, we know little about the supply function
cation levels and in teacher experience is that salaries rise
for teacher quality.43 Thus, it is not possible to predict what
with these factors even though they have no systematic
kinds of pay changes would be needed to ensure any given
influence on student achievement. Fig. 3 shows average
quality of teacher force.
teacher salaries by degree and years of experience.41 A
The standard arguments for performance pay sug-
teacher with 25 years of experience earns 35 percent more
gest the potential value of differential pay based on
than a teacher with 5 years of experience. The average
effectiveness in the classroom. We actually have little
teacher with a master’s degree earns 18 percent more than
empirical evidence about how to structure any such pay
a teacher with just a bachelor’s degree. But, neither higher
systems or about what the effects might be.44 The evi-
levels of experience nor advanced degrees are related to
teacher effectiveness.
In 2008, 9.5 percent of total teacher salaries went
42
to bonuses for advanced degrees, while 27 percent of Total expenditure on instructional salaries in public schools in 2007
was $197 billion, not counting any benefits and any degree bonuses to
total salaries went for experience bonuses for teachers administrators or those providing instructional staff services. See U.S.
with greater than two years of experience. Eliminating or Department of Education (2010), Table 180.
reducing these bonus payments for unproductive back- 43
There are actually different ways to think about the supply function
ground characteristics of teachers could obviously free up of teacher quality. One can put the supply of quality into terms related to
salary arguments, where selection of teachers in both hiring and retention
decisions is central. On this score, no systematic research exists. Alterna-
tively, one could relate quality to the effort made by existing teachers. This
39
Information on teacher degrees and experience is found in U.S. focus is central to the early work on merit pay (e.g., Murnane and Cohen,
Department of Education (2010), Table 68. 1986), but has also been the key element of more recent evaluations such
40
See Hanushek (2003) and, more recently, Chingos and Peterson as Lavy (2002, 2009) and Muralidharan and Sundararaman (2009). See
(2011). also the review of performance incentives in Lavy (2007).
41 44
The information on salaries is found in U.S. Department of Education A discussion of current pay schemes can be found in Podgursky and
(2010), Table 74. Springer (2007). See also the various discussions in Springer (2009).
 E.A. Hanushek / Economics of Education Review 30 (2011) 466–479 477

dence presented in this paper simply suggests that the completely constrained, schools may reward the better
economically appropriate rewards for particularly effective teachers by giving them smaller classes. These concerns
teachers in the context of a performance pay plan could be could be eliminated if teachers are paid a portion of their
very large. economic returns.
The foregoing analysis has also implicitly suggested an In the end, there is ambiguity in policy because we
alternative approach to simple performance pay that could have never been able to effectively evaluate what the
be more cost effective. If there is an accurate screen on supply function for teacher quality looks like. This lack
teacher effectiveness, many of the properties of a perfor- of information could, of course, be eliminated by a set
mance pay scheme can be achieved by eliminating low of pay experiments. Unfortunately, the current negoti-
performing teachers and paying the remaining teachers ated pay alternatives do not seem to be providing much
higher but relatively flat salaries. information—in part because they imply salaries that are
The policy of eliminating the least effective teachers is relatively insensitive to effectiveness.
very consistent with the McKinsey analysis of the policies The bottom line remains that much higher teacher
found in high-performing school systems around the world salaries would be economically justified if salaries reflected
(Barber & Mourshed, 2007). Their analysis suggests that teacher effectiveness more closely. Without that linkage,
the best school systems do not allow ineffective teachers we should expect our schools to underperform, and we
to remain in the classroom for long. These conclusions are might also expect teacher salaries to lag those in the general
also consistent with more U.S. evidence, such as that for labor market.
New York City, in Kane et al. (2008) and the related pol-
icy prescriptions in Gordon, Kane and Staiger (2008) and
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