In lieu of an abstract, here is a brief excerpt of the content:

  • Teacher Compensation and Student PerformanceEvidence from National Data on Districts' Finances and Standardized Test Scores
  • Eunice S. Han


There is increasing concern about the low levels of U.S. students' performance both on national and international assessments. To remedy the situation, the 2001 No Child Left Behind Act requires states to develop instruments for high standards for students and establish sanctions for schools and districts failing to meet annual yearly progress goals. However, overall student achievement continues to fall short of national assessment standards, and policymakers struggle to put forward fundamental solutions.

The quality of the teaching force in our public schools has received great attention as one of the approaches to improve student performance, as there exists ample evidence that teacher quality matters for student achievement (see McCaffrey et al., 2004 for a review on this literature). Rivkin, Hanushek, and Kain (2005) find large differences among public school teachers in their impact on student achievement and suggest that high-quality teaching can help offset disadvantages that students with low socioeconomic backgrounds face.1

In attracting and retaining high-quality teachers, higher teacher pay has been indicated as a potential educational policy. Yet, the lack of direct evidence of whether higher teacher pay improves educational outcomes has added to the ongoing debate, as literature finds that the linkage between teacher pay and teacher quality is ambiguous. Allegretto, Corcoran, and Mishel (2004) point out that the relationship between teacher pay and teacher quality varies, depending on the study period. Several studies find that pay increases do not significantly impact in the short-run the quality of teachers entering teaching (Figlio 2002; [End Page 199] Ballou & Podgursky 1997; Hanushek, Kain, & Rivkin 1999). Over the long-run, however, researchers find that the trends in relative teacher pay (compared to the pay levels of non-teaching occupations) are associated with the trends in teacher quality (Corcoran, Evans, & Schwab 2004; Bacolod 2003). Lakdawalla (2001, 2002) finds that higher wages outside teaching cause districts to substitute the quantity of teachers for the quality of teachers, and Hoxby and Leigh (2004) argue that greater pay opportunities in the non-teaching sector "pull" high-aptitude people out of the teaching sector.

Teacher compensation requires a significant amount of public investment, but direct tests of whether higher pay improves educational outcomes often show little or no relationship (Hanushek 1986, 1996; Hedges, Laine, & Greenwald 1994, 1996; Krueger 2002). Thus, the debate regarding "money does not matter" intensifies. Considerable controversy continues over whether the current teacher pay level is adequate, and calls are increasing for uncovering the association between teacher pay and student outcomes.

To fill this knowledge gap and facilitate more informed and meaningful debates among policymakers, this paper examines the relationship between teacher compensation and districts' academic performance, using national data on district finance from 2009-2015. Teacher compensation is measured with both salary and benefits expenditure, and district performance is assessed by average scores from standardized tests for both math and English. In estimating the effect of teacher pay on district performance, I employ district fixed effects to control for districts' unobservable factors that are constant over time, such as districts' general preferences and political inclination towards public education.

This research makes several key contributions to literature. First, this study relies on national data to utilize the full breadth of variation of teacher compensation. Second, both salary and non-wage benefits expenditure are used to better capture the variation of teacher compensation of each district and to offer a comprehensive analysis on teacher pay. Third, district fixed effects are used to control for unobservable factors that may affect both teacher compensation and student outcomes to identify the causal relationship between the two variables. Finally, by disaggregating the results for various subgroups of students and districts, this study provides insights on educational inequality across these groups.


Literature provides ample evidence for the potential channels through which higher teacher pay leads to better educational outcomes, mostly based on the efficiency wage theory. Higher salaries encourage higher quality students–assessed by teachers' test scores, college selectivity, or other credentials–to enter [End Page 200] education (Figlio 1997; Hanushek et al. 2019; Leigh 2012; Podolsky et al. 2019). For...