Executive Summary
The teaching profession is crucial to America’s society and
economy, but public-school teachers should receive compensation that is
neither higher nor lower than market rates. Do teachers currently
receive the proper level of compensation? Standard analytical approaches
to this question compare teacher salaries to the salaries of similarly
educated and experienced private-sector workers, and then add the value
of employer contributions toward fringe benefits. These simple
comparisons would indicate that public-school teachers are
undercompensated. However, comparing teachers to non-teachers presents
special challenges not accounted for in the existing literature.
First, formal educational attainment, such as a degree acquired
or years of education completed, is not a good proxy for the earnings
potential of school teachers. Public-school teachers earn less in wages
on average than non-teachers with the same level of education, but
teacher skills generally lag behind those of other workers with similar
“paper” qualifications. We show that:
- The wage gap between teachers and non-teachers disappears when
both groups are matched on an objective measure of cognitive ability
rather than on years of education.
- Public-school teachers earn higher wages than private-school
teachers, even when the comparison is limited to secular schools with
standard curriculums.
- Workers who switch from non-teaching jobs to teaching jobs receive a wage increase of roughly 9 percent. Teachers who change to non-teaching jobs, on the other hand, see their wages decrease by roughly 3 percent. This is the opposite of what one would expect if teachers were underpaid.
Second, several of the most generous fringe benefits for public-school teachers often go unrecognized:
- Pension programs for public-school teachers are significantly
more generous than the typical private-sector retirement plan, but this
generosity is hidden by public-sector accounting practices that allow
lower employer contributions than a private-sector plan promising the
same retirement benefits.
- Most teachers accrue generous retiree health benefits as they
work, but retiree health care is excluded from Bureau of Labor
Statistics benefits data and thus frequently overlooked. While rarely
offered in the private sector, retiree health coverage for teachers is
worth roughly an additional 10 percent of wages.
- Job security for teachers is considerably greater than in
comparable professions. Using a model to calculate the welfare value of
job security, we find that job security for typical teachers is worth
about an extra 1 percent of wages, rising to 8.6 percent when
considering that extra job security protects a premium paid in terms of
salaries and benefits.
We conclude that public-school-teacher salaries are comparable to
those paid to similarly skilled private-sector workers, but that more
generous fringe benefits for public-school teachers, including greater
job security, make total compensation 52 percent greater than fair
market levels, equivalent to more than $120 billion overcharged to
taxpayers each year. Teacher compensation could therefore be reduced
with only minor effects on recruitment and retention. Alternatively,
teachers who are more effective at raising student achievement might be
hired at comparable cost.
Assessing the Compensation of Public-School Teachers
The compensation of public-school teachers is a perennial issue
in American public policy, as the need to balance budgets collides with
the desire to recruit and retain quality teachers. Since the operation
of public schools is typically the largest local government expenditure,
decisions about education funding often dominate local elections.
Teachers’ unions or professional associations operate in all 50 states,
and they support local candidates who do political battle with opponents
concerned about rising property taxes. In 13 states, teachers are
allowed to strike to secure a more favorable contract—an option
unavailable to police and firefighters—which raises the political stakes
considerably.
[1]
Pensions and other teacher benefits are often funded at the state
level, leading to periodic clashes between teachers’ unions and state
governments over budget priorities. The recent recession has reduced tax
receipts and forced states to make painful decisions about spending
cuts or tax increases, further amplifying these conflicts.
One of the more prominent battles over teacher compensation has
occurred in New Jersey, where Governor Chris Christie has required
teachers and other public workers to increase their health care
contribution from 0 percent to 1.5 percent of salary.
[2]
Reforms proposed by Wisconsin Governor Scott Walker, which led to
Democratic lawmakers fleeing the state to deny the legislature a quorum,
reduced teachers’ benefits and limited their ability to bargain
collectively. Florida recently required state employees to contribute 3
percent of their salary to their pension plan, which had been funded
exclusively by taxpayers. Florida teachers filed a lawsuit in response.
[3]
Much of the debate over teacher compensation is couched as a
question about how much the government can afford at the present
time—that is, how much is it
able to pay teachers? Reformers
argue that reductions in wages and benefits for teachers are a budgetary
necessity, while teachers argue that savings should be found elsewhere.
But a different question is often ignored in the education debate, one
that is independent of any government’s current fiscal situation: How
much
should teachers be paid?
No one doubts the significance of high-quality teachers to the
school system and to the economy in general, but even the most important
public workers should be paid at a level commensurate with their
skills—no more, no less. Ideally, if a teacher’s skills are worth $X in
the private marketplace, that teacher should be paid $X by the
government. This system would ensure that the public gets qualified and
competent teachers without overpaying for the privilege. How close is
the United States to that ideal? There is much dispute about how to
measure teachers’ skills and the total compensation they receive for
them.
This report is a comprehensive assessment of salaries, benefits,
and job security for public-school teachers, intended to resolve
disputes over whether teachers as a group are “overpaid” or “underpaid.”
We find that public-school teachers receive compensation about 52
percent higher than their skills would otherwise garner in the private
sector, and we discuss the implications of this fact for education
policy in general.
Salaries
We begin by introducing the human capital model of wages, using
it to compare teacher and non-teacher salaries with adjustments for
skill differences between the two groups. We then show how the standard
analysis focused on formal educational attainment can be misleading in
the case of teachers, whose years of education may not be as valuable in
the marketplace as for workers in other occupations. We also compare
public-school-teacher salaries to private-school-teacher salaries, and
we conclude by examining how the average teacher’s wage changes when he
or she leaves the profession.
Initial Wage Analysis. Public-school teachers receive
higher wages than the average worker, but it would be simplistic to
conclude that one group is overpaid relative to another group based only
on average salaries. Because groups may have different characteristics
that affect their productivity, proper comparisons require controlling
for worker skills.
Comparing Jobs versus Comparing Workers. There are two
major ways that researchers attempt to account for skill differences
between teachers and non-teachers. One is to identify occupations that
have similar skill requirements as teaching, and to then examine average
salaries in those occupations as reported by the Bureau of Labor
Statistics (BLS). For example, Jay Greene and Marcus Winters of the
Manhattan Institute recently reported that public-school teachers
nationwide earn an hourly salary 11 percent higher than other
“professional specialty and technical workers,” and 36 percent higher
than white-collar workers in general.
[4]
The major strength of this approach is that it uses compensation data
as reported by employers, which is generally more reliable than surveys
of individual employees.
Use of the BLS occupational wage data has a number of drawbacks,
however. First, the choice of occupations to compare with teaching is
subjective. Even systematic methods of identifying comparable
occupations rely on assumptions about job characteristics that are hard
to verify. Second, occupational comparisons cannot fully account for
differences in earnings-related worker characteristics, such as race,
gender, marital status, and experience, which may be distributed
differently among seemingly comparable occupations. At the federal
level, at least, it has been shown that the government hires and
promotes employees who have less experience and education than
private-sector workers in similar occupations.
[5]
In contrast, the “human capital” model focuses on the education,
experience, and other skills that employees bring to a job. In this
view, if two jobs are comparable in terms of other factors, such as risk
and work conditions, the human capital that employees bring to their
jobs should account for differences in their compensation. The
Congressional Budget Office (CBO) has deemed the human capital approach
“the dominant theory of wage determination in the field of economics.”
[6]
Our preferred dataset for making worker-to-worker comparisons is
the Annual Social and Economic Supplement of the Census Bureau’s Current
Population Survey (CPS). The CPS is one of the best datasets for
analyzing salaries because of its large sample size and rich set of
control variables. It has the drawback of relying on self-reports rather
than employer data from the BLS, but it allows us to control for a much
larger set of human capital traits.
[7]
Summer Vacation. It is well known that public-school
teachers have shorter average work years than most other job holders. A
teacher who receives a given salary for nine months of work is clearly
better compensated than someone who earns the same salary for a full
year’s work.
But just how lengthy summer vacations really are, and to what
extent they benefit teachers, are major points of contention among
education researchers. Some analysts have tried to avoid the issue by
using weekly salaries reported in the CPS during the school year.
Theoretically, this allows them to compare teacher and non-teacher
earnings per week of paid work, without regard to summer vacation. In
many cases, however, weekly salaries in the CPS are simply annual
salaries divided by 52 weeks.
[8] Using weekly salaries without further adjustment for summer vacation will upwardly bias teacher compensation.
We treated teachers as full-year workers for the purposes of
comparing salaries. We first compared the annual CPS salaries of
teachers and non-teachers without taking actual time worked during the
year into account. The salary variable that we used included only
salaries that teachers received from their primary job, thereby
excluding earnings from a potential second job taken during summer
vacations. We then included the value of summer vacation in the benefits
section, showing how different estimates of paid leave affected overall
compensation.
Method and Results. A representative sample of about
100,000 American households participate in the CPS supplement each year.
Because a much smaller number of respondents are teachers, we combined
the past 10 years of CPS data, from 2001 through 2010. This enlarged the
sample size by an order of magnitude and gave our results greater
precision.
We limited the analysis to respondents who worked full-time jobs
in either the private sector or in the state and local sector as
teachers. (All federal and non-teacher public workers were excluded.)
Private workers were included only if they were employed for all 52
weeks in the past year, while teachers were included who reported
working 35 weeks or more.
[9]
These parameters allowed us to treat both teachers and non-teachers as
full-year workers, with paid leave for each group to be added in the
benefits section.
We employed ordinary least squares regression, with the log of
annual earnings as the outcome variable and the following control
variables: usual hours worked per week, experience,
[10]
experience-squared, years of education, firm size (six categories),
immigration status, state of residence, race, gender, marital status,
and year indicators to account for inflation. We also included
interaction terms: experience
x education, experience-squared
x education, marital status
x gender, and gender
x race.
The explanatory variable most relevant for our purposes is one that indicates whether someone is a public-school teacher.
[11]
By including a teacher indicator variable in the regression, we were
able determine how the average public-school teacher’s salary compares
to the salary of a private worker with the same earnings-related
characteristics.
Linear regression analysis can tell us how a one-unit change in a
particular worker characteristic affects wages when all other
characteristics are held constant. For example, Table 1 indicates that
an extra year of education is associated with an 11.8 percent increase
in the average worker’s wages, assuming other characteristics stay the
same. As the table shows, the effect on wages of teaching in public
school, all else being equal, is -19.3 percent. In other words,
public-school teachers receive salaries that are 19.3 percent lower than
non-teachers who have the same observable skills.
We should be careful not to draw strong conclusions about the
wages of a single occupation from a regression such as this one.
Unobserved ability differences and work conditions could still influence
the observed wage gap. If we added an indicator for architects to the
regression, for example, we would find that architects receive a wage
premium over similarly-skilled workers. Yet few people would immediately
conclude that architects are “overpaid.” In the next several sections,
we explore to what degree work conditions and unobserved ability
differences may be affecting the observed teacher wage penalty. We place
particular emphasis on the fact that years of education is not a good
measure of teacher quality, either within the teaching population or in
comparing teachers to members of other professions.
Problems with Education as a Measure of Teacher Quality. In
standard wage regressions, such as the one we have presented, education
is measured either as years of schooling or as level of degree
obtained. The implicit assumption is that education’s effect on future
earnings is consistent across fields of study—a degree in French
literature is treated as equivalent to a degree in engineering or
biochemistry. While that may seem like a serious limitation on salary
comparisons in general, it is usually not an issue when members of each
group work in a wide variety of occupations requiring diverse
educational backgrounds. Differences in educational quality at any given
educational level tend to average out in heterogeneous groups.
However, a problem exists when comparing the salaries of a single
occupational group to the salaries of comparably educated workers in
the general population. A large proportion of teachers have bachelor’s
or master’s degrees in education. One study estimated that 72 percent of
elementary school teachers and almost half of secondary school teachers
were education majors.
[12]
In addition, more than two out of three teachers received their highest
degree (typically a master’s) in an education-related field.
[13]
Because fields of study for teachers are considerably less diverse than
for the general population, relying solely on differences in
educational
quantity (years of schooling) may mask important differences in educational
quality
between teachers and non-teachers. In other words, the standard
education variable may not be an accurate measure of teacher skill.
Consider the two main ways in which education is related to
worker productivity. First, education indicates basic knowledge and
experience. Someone who has attended medical school, for example, will
usually be better at diagnosing diseases than someone who has only a
bachelor’s degree. For teachers, however, there is little evidence that
advanced degrees improve performance at all. Carefully constructed
value-added models tend to show that teacher effectiveness varies
considerably, but “resume characteristics” such as years of schooling,
certifications, and experience beyond the first few years of teaching
show little to no relationship to student achievement.
[14]
A second way that education usually reflects productivity is that
educational success can be a proxy for certain personality
traits—perseverance and intelligence, for example—that are difficult to
measure directly. Employers are often impressed with a job applicant who
has completed years of challenging academic work, even if the specific
field of study is not directly relevant to the job. This is sometimes
referred to as the “sheepskin effect,” where holding a degree signals
skills or attributes distinct from those acquired while obtaining the
degree.
Elementary school teachers typically possess a degree in
elementary or early childhood education. Secondary school teachers,
being more specialized, usually major in an academic field or in how to
teach a particular field, such as “Math for School Teachers.”
[15]
Do these education degrees earned by teachers carry a strong
sheepskin effect, as other degrees do? It is unlikely. Given the
relative lack of rigor of education courses, many teachers have not
faced as demanding a college curriculum as other graduates. More than 50
years ago scholars were already noting the low grading standards in
university education departments.
The Journal of Higher Education
reported in 1960 that 32 percent of students in education courses
received “A” grades, compared to just 16 percent in business courses.
[16]
A half century later, the situation is little changed. Economist
Kevin Rask collected data on course grades at a Northeastern liberal
arts college from 5,000 students who graduated between 2001 and 2009.
[17] Out of the 20 academic departments included in Rask’s data, education awarded the highest grades.
Although Rask’s data come from only one college, his results are
consistent with a larger study of three state universities in the
Midwest.
[18]
Economist Corey Koedel recently analyzed grade point averages (GPAs) at
Indiana University, the University of Missouri, and Miami University of
Ohio. He found that education majors had substantially higher GPAs than
students majoring in the hard sciences, social sciences, or the
humanities. Education majors at Indiana University, for example, had an
average GPA of 3.65, while math, science, and economics students
averaged 2.88.
These results could mean that education majors are the brightest
and hardest-working college students. However, as the following sections
show, it is more likely that education courses are simply easier than,
say, chemistry and math classes, which feature stricter grading.
Koedel suggests that grading standards are so low in the
education field that distinguishing student performance in education
classes has become difficult to impossible. He links his findings to
evidence that student effort decreases as grading standards decrease,
implying that education majors learn less than other students as a
consequence. If so, holding a degree in education should signal less
knowledge than a degree in an alternate subject.
Aside from the motivation and perseverance that earning a degree
may imply, succeeding in college also suggests that a person possesses a
certain raw intelligence useful for many different tasks. However,
years of education is a poor proxy for cognitive ability when comparing
teachers to non-teachers. Although teachers as a group score above the
national average on intelligence tests, their scores fall below the
average for other college graduates. This implies that, to the extent
that cognitive ability affects earnings independently of education,
ordinary wage regressions may overestimate teacher earnings relative to
those of other professions.
Although the College Board is reluctant to say exactly what the SAT measures, it is essentially an IQ test.
[19]
In 2010, the College Board asked students taking the SAT about their
intended college major. Students who indicated that education was their
intended major earned a combined math and verbal score of 967, about
0.31 standard deviations below the average of 1,017, meaning the 38th
percentile in a standard normal distribution.
[20]
In contrast, students intending to major in engineering had average
combined SAT scores of 1,118. In a standard wage regression, however,
individuals with bachelor’s degrees in education and engineering are
assumed to possess the same human capital and should earn the same
wages, all else being equal.
College graduates who take the Graduate Record Examination (GRE)
also indicate their intended field of study when they sit for the test.
During the past academic year, students who planned to study elementary
or secondary education in graduate school scored 0.13 standard
deviations below average on the GRE. If all education-related fields are
counted—including special education, early childhood education, and
curriculum development—the difference was 0.35 standard deviations.
[21]
Not all education majors go on to become teachers, nor do all
teachers major in education, but even active teachers exhibit low
cognitive ability compared to other college graduates. A recent study
examined scores on the ACT—an alternative to the SAT often used in the
Midwest—of students who attended public colleges and universities in
Missouri. Four-year graduates who became public-school teachers scored
0.23 standard deviations below four-year graduates who did not become
teachers.
[22]
More broadly, the National Longitudinal Survey of Youth (NLSY)
includes scores on the Armed Forces Qualification Test (AFQT), a
cognitive test battery similar to a full-scale IQ test.
[23] Teacher scores on the AFQT lag behind other full-time workers with the same education levels by about 0.25 standard deviations.
[24] These data indicate that, on average, teachers do not have the same cognitive skills as other college graduates.
As both a direct measure of acquired knowledge and an indirect
measure of innate ability, teacher education does not compare well to
education in other fields. The result is that years of education could
be a highly misleading measure of teacher skill.
Wage Regression with IQ. Like the CPS, the NLSY is a rich
dataset that includes the earnings-related variables needed to run wage
regressions. Though its sample is small compared to the CPS, the NLSY
provides the opportunity to test the hypothesis that education is a
misleading measure of teacher skill. We constructed a salary model with
all of the usual controls
except for education, which we replaced
with the AFQT score. If the teacher salary penalty remains large when
an objective measure of cognitive ability is used in place of education,
then we can reject our hypothesis.
As the name implies, the NLSY is a longitudinal survey that began
interviewing young adults between the ages of 13 and 21 in 1979. Each
successive wave tracked the growth and development of the original
interviewees. In order to obtain the largest sample of NLSY teachers
possible, we combined data from the 1990 through1994 waves. These years
contain wage data modeled on the CPS collection procedure, and they come
before dropouts from the sample became a large issue.
Using the log of wage-indexed hourly wages as the dependent
variable, we ran regressions with and without education and AFQT as
explanatory variables. All of the regressions used the following control
variables: experience, experience-squared, establishment size (four
categories), firm size (two categories), immigration status, region of
residence, residence in a metropolitan area, race, gender, marital
status, and an indicator variable for public-school teacher. We omitted
state indicators, year indicators, and interaction terms because of the
smaller sample size.
Table 2 shows how teacher salaries change depending on whether
education or AFQT is included in the regression. The first row is the
“standard” regression based on our CPS analysis in the previous section:
Years of education are controlled for, but AFQT is not. The standard
regression shows a teacher salary penalty of 12.6 percent.
The second row includes both education and AFQT in the same
regression. The impact on teacher wages is small: The penalty decreases
by less than two percentage points. The third row again includes AFQT
but now omits education. With this specification, the change is
dramatic: The teaching penalty is gone, replaced by a statistically
insignificant premium.
How to interpret these results? On the one hand, the difference in IQ between teachers and other college graduates
by itself
has only a small effect on estimates of the teacher penalty. As the
second row indicates, teachers with both the same education and AFQT
score as other workers still receive 10.7 percent less in wages.
However, as we have shown, education is a misleading measure of
teacher skills in several ways. In addition to the IQ difference between
teachers and non-teachers, the education major is among the least
challenging fields of study, and years of education subsequently have
little to no effect on teacher quality. This suggests that eliminating
education as a control variable and letting AFQT alone account for
skills (as in the third row) may provide the most accurate wage
estimates.
Replacing education with an objective measure of skills
eliminates the observed teacher penalty, indicating that non-teachers
with the same education as a typical teacher will likely have more
applicable skills. We emphasize that a job is not necessarily less
important or less challenging when the credentials for it are easier to
obtain. Indeed, effective teachers are highly valuable to society and
the economy.
[25]
Effective teaching does have skill requirements, including patience and
empathy, which disqualify many people from the profession. Our point is
that traditional skill measures do not allow for a fair salary
comparison of teachers to non-teachers.
Public-School Teachers versus Private-School Teachers. A
better assessment of teacher pay may come from changing the comparison
group. Rather than compare public-school-teacher salaries with the
salaries of all private workers, the salary comparison could compare
teachers in the public sector with teachers in the private sector. This
approach largely avoids the problems described in the previous section.
We need not worry about how the value of education changes by occupation
when everyone involved in the comparison is a teacher.
A teacher-to-teacher comparison also helps to eliminate
intangible work-related factors from the analysis. If there are certain
aspects of teaching that are particularly frustrating (or rewarding)
relative to other occupations, a higher (or lower) salary for teachers
may be required as a compensating differential. By limiting both the
reference and comparison group to teachers, whatever salary differences
we observe are less likely to be driven by these intangible factors.
Table 3 shows the results of a salary regression that was limited
to elementary and secondary teachers. The data and model specification
was the same as our earlier CPS analysis, except now the variable of
interest is
public school, which shows the salary premium
associated with working for a public school rather than a private
school. With all observable skills held constant, public-school teachers
nationally earn 9.8 percent
more in salaries than private-school teachers.
The change in relative salaries for public-school teachers is
drastic—a 19.3 percent penalty when compared to private workers in
general, as opposed to a 9.8 percent premium when compared to
private-school teachers. The choice of comparison group obviously makes a
substantial difference in the results, but which choice is preferable?
We have already discussed the problems with using private workers as the
comparison group, and how they may be mitigated by using private
teachers. However, the use of private teachers as the comparison group
has its own problems.
Public and private schools do not necessarily perform the same
functions. While public schools must provide a general education to
motivated and unmotivated students alike, private schools have more
varied missions. Elite private schools often feature specialized
curriculums directed at select groups of students. Consequently, the
skills needed for private-school teaching may be somewhat different than
the skills needed for teaching in a public school. The religious
mission in particular of many private schools could also affect the
attractiveness of teaching. For example, teachers in sectarian schools
often consider their work to be part of their religious service, meaning
they may accept below-market salaries.
If public schools ceased to exist, the demand for secular private
schools with a standard curriculum would presumably increase, changing
the private labor market for teachers. For this reason, the salaries of
private-school teachers in general do not necessarily reflect the “true”
labor market value of public-school teachers. To better estimate the
true market value, we can restrict the comparison even further. By
excluding private schools with religious missions or non-standard
curriculums, the comparison of teacher salaries in the public and
private sector becomes clearer.
Michael Podgursky, an economist at the University of
Missouri–Columbia, has used the Department of Education’s School and
Staffing Survey to perform that analysis.
[26]
After controlling for education, gender, region, and metro status,
Podgursky found that public-school teachers earn higher salaries than
teachers in non-sectarian and standard-curriculum private schools. The
salary premium for public-school teachers ranged from 9 percent to 28
percent depending on teacher experience, with the least experienced
receiving the highest premiums.
Salaries of Teachers Who Leave the Profession. Another
method of comparison examines the salaries of teachers who leave the
profession. If public-school teachers receive lower salaries than they
could otherwise earn in the private market, we would expect a large
portion of those who leave teaching to take new jobs that pay better.
Evidence from Georgia and Missouri, however, indicates this is
not the case. According to state data from the 1990s, just 4 percent of
Georgia elementary teachers who left their jobs for a non-education
field were earning more than the minimum teaching wage a year after
their exit. The same figure for exiting high school teachers was 5
percent.
[27]
In Missouri, women who quit teaching earned just 73 percent as much as
their teaching wage in their new non-teaching jobs. Male teachers who
quit saw no change in their average salaries.
[28]
We can broaden the scope of these results using the Survey of
Income and Program Participation (SIPP), along with a regression
technique called “fixed effects.” The regression analyses we have
presented so far have been cross-sectional, meaning they compare
different workers with similar skills at a single point in time. In
contrast, a fixed effects analysis follows the same workers over time as
they switch into and out of the teaching profession.
The major benefit of this approach is that it automatically
controls for differences in unobserved abilities—intelligence,
motivation, empathy, etc.—because the individual teachers carry these
attributes with them from job to job. If the
same worker—not
merely a worker with similar skills—is paid less in a non-teaching job,
it is difficult to argue that he or she was underpaid as a teacher.
The SIPP is a longitudinal dataset that follows about 50,000
households over three to four years. During this period, many survey
participants changed jobs, with some switching between teaching and
non-teaching careers. To bolster the number of switchers into and out of
teaching, we combined the 2001, 2004, and 2008 SIPP panels. We then
examined the average percentage change in inflation-adjusted monthly
wages experienced by workers who switch from a non-teaching job to a
teaching job (group abbreviation: NT), a teaching job to a non-teaching
job (TN), one teaching job to another teaching job (TT), and, as a
control, a non-teaching job to another non-teaching job (NN).
[29]
Of course, workers often change jobs because they have acquired
new skills that justify a higher salary, and the fixed effects
regression allows us to include controls for observable changes in age,
education, marital status, region of residence, and residence in a
metropolitan area. Worker characteristics that do not change over time,
even those that are not directly observable, are automatically
controlled for in this analysis.
Table 4 indicates that the control group that shifts from
non-teaching jobs to other non-teaching jobs experiences a real wage
increase of only 0.5 percent. Workers who switch from non-teaching to
teaching receive a larger increase of 8.8 percent. Teachers who change
to non-teaching jobs, on the other hand, see their wages
decrease
by 3.1 percent. In other words, the effect on wages of switching into
or out of a teaching job is precisely the opposite of what one would
expect if teachers were underpaid.
Given the small number of workers switching between teaching and
non-teaching, these data should not be considered precise, but they at
least cast strong doubt on the notion that teachers are underpaid in
wages.
Why does the fixed-effects approach show a salary premium for
teachers, while the earlier cross-sectional regression showed a penalty?
The traditional controls in a cross-sectional regression do not
adequately measure teacher skills. By following the same workers over
time, fixed effects models capture worker characteristics that are not
directly observable. Once those previously unmeasured characteristics
enter the analysis, the large teacher wage penalty appears to become a
small premium.
The Bottom Line on Teacher Salaries. The claim that
public-school teachers endure a salary penalty is dubious. Although the
“standard” wage regression suggests that teachers receive about 19
percent lower salaries than similarly skilled full-time workers, the
regression is flawed. Important differences exist between teachers and
workers in other occupations that are obscured by traditional control
variables.
Years of education, in particular, is a misleading measure of
teacher skill, both within the teaching profession and between teaching
and non-teaching occupations. The field of education is less challenging
than other academic concentrations, and teacher education has little
measurable effect on classroom performance. Furthermore, teachers have
significantly lower cognitive ability, on average, than non-teachers
with the same level of education. Removing education from a wage
regression and replacing it with a measure of raw cognitive ability
appears to erase the teacher salary penalty. Clearly, the standard
regression masks important facts about teacher skills.
Teacher-to-teacher comparisons avoid the problem of measuring
skills across occupations. Public-school teachers receive significantly
higher salaries than private-school teachers, even more than private
teachers at secular general-education schools.
Finally, workers who switch from non-teaching to teaching jobs
increase their wages on average, while workers who switch jobs in the
other direction see their wages
decrease. The totality of the
evidence suggests that public-school teachers are not underpaid in wages
by private-sector standards, and they may even be overpaid.
Benefits
Evaluating the level of benefits enjoyed by public-school
teachers is more challenging than analyzing their salaries, for two main
reasons. First, some benefits (such as pensions) are accrued during a
person’s working life but not collected until retirement. For benefits
that are delivered in the present, such as health coverage, paid leave,
or taxes paid on a worker’s behalf, the employer’s contribution toward
these benefits is a good measure of what employees actually receive.
However, for pensions, retirement health benefits, and other deferred
compensation, the current employer contribution is a poor indicator of
the actual benefits to be received. The reason is that employers often
disagree about what current contributions are needed to finance the same
future benefit. To accurately calculate the value of deferred benefits,
it is necessary to control both for how much the employer contributes
and how that employer calculates the required contribution. We make this
adjustment as needed.
A second challenge to measuring benefits is that no comprehensive
dataset exists that would allow the kind of direct individual
comparisons presented in the previous sections on salaries. Data must be
pieced together from separate sources. Our starting point is the
Employer Costs for Employee Compensation (ECEC) survey published by the
Bureau of Labor Statistics, supplemented by additional data sources as
needed.
The ECEC dataset does not report benefits at the individual
level; rather, benefits are reported on an aggregated basis by industry,
firm size, profession, and other employer characteristics. The ECEC
does list benefits specifically for public-school teachers, albeit at
lower levels of detail than are available for the workforce as a whole.
For simplicity, benefits are reported as a percentage of wages.
Table 5 shows the main benefit categories for public-school teachers in
2010. Total employer contributions toward benefits are reported as equal
to 41.2 percent of teacher salaries. Subcategories include:
- Paid leave (6.6 percent of wages)—paid vacation, holidays, and sick leave;
- Insurance plans (16.1 percent)—health, disability, life, and other insurance protections;
- Retirement and savings (11.1 percent)—defined-benefit pensions and defined-contribution pensions; and
- Legally required benefits (7.4 percent)—employer taxes toward
Social Security, Medicare, unemployment and workman’s compensation
insurance, among others.
We compared teachers to workers in establishments of 100 or more employees.
[30]
The latter group receives benefits equal to 41.3 percent of salaries,
making teacher benefits appear comparable. An alternate comparison group
based on occupation would be “full time professionals, and
related”—this group tends to receive lower average benefits than the
private-sector 100+ category, making the comparison shown in this
section relatively conservative.
Combining similar benefit levels with standard estimates of the
teacher salary differential, which the prior section showed are flawed,
one could easily conclude that public-school teachers are substantially
undercompensated relative to private-sector workers. However, there are
several important ways in which the BLS data understate the total fringe
benefits paid to public-school teachers:
- First, the BLS data on employer contributions to pensions fail
to adjust for the public sector’s more aggressive funding rules, which
imply significantly higher guaranteed benefits per dollar of employer
contributions compared to the private sector.
- Second, BLS data exclude retiree health coverage. Most
teachers and other public-sector employees receive this coverage, but
most private-sector workers do not.
- Third, the “paid leave” category in the BLS data does not account for the shorter working year enjoyed by most teachers.
After a full accounting, benefits for teachers are shown to be
significantly more generous than those paid to employees of large
private-sector establishments.
[31]
Pensions. Most evaluations of public-sector and
private-sector compensation compare employer retirement plan
contributions without accounting for important differences in how
pensions are financed. As a result of this error, individuals who would
receive exactly the same benefits in retirement could be credited with
very different levels of “pension compensation” while working.
Part of the confusion stems from the different types of
retirement plans. A defined-contribution (DC) plan, such as a 401(k) or a
403(b), is an account owned and invested by the worker himself. Many
employers will make regular contributions to DC accounts as part of
their worker retirement plans, but no specific level of benefits is
guaranteed. The employer’s obligation begins and ends with its annual
contribution. If every worker had a DC pension, it would be easy to
compare their retirement benefits—just look at their employers’ annual
contributions to the accounts.
A defined-benefit (DB) plan is essentially an annuity—a regular,
fixed sum paid to workers after they retire. In order to have the money
needed to pay for DB pensions, employers usually set aside funds each
year to be invested. But employers do not set aside $1 for every $1 in
pension benefits they must eventually pay. Instead, they assume a
certain rate of return on their investments and then contribute an
amount that they expect to grow to the proper level needed in the
future.
While the annual employer contribution to DC plans is equivalent
to the retirement benefit workers receive, the employer set-aside for DB
pension funding is
not the same as the benefit. The higher the
employer assumes the rate of return will be, the lower the annual
set-asides for DB pensions need to be, even as the actual retirement
benefit to workers stays at the same guaranteed level.
Public-sector pensions finance their benefits with a more
aggressive funding strategy than private-sector plans. A funding
strategy, in simple terms, encompasses how much the employer contributes
to fund pension benefits and how those contributions are invested. An
aggressive funding strategy implies lower contributions invested in
higher risk assets, such as stocks, private equity, and hedge funds.
Public-sector pensions invest in assets with an expected return of
around 8 percent, which allows them to make lower contributions as long
as the returns come as expected. If pension investments fall in value,
then public employers—meaning, ultimately, taxpayers—must increase their
contributions to the pension funds. Because the risk is borne by
taxpayers, the average public worker is effectively guaranteed an 8
percent return.
This guarantee makes comparisons of pension plans difficult. As a
recent paper published by the Center for State and Local Government
Excellence noted, “contributions to private sector 401(k) plans and
public sector defined benefit plans are not comparable. The public
sector contribution guarantees a return of about 8 percent, whereas no
such guarantee exists for 401(k)s. Thus, the public sector contribution
under-states public sector compensation.”
[32] (Emphasis in original.)
In DC plans, which are predominant in the private sector, all the
market risk is borne by the worker. If a worker wants a guaranteed
benefit in retirement comparable to that received by a public-school
teacher, he must invest his account in guaranteed assets: U.S. Treasury
securities, yielding around 4 percent over 20 years.
These higher returns show themselves in higher benefits.
According to the Public Plans Database compiled by the Center for
Retirement Research at Boston College, the average teacher pension plan
required an employee contribution of 5.1 percent of wages and paid
benefits equal to 1.8 percent of final wages multiplied by the number of
years of service.
[33]
To illustrate, imagine a teacher who retired after 30 years of service
with an annual salary of $40,000. Her annual DB pension benefit would be
about $20,330.
[34]
Now consider what she might receive in a private 401(k) plan.
According to BLS data in Table 5, the average employer pension
contribution was about 5.4 percent of earnings. We assume that, like the
teacher pension, employees contribute 5.1 percent of their own pay.
Following the practice of the CBO, we assume a 4 percent interest rate
on 401(k) contributions to match the guaranteed nature of DB pension
benefits. At retirement, the total account balance would equal $96,131,
sufficient to purchase a lifetime inflation-indexed annuity paying
$4,450 per year.
[35]
Therefore, assuming equal employee contributions, the teacher can
expect to receive retirement benefits that are roughly 4.5 times higher
than she would receive from a typical private-sector pension. This does
not mean that every teacher receives such generous benefits. Since
pension benefits tend to accrue much faster near the end of a teaching
career, a teacher who changes jobs early in her career may even lose
money.
[36] On average, however, public-sector pensions are simply far more generous than private-sector plans.
Compound interest is said to be the most powerful force in the
universe. In the example above, the difference between a 4 percent
return and an 8 percent return, compounded over a working lifetime,
results in a much higher DC contribution rate needed to generate the
same benefits as a DB plan. A similar dynamic takes place with
private-sector DB pension plans, though private plans are not allowed to
discount their liabilities as aggressively as public-sector DB
pensions.
The Teachers Pension and Annuity Fund of New Jersey illustrates
the scale of the issue. The fund reports that the average new retiree in
2009 claimed benefits at age 61 and received an annual benefit of
around $46,500. To finance the accrual of these benefits, the fund
required total annual contributions equal to approximately 8 percent of
worker wages.
[37]
From this, one might infer that the implicit value of “pension
compensation” is 8 percent of wages. However, a private-sector DB
pension plan promising exactly the same benefits would need to set aside
a much larger amount, equal to almost 19 percent of worker pay. A DC
plan that sought to guarantee the same level of retirement benefits
would need to set aside an even greater amount, about 27 percent of
salaries. These disparate contribution rates are driven not by the
generosity of the plans’ benefits themselves, but simply by different
accounting rules.
Note that the question here is not whether state and local
pensions should assume a 4 percent riskless rate of return when deciding
how to value their pension obligations, although almost all economists
believe that they should.
[38]
When measuring the value of benefits paid as compensation to employees,
that debate is irrelevant. Even if state and local governments could
somehow generate higher pension benefits with less risk and lower costs
than the private sector, those higher benefits should not be excluded
from the tally of public-sector compensation. The savings from the
alleged government efficiency could just as well be devoted to other
government outlays or tax reduction rather than higher employee
compensation.
To properly compare pensions, we need to adjust for differences
in how pension contributions are calculated. The basic approach is to
convert employer DB contributions to the amount necessary to fund the
same benefits using a DC account.
[39]
This approach ensures that the same dollar amount of future retirement
benefits will be converted to the same level of pension compensation
today, regardless of whether benefits are paid from a public-sector DB
plan, a private-sector DB plan, or a DC plan.
Data from the Public Plans Database for 2009 shows that state and
local pensions that include teachers have an average cost of annual
benefit accruals (called the “normal cost” in pension parlance) of 12.4
percent of wages, when discounted at the 7.9 percent average interest
rate assumed by teacher pensions in the database. This normal cost is
split between employers (a 6.7 percent average contribution rate) and
employees (5.7 percent).
We first adjusted the 12.4 percent total normal cost to account
for differences in discount rates. Our principal source was a March 2011
analysis prepared for the Florida Retirement System (FRS) by the
actuarial firm Milliman, in which the normal costs of nine pension plans
under the FRS were calculated using a range of discount rates.
[40]
Using these figures, we calculated an adjustment factor which equaled
the normal cost of the average FRS plan using a 4 percent discount rate
divided by the normal cost assuming a 7.9 percent discount rate, the
average interest rate assumed by teacher pension plans.
[41]
The resulting quotient, 2.94, was multiplied by the reported 12.4
percent average normal cost for teacher pensions, resulting in a total
normal cost of 36.5 percent of payroll. This is the contribution to a DC
pension account, compounded at the government bond rate of return,
which would generate the same guaranteed pension benefit at retirement
as the typical teacher pension plan. From this we subtracted the average
employee contribution of 5.7 percent of payroll, for a total DB pension
compensation of 30.8 percent of wages.
[42]
In addition to DB pensions, teachers receive average employer
contributions to DC pension plans of 1.2 percent of wages, for a total
employer contribution toward retirement and savings of 32 percent. In
contrast, the typical private-sector retirement and savings component of
compensation equals only 6.2 percent of wages, even after adjusting
private-sector DB contributions in a similar manner to public-sector DB
plans above.
Why Do Teacher Advocates Claim that Pension Benefits Are Modest?
In Illinois, where public pension funding has been especially
controversial, the state’s Teachers’ Retirement System has pointed out
that the average teacher’s pension is “only” around $43,000 per year.
[43]
While significantly higher than a typical retiree’s pension, the number
is misleadingly low. It is not an average for teachers retiring today;
rather, it includes teachers who retired years or decades ago who,
because salaries were lower in the past, receive lower pensions than a
teacher retiring today. The 2010 actuarial report for the Teachers’
Retirement System of Illinois shows, for instance, that retirees between
the ages of 55 and 59 receive average annual benefits of $55,893.
[44]
Even that figure is deceptive because it includes benefits paid
to individuals who worked only part of their careers in public schools.
These retirees would receive lower average benefits, but they may have
retirement income drawn from another job. The 2010 Comprehensive Annual
Financial Report in Illinois shows that the average benefit paid to a
60-year-old retired teacher with 35 to 39 years of service—a full
working career—was $67,452.
[45]
Illinois teachers do not pay into, and do not receive, Social
Security benefits, meaning that comparisons to private-sector workers
should include both private pensions and Social Security benefits.
Advocates for teachers sometimes suggest that their inability to
participate in Social Security is a disadvantage. However, Social
Security pays middle-income and upper-income workers a below-market rate
of return, generating benefits around one-third lower than workers
could receive by investing in safe government bonds.
[46]
In contrast, public pensions pay employees more than three times the
total bond yield. By and large, teachers and other public employees
benefit from not participating in Social Security.
Retiree Health Benefits. BLS benefits data do not include
information on health coverage provided to retirees. Most public-sector
employees, including school teachers, become eligible to receive health
benefits in retirement. Economists Robert Clark and Melinda Morrill note
that retiree health insurance plans “cover virtually all full-time
public sector employees.”
[47]
Retiree health benefits are extremely valuable for early retiring
public employees, who otherwise would need to acquire health coverage in
the more expensive individual insurance market until they became
eligible for Medicare benefits at age 65.
In the private sector, retiree health coverage is less common and
less generous. Data from the Medical Expenditure Panel Survey indicate
that roughly 18 percent of employees work for employers who offer
retiree health coverage, but in many cases that coverage has been frozen
or restricted. A Kaiser Family Foundation survey reports that 29
percent of companies that report offering retiree health coverage do
not offer it to newly hired workers.
[48]
Other companies have frozen further accumulations of retiree health
benefits. Thus, significantly fewer than 18 percent actually are truly
eligible for such coverage. In addition, as the Pew Foundation has
noted, of the large private firms “that do offer benefits, they tend to
be considerably less generous than those offered by state governments.”
[49]
Many private employers have both tightened eligibility standards and
increased cost-sharing through new formulas or explicit global caps on
employer subsidies.
[50]
It is possible to estimate the value of retiree health coverage
on a system-by-system basis through disclosures required by the
Government Accounting Standards Board (GASB). According to GASB, retiree
health benefits—which are referred to as “Other Post Employment
Benefits” (OPEB)—“are a part of the compensation that employees earn
each year, even though these benefits are not received until after
employment has ended.”
[51]
These reports, required by GASB Rules 43 and 45, measure the value of
accruing retiree health benefits as a percentage of workers’ salaries,
just as we measure other benefits as a percentage of salaries in the
above sections. This value, known as the “normal cost” of accruing
benefits, “can be thought of as the cost for OPEB being earned by
employees in exchange for [their] services now.”
[52] It allows adjustments to BLS data to include the value of retiree health coverage.
The generosity of retiree health coverage varies significantly.
In some cases, retired teachers are merely allowed to buy into health
coverage provided to working-age teachers. This provision still counts
as a subsidy, since it allows retired teachers to purchase coverage at
the price offered to younger working-age teachers. Some employers
provide explicit subsidies toward health coverage, and in some cases all
costs are covered by employers, meaning retired teachers face very few
out-of-pocket costs.
Unfortunately, no national-level data on retiree health care
exist, meaning that we can illustrate benefits only on a case-by-case
basis. The situation is even more complicated for teachers, since
retiree health is sometimes provided by individual school districts even
when teachers participate in a statewide pension plan. Table 6 provides
a selection of available retiree health disclosures. The normal costs
for the sample averages to about 8 percent of wages, which we will use
as a representative value in our calculations.
[53]
However, it is worth reiterating that the generosity of retiree health
coverage varies from place to place. In analyzing any specific state,
city, or school district, a local value should be used.
The figures presented in Table 6 reflect the cost to the
government, not the full value to employees. Lacking retiree health
coverage, a retired public-sector employee would purchase coverage in
the individual market, where costs are on average 25 percent higher than
under group coverage.
[54]
Thus, a stated cost to employers of 8 percent of salaries for retiree
health coverage would have a value to employees of 10 percent of their
salaries.
Given the data problems outlined above, it is impossible to value
private-sector retiree health coverage precisely. The coverage value is
likely quite small, but we can develop a rough estimate by multiplying
the retiree health care value for public-school teachers (10 percent of
wages) by an assumed private coverage rate of 18 percent, then further
multiplying by 70 percent to account for employers who report offering
retiree health coverage but have frozen their plans to new hires or who
have halted accruals of new benefits. This produces a private-sector
value of 1.3 percent of wages.
Paid Leave. The BLS reports that public-school teachers
receive paid leave equal to 7 percent of salaries on average. For
private-sector workers in establishments of 100 employees or more, the
comparable value is 11.4 percent of pay, counterintuitively implying
much less paid leave for school teachers. Stranger still, BLS reports
that state and local employees on average receive paid leave equal to
12.5 percent of salaries, implying that public-school teachers receive
significantly less paid leave than other public employees, despite the
fact that school teachers work a significantly shorter average work
year.
The answer to this puzzle lies in a footnote to the BLS data, which states that:
The NCS [National Compensation Survey] uses contract hours for
teachers in determining the work schedule. Contracts usually specify the
length of the school day, the number of teaching and required
nonteaching days, and the amount of time, if any, teachers are required
to be in the school before and after school hours. These hours are used
to construct the work schedule. For example, it is common for teacher
contracts to specify that teachers will work 185 days per year. In these
cases, the daily work schedule would be the length of the school day
plus any time teachers are required to be in school before or after the
school day, and the weekly work schedule would be the daily schedule
multiplied by 5 days (Monday through Friday). The number of weeks would
be 37 (185 days ÷ 5 days per week). The time not worked during summer,
Christmas break, and spring break would be excluded from the work
schedule and would not be considered vacation or holiday.[55]
In other words, paid time off reported in BLS data reflects leave
only during a 37-week work year and excludes 15 weeks of leave during
summers and holidays. To account for shorter work years, we created an
additional BLS category called “Work Year Leave” which represents the
value of a shorter work year. The baseline value of Work Year Leave
equals 15 weeks divided by 52 weeks, or 28.8 percent of salary.
The BLS assumption of a 185-day work year seems reasonable.
[56]
In some cases, teachers must work both before and after the official
school year ends, and indeed some work years are longer than 185 days.
Washington, D.C., public schools have 180 student days but 195 total
teacher days; likewise, Chicago public schools have 193 teacher days.
For the purposes of sensitivity analysis, we also use a longer 195-day
work year in which work year leave equals 13 weeks divided by 52 weeks,
or 25 percent of salary.
Summary of Benefits. With modifications to retirement
income and paid leave, along with the inclusion of retiree health care, a
fuller view of non-wage compensation is presented in Table 7. The
changes are far from trivial. While the incomplete BLS data imply that
benefits for public-school teachers are worth about 41.2 percent of
their salaries, a more complete accounting puts the true value at 100.8
percent. Because of retiree health coverage and a small upward
adjustment to private-sector DB pensions, private-sector benefits rise
to 43.5 percent of salaries.
Even with the lower value for work year leave premised on a
195-day work year, total teacher benefits equal 97 percent of salaries.
While including the value of longer paid leave is important, reasonable
changes in its value do not result in large changes to measured
compensation. In fact, benefits equal 72 percent of salaries—two-thirds
larger than for comparable private-sector workers—even when work year
leave is excluded entirely.
The Teacher Compensation Premium
We began both the salary and benefits sections by describing how
the “standard” measures of teacher compensation are misleading and
incomplete. If accepted at face value, they would imply that
public-school teachers are highly undercompensated compared to similar
private-sector employees. The initial Current Population Survey
regression suggested that teachers are underpaid in wages by 19.3
percent, and the incomplete BLS data indicated that teachers receive
about the same benefits as a percentage of their salaries as
non-teachers in large firms—41.2 percent for teachers versus 41.3
percent for non-teachers.
However, once salaries and benefits are properly measured,
public-school-teacher compensation is significantly greater. We have
shown that public-school teachers are not likely to be underpaid in
wages, and they may even enjoy a small wage premium. As a baseline, we
assumed that public-school-teacher salaries are in line with market
rates—that is, there is neither a salary penalty nor a premium. With
that assumption, benefits become the decisive factor. Including
benefits, total compensation is 40 percent higher for public-school
teachers.
[57]
Benefits are so much higher for teachers that they dwarf the
impact of salaries. Even if we use the initial, flawed regression
estimate of a 19.3 percent salary penalty, teachers would still enjoy a
12.9 percent total compensation premium over similarly qualified
private-sector employees.
[58]
Better data and further research could produce improved wage and
benefit estimates, and total teacher compensation will vary from state
to state and district to district. Nevertheless, the
teacher-compensation premium measured here is not a function of any
single adjustment or assumption. No reasonable set of assumptions will
produce a teacher compensation penalty, and job security has yet to be
considered.
Job Security
Once hired, most public-school teachers face a short probationary
period when they may be fired relatively easily. After that, teachers
rarely lose their jobs. Anecdotes abound about teachers who stay
employed despite obvious misconduct or incompetence. While perhaps an
extreme case, New York City maintains the infamous “rubber rooms” where
teachers whom the district is attempting to fire are paid to do nothing,
as the seemingly endless appeals process grinds on.
[59]
During the recent recession and state and local budget crunch,
some public-school teachers were indeed laid off. Employment in
education by local government declined by 2.9 percent between September
2008 and July 2011, according to BLS data. Nevertheless, these job
losses occurred in a period in which overall private-sector employment
declined by 4.4 percent.
Relative to the workforce as a whole and to comparable
occupations, public-school teachers do appear to be unemployed rather
infrequently. Chart 1 shows the average unemployment rates between 2005
and 2010 for public and private teachers, along with several other
occupations that have been deemed “comparable” in terms of workload.
[60]
The unemployment rate for public-school teachers is 2 percentage points
lower than for private-school teachers, and 1.7 percentage points lower
than the non-teaching average. To the degree that formal educational
qualifications overstate the market value of public-school teachers,
these figures may understate the level of additional job security
enjoyed by teachers.
“
Much of the observed public–private difference in
unemployment rates is attributable to the ability of unions to promote
job security in the public sector,” wrote economist Steven G. Allen
in a National Bureau of Economic Research book on government employee unions.[61] Indeed, job
security is one of the express goals of teachers’ unions. Job security
is especially valuable to employees when it protects against losing a
job that already offers higher pay than teachers could otherwise
receive. In other words, the value of job security partly depends on the
wage and salary premium we found in prior sections.
The public-school system in Washington, D.C., now offers salary
increases and bonuses to the best-performing teachers in the city, those
in the top 7 percent of performance ratings. However, these pay
increases come with one catch—teachers who accept the money must give up
some of their job security. Remarkably, 20 percent of the
best
teachers declined this offer, even when they could have increased their
base salary by up to $44,000 per year, equal to a 50 percent salary
increase over the standard seniority-based pay scale.
[62] Clearly, teachers—like other employees—value job security.
[63]
Putting an overall monetary value on job security is not a
straightforward task, and academic research has demonstrated that the
impact of greater or lesser job security on wages will not be apparent
in survey data.
[64] However, we have developed a model that gives some conservative estimates.
[65]
We use a “certainty equivalent,” a guaranteed payment that individuals
would find equally attractive compared to a higher but uncertain
payment. For example, an individual might be willing to accept a
guaranteed payment of $45,000 in lieu of a 50 percent chance of winning
$100,000. The more risk averse the individual, the lower the certainty
equivalent relative to the expected value of the risky payment.
Similarly, we might ask how much salary reduction a
private-sector worker would accept to have the job security of a
public-school teacher. We begin with the standard assumption that the
utility or welfare generated by income will rise as income rises, but at
a decreasing rate. Moreover, the rate at which utility declines
increases with the risk aversion of the individual. A more risk-averse
individual will be willing to accept a lower guaranteed income because
the increase in expected utility by accepting a risky job is lower.
The theory may be more understandable with a graphical
illustration that appears in some form in most economics textbooks.
Figure 1 shows a stylized utility function, where the curved line shows
the relationship between income (on the horizontal axis) and utility (on
the vertical axis). Higher income generates more happiness, but at an
ever-declining rate. Point A represents the income and utility if the
individual keeps his job throughout the year, while Point B represents
the income and utility should he lose his job. Point C, which lies
between the two, represents the individual’s expected utility from his
employment—that is, the probability-weighted average of the utilities at
Points A and B.
Point D lies to the left of Point C and represents the
certainty-equivalent income—that is, the compensation with zero
probability of discharge that would generate the same utility as the
non-guaranteed compensation the individual currently receives. Put
another way, the difference between points C and D reflects the pay
increase an individual would demand to shift to a job with lesser job
security.
Calibrating the model with a difference of 1.7 percentage points
in the unemployment rate between public-school teachers and comparable
private-sector occupations yields a baseline value of job security equal
to an additional 1 percent of pay.
[66]
A variety of real world examples, including the Washington, D.C.,
teacher bonuses cited above, indicate that in practice employees value
their job security more highly. This may in part be due to psychological
costs to job loss, such as the loss of friends made on the job, or the
financial costs associated with a job search. These are not considered
in our calculations.
In our model, job security becomes even more valuable when it
protects a position that pays a wage and benefit premium relative to
alternate employment. We have shown in earlier sections that
public-school teachers receive wage and benefit compensation
approximately 40 percent higher than they would likely receive in
alternate private-sector employment. Job security protects this premium.
Assuming that a teacher who becomes unemployed finds a new job at a
lower, private-sector level of pay yields a job security value of 8.6
percent of compensation. This is essentially the value of lost
compensation due to a spell of unemployment added to the difference in
compensation between teaching and working at a new, lower-paying job. As
noted above, we have not attempted to quantify the psychological or
transitional costs of unemployment, which likely make job security even
more valuable.
Since greater or lesser job security should generate a
“compensating wage differential,” we can apply the value of job security
to the wage and benefit premiums already calculated. If the wage and
benefit premium totals 40 percent, including a job security premium of
8.6 percent increases total compensation to 52 percent above market
rates.
[67]
How Much Should Teachers Be Paid?
Because of the large compensation premium that public-school
teachers enjoy, teachers are unlikely to receive better offers
elsewhere. Policymakers should evaluate teacher compensation packages in
light of this fact, particularly given the serious state and local
budgetary shortfalls across the country. Reducing teacher compensation,
especially overly generous benefits, could help to balance budgets today
and to free up resources in the future. These resources could be put
toward classroom materials and school building amenities, spending
priorities outside education, tax relief, or all of the above.
More deep-seated reforms of teacher compensation should focus on improving teacher quality. We have shown that
existing
teachers are paid above market rates, but recruiting highly effective
teachers into the profession may require present levels of compensation
or perhaps even higher levels. The key is restructuring the pay system
in a way that attracts and retains the most effective teachers.
Unfortunately, most union contracts specify that teachers be paid based
on their level of education and their experience rather than their
effectiveness. As we have discussed, years of education have little
impact on teacher quality, and experience ceases to matter after just a
few years on the job. High levels of job security ensure that even
poor-performing teachers continue to receive regular raises each year,
instead of facing competition from more effective candidates.
Furthermore, union contracts are not easily adaptable to changes
in the supply and demand for particular kinds of teachers—gym teachers
are often on the same pay scale as math teachers, even when there is a
shortage of the latter. Although our analysis shows that the
average
elementary or secondary teacher is paid substantially more than market
levels, data limitations prevent us from being more specific. It could
be that calculus teachers are underpaid, while music teachers are
overpaid, or
vice versa. While union contracts help secure
overcompensation for the average teacher, they may still leave the most
valuable teachers underpaid.
Much greater flexibility is needed. School administrators need to
be able to hire and fire teachers as needed, basing personnel decisions
on rigorous value-added evaluations and setting pay based on prevailing
market rates. Doing so would help attract better applicants who are
willing to be judged by their performance. This arrangement, in which
employers are empowered to reward their best workers and to terminate
their worst, is standard in the private sector.
Under a market-driven pay-for-performance system, teacher
compensation will begin to move toward levels matching those of
similarly skilled private-sector employees. Whether fundamental reforms
of this kind can be implemented within the public-school system is
questionable, which makes flexible school models—such as expanded
charter school options or vouchers—attractive options that policymakers
should consider. Any reform that allows schools to operate with a less
onerous regulatory burden could potentially improve the
teacher-compensation system.
Conclusion
After overcoming several methodological challenges to evaluating
teacher compensation, it is evident that existing public-school teachers
receive wages that are at least as high as comparably skilled workers,
while their benefits and job security exceed what they could earn in the
private sector. Overall, public-school-teacher compensation exceeds
private levels by approximately 52 percent, for a total of more than
$120 billion annually in excessive labor costs.[68]
State and local governments seeking to balance their budgets in
difficult times should take a close look at teacher compensation, which
is considerably higher than necessary to retain the existing teacher
workforce. More fundamental reform of teacher compensation would scrap
the existing rewards for education and experience—and instead pay market
rates to teachers who are measurably effective.
——
Jason Richwine, Ph.D. is Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation, and Andrew G. Biggs, Ph.D. is a Resident Scholar at the American Enterprise Institute.
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