Spending in education does matter.

While economic intuition points at the relevance of economic resources to improve school performance, the evidence on the impact of school spending on outcomes is far from being set. Rather, some early studies that became seminal references on the subject, notably the well-known Coleman report (1996)[1], pointed that spending on education was not necessarily associated with better students outcomes.

However, a main concern with most early studies is the endogeneity of school spending. Increases on school resources tend to be directed towards schools with less resources, which are usually attended by low-income students. Low-income students in turn tend to perform worse in school and have lower income as adults. As a consequence, the relationship between school resources and outcomes in the previous studies tends to be biased downwards.

A recent study tries to provide new evidence on the casual link between spending on education and outcomes, while trying to properly address the endogeneity problem[2]. To do this, the authors analyze exogenous changes in the funding to public school in the United States over a long period. They focus on the school finance reforms that took place in the US since the 70s that concern public education from kindergarten to grade 12 (commonly known as K-12 education). These reforms changed the spending formulas in order to achieve a more equal distribution of spending across school districts but there was significant variation in the new formulas between the districts. To deal with endogeneity, the identification strategy exploits the timing of the court-mandated reform and the different financing formulas introduced.

The different formulas were associated with significance difference in the increase of spending. Thus, the authors estimate the impact of the predicted increase in per-pupil spending by comparing individuals with different time of exposure to the reform (according to their time of birth) and different degree of per-pupil spending increase (according to their place of birth). To put it simply, the strategy relies on comparing individuals who went to school when or after the reform was passed with students who were too old to profited from it in districts with larger predicted increase on per-pupil spending with respect to those same groups of individuals in districts with lower increases on spending.

The impact is analyzed on two long-run adult outcomes: educational attainment and wages among adult between 25 and 45 years old. Results show that the increase in school spending did have a positive impact on educational attainment and earnings among the cohorts exposed to the reforms. Precisely, the study finds that a 10% increase in per-student spending each year over all years of public school leads to an average increase of a slightly more than a quarter of a year of schooling. It also leads to an increase of 7% in wages and a reduction of around 4 percentage points in poverty. These impacts are much higher for low-income individuals. The study further explores the potential channels that could mediate the increase in adult outcomes. Results show that the increase in spending lead to an increase in school quality, measured by proxies such as student-to-teacher ratio, teacher salaries and length of the school year.

The impact on educational attainment and adult earnings is mainly driven by changes among children belonging to low-income families. The authors estimate that a 25% increase in spending over all school age years would completely eliminate the attainment gap between children from low and high-income families. This result highlights the relevance of investing in public school funding to reduce achievement gaps among children with different socioeconomic background.

[1] James S. Coleman (1996). Equality of Educational Opportunity (COLEMAN) Study (EEOS), 1966. ICPSR06389-v3. Ann Arbor, MI: Inter-university Consortium for Political and Social Research.

[2] Jackson, C. Kirabo, Johnson, Rucker C. and Claudia Persico (2015). NBER Working Paper 20847.

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