Working Paper: NBER ID: w24883
Authors: Kevin Lang; Maria Dolores Palacios
Abstract: Among college graduates, teachers have both low average AFQT and high average risk aversion, perhaps because the compression of earnings within teaching attracts relatively risk-averse individuals. Using a dynamic optimization model with unobserved heterogeneity, we show that were it possible to make teacher compensation mimic the return to skills and riskiness of the non-teaching sector, overall compensation in teaching would increase. Moreover, this would make many current teachers substantially worse off, making reform challenging. Importantly, our conclusions are sensitive to the degree of heterogeneity for which we allow. Since even a model with no unobserved heterogeneity fits well within sample, one could easily conclude that allowing for two or three types fits the data adequately. Formal methods reject this conclusion. The BIC favors seven types. Ranking models using cross-validation, nine types is better although the improvements of going from six to seven, from seven to eight and from eight to nine types are noticeably smaller than those from adding an additional type to a lower base.
Keywords: teacher compensation; occupational choice; risk aversion; dynamic optimization
JEL Codes: C52; I20; J2; J3; J45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| teacher compensation structures (J33) | overall compensation in teaching (M52) |
| teacher compensation structures (J33) | current teachers' well-being (I39) |
| performance-based pay (J33) | attraction of more productive individuals to teaching (J24) |
| current salary scales (J31) | discouragement of high-ability individuals from entering teaching (A21) |
| ability compensation (J33) | shift of more skilled individuals into teaching (J24) |
| shift of more skilled individuals into teaching (J24) | average AFQT scores of teachers (J45) |
| teacher compensation structures (J33) | utility losses for current teachers (A29) |