School Finance Reform: is increased school spending across the board a prerequisite for improving pupil outcomes?

The question about whether increased school resources have positive effects on children’s attainment is one of the most debated in both education policy circles and the academic community. Yet it is a very difficult question to study. Simple correlations between resources and attainment are likely to be biased, but the direction of the bias is not clear-cut. For example, if more motivated parents, with more high-achieving children, seek out school districts where spending is higher, it is likely that there is a ‘false’ positive association between resources and attainment. However, in most countries, education spending tends to be compensatory in a way that ensures that pupils from lower socio-economic background, who tend to have the lower attainment, are given more resources. And if lower-achieving children get more resources, we should not be surprised by a lack of correlation between resources and attainment – or even by a negative correlation between the two variables. Rudimentary analyses of their relationship are therefore unable to tell us much at all about whether resources ‘matter’. Instead, we need much better methodology to separate causation from correlation. In a new study, economists C. Kirabo Jackson, Rucker Johnson, and Claudia Persico provide a rigorous analysis of whether resources matter. The authors analyse reforms across American states, implemented at different times, which attempted to produce a more equitable resource allocation between school districts. This means that some districts increased the amount of school funding much faster than others.* The authors analyse a sample of pupils across America who went to school during the period 1967-2010 in order to figure out how they were affected by certain court-ordered reforms that changed the resource allocation across districts. By doing so, they can pick up the causal effect of changes in spending on pupil outcomes. The results suggest that a 20% increase in resources during pupils’ entire schooling career increases the likelihood that pupils graduate from upper-secondary school by 17% and the number of years of total schooling by 6%. At the same time, there are no positive effects on average salaries, family income, or the probability that pupils fall into poverty later in life. This suggests that the resource expansions that occurred because of court-ordered reforms were not cost effective on average. But the impact differs between poor and non-poor pupils. In fact, there is no effect at all among non-poor pupils, either on economic outcomes or the academic outcomes described above. Instead, there are signs that non-poor pupils educated during periods when education resources are higher have lower salaries and family incomes, although this effect is not statistically significant on average. Since the negative impact grows over time, it is nevertheless possible that the average effect hides a statistically significant impact in the long term. Among non-poor pupils, therefore, more education resources appear to be meaningless in a long-term perspective – and they may even be harmful. This is a remarkable result since the authors analyse effects of increased spending during pupils’ entire schooling career. Yet the authors find positive effect on long-term economic outcomes among poor pupils. The results indicate that a 20% increase in resources generates a 29% higher probability of graduating from upper-secondary school and a 7% increase in the number of years of schooling among poor pupils. Meanwhile, the same resource increase generates a 24.6% increase in poor pupils’ salaries, a 52.2% increase in their family incomes, and a 19.7 percentage point decrease in the probability that they fall into poverty later in life. These are important and economically meaningful effects. As the authors note, however, the level of education resources was about 50% of what it is today, indicating that much higher resource increases would be required to achieve the same effects today. However, it is unclear why the positive effects on poor pupils’ economic outcomes appear. We know from other research, discussed in a previous issue of this research digest, that higher resources among poor pupils may increase grade inflation. Since upper-secondary school graduation in America has historically depended on grades from teacher assessment, without any external moderation, it is possible that the spending increases caused grade inflation – which in turn may have given advantages to the poor pupils who were exposed to them. The positive economic effects among poor pupils could then result from the fact that they graduated from upper-secondary school as a result of grade inflation – and thus be produced by a so-called ‘signalling effect’ rather than a ‘human capital effect’. A signalling effect may occur if employers assume that pupils who graduate from upper-secondary school (or have higher grades than other pupils) perform better than those who do not, and thus award the former with higher salaries even if they do not necessarily perform better. On the other hand, a human capital effect occurs if pupils who graduate from upper-secondary school (or have higher grades than other pupils) indeed do perform better than those who do not, which should be reflected in salary differences. The fact that there are no average effects on salaries or incomes supports the thesis that the results can be explained by signalling effects rather than human capital effects. The signs of negative effects on salaries and incomes among non-poor pupils support it too. Overall, therefore, the reforms appear to have produced a zero-sum game in terms of pupils’ long-term economic outcomes. Of course, the signalling impact is important for the pupils who benefit from it, but by definition it also means that other pupils lose out. Finally, of course, even if human capital effects were to explain the positive effects among poor pupils, it would be a waste of money to increase school spending through universal, un-targeted reforms. Instead, the results should be interpreted as evidence that resources may matter among poor pupils under certain circumstances, but that other pupils may have to pay for it. So the policy lesson is clear: do not expect that universal increases in school spending are a cost-effective way to improve pupil outcomes in general. _____ *Since the level of school spending in America for many years has depended on taxes raised from properties, a peculiar feature of its education system is that pupils from higher socio-economic backgrounds traditionally have received more education resources than those from lower socio-economic backgrounds. Gabriel H. Sahlgren This comment piece first appeared as the Editor's Pick in the CMRE Research Digest (July 2014). The piece reviews a paper by economists C. Kirabo Jackson, Rucker Johnson, and Claudia Persico, 'The Effects of School Finance Reforms on the Distribution of Spending, Academic Achievement, and Adult Outcomes' - NBER Working Paper No. 20118. The original version of the paper may be downloaded here. You can download free copies of back issues of the CMRE Monthly Research Digest here. to subscribe.