NBER WORKING PAPER SERIES
THE EFFECTS OF SCHOOL SPENDING ON EDUCATIONAL AND ECONOMIC OUTCOMES: EVIDENCE FROM SCHOOL FINANCE REFORMS
C. Kirabo Jackson
Rucker C. Johnson
Claudia Persico
Working Paper 20847
/papers/w20847
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
January 2015
We wish to thank the PSID staff for access to the confidential restricted-use PSID geocode data, and confidential data provided by the National Center for Education Statistics, US Department of Education. This research was supported by research grants received from the National Science Foundation under Award Number 1324778 (Jackson), and from the Russell Sage Foundation (Johnson). We are grateful for helpful comments received from Larry Katz, David Card, Caroline Hoxby, several anonymous referees, and seminar participants at UC-Berkeley, Harvard University, NBER Summer Institute, Institute for Research on Poverty Summer Workshop, Mannheim University, and Stockholm University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
© 2015 by C. Kirabo Jackson, Rucker C. Johnson, and Claudia Persico. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided
The Effects of School Spending on Educational and Economic Outcomes: Evidence from School Finance Reforms
C. Kirabo Jackson, Rucker C. Johnson, and Claudia Persico
NBER Working Paper No. 20847
January 2015
JEL No. H0,I20,I24,J00,J1
ABSTRACT
Since Coleman (1966), many have questioned whether school spending affects student outcomes. The school finance reforms that began in the early 1970s and accelerated in the 1980s caused some of the most dramatic changes in the structure of K–12 education spending in US history. To study the effect of these school-finance-reform-induced changes in school spending on long-run adult outcomes, we link school spending and school finance reform data to detailed, nationally-representative data on children born between 1955 and 1985 and followed through 2011. We use the timing of the passage of court-mandated reforms, and their associated type of funding formula change, as an exogenous shifter of school spending and we compare the adult outcomes of cohorts that were differentially exposed to school finance reforms, depending on place and year of birth. Event-study and instrumental variable m
odels reveal that a 10 percent increase in per-pupil spending each year for all twelve years of public school leads to 0.27 more completed years of education, 7.25 percent higher wages, and a 3.67 percentage-point reduction in the annual incidence of adult poverty; effects are much more pronounced for children from low-income families. Exogenous spending increases were associated with sizable improvements in measured school quality, including reductions in student-to-teacher ratios, increases in teacher salaries, and longer school years.
C. Kirabo Jackson
Northwestern University
School of Education and Social Policy 2040 Sheridan Road
Evanston, IL 60208
and NBER
kirabo-jackson@northwestern.edu Rucker C. Johnson
Goldman School of Public Policy University of California, Berkeley 2607 Hearst Avenue
Berkeley, CA 94720-7320
and NBER
ruckerj@berkeley.edu Claudia Persico
Northwestern University
Institute for Policy Research
2040 Sheridan Road
Evanston, IL 60208
hwestern.edu
I.I NTRODUCTION
US K-12 public schools vary significantly in quality, as has been documented in a broad range of studies.1These differences are often cited as a major contributor to achievement gaps by parental socioeconomic status and race/ethnicity. Moreover, education is one of the largest single components
of government spending, amassing 7.3% of GDP across federal, state, and local expenditures (OECD 2013 report). Accordingly, understanding the role (if any) of school spending, and the roles of school resource inputs, as determinants of school quality and student outcomes are of first-order significance.In this paper we present fresh evidence on the enduring question of whether, how, and why school spending affects student outcomes.The objectives of this paper are threefold: we aim to (1) isolate exogenous changes in district per-pupil spending that are unrelated to unobserved determinants of student outcomes, (2) document the relationship between exogenous changes in school spending and the adult outcomes of affected children, and (3) shed light on underlying mechanisms by documenting the changes in observable school inputs through which any education spending effects might emerge.
Since Coleman (1966), researchers have questioned whether increased school spending actually improves student outcomes. The report—the first national, large-scale quantitative analysis of the role of schools—employed data from a cross-section of students in 1965-66 and showed that variation in school resources, as measured by per-pupil spending and student-to-teacher ratios, was unrelated to variation in student achievement on standardized tests. Since then, how school spending affects student academic performance has been extensively studied. Hanushek (1986)reviews this recent literature and his conclusions echo those of Coleman (1966).
documented evidenceGiven that adequate school funding is a necessary condition for the provision of a quality education, the lack of an observed positive relationship between school spending and student outcomes is surprising.2However, there are two key attributes of previous national studies that might limit the ability to draw firm conclusions from their results.The first limitation is that test scores are imperfect measures of learning and may be weakly linked to adult earnings and success in life. Indeed, recent studies have documented that effects on long-run outcomes may go
1For example, adult earnings has been found to vary significantly by high school attended even after controlling for childhood family background characteristics (Betts, 1995; Grogger, 1996).
2Potential explanations that have been put forth to explain why there is no link found between school spending and student outcomes for cohorts educated since the 1950s include: (a) diminished returns to school spending as levels of spending have increased over time (relative to earlier cohorts); (b) deterioration of the quality of the teaching workforce; (c) increased waste and ineffective allocation of resources to school inputs(see Betts, 1996).
undetected by test scores (e.g. Heckman, Pinto, & Savelyev, 2014; Deming 2009; Jackson, 2012; Chetty, Friedman and Rockoff, 2013; Ludwig and Miller, 2007).We address the limitations of focusing o
n test scores as our main outcome by focusing on the effect of school spending on long-run outcomes such as educational attainment and earnings.
The second limitation of previous work is that most national studies correlate actualized changes in school spending with changes in student outcomes.This is unlikely to yield real causal relationships because many of the changes to how schools have been funded since the 1960s would lead to biases that weaken the observed association between changes in school resources and student outcomes. For example, with the passage of the Elementary and Secondary Education Act of 1965, school districts with a high percentage of low-income students receive additional funding, and the regulations give priority to low-achieving schools. Such policies likely generate a mechanical negative relationship between school spending and student achievement that would negatively bias the observed relationship between school spending and student outcomes.3 Additionally, because localities face tradeoffs when allocating finite resources,positive effects of endogenous increases in school spending could be offset by reductions in other kinds of potentially productive spending. We overcome the biases inherent in relying on potentially endogenous observational changes in school resources by documenting the relationship between exogenous quasi-experimental shocks to school spending and long run adult outcomes.
As documented in Murray,Evans,and Schwab (1998), Hoxby (2001), Card and Payne (2002) and Jackson, Johnson, and Persico (2014a), the school finance reforms (SFRs) that began in the early 1970s and accelerated in the 1980s caused some of the most dramatic changes in the structure of K–12 education spending in US history.To isolate plausibly exogenous changes in school resources we investigate the effects of changes in per-pupil spending, due only to the passage of court-mandated school finance reforms, on long-run educational and economic outcomes. We link detailed data on school reforms and school spending to longitudinal data on a nationally-representative sample of over 15,000 children born between 1955 and 1985 and followed into adulthood in the Panel Study of Income Dynamics (PSID). These birth cohorts straddle the period in which SFR implementation accelerated, and thus were differentially exposed
3Similarly, the wave of school finance reforms that started in 1972 changed how public schools were funded in 45 states (Jackson, Johnson, and Persico 2014a). School finance reform-induced changes in school spending are largely comprised of additional school funding that is allocated by compensatory formulas, whereby school resources are disproportionately targeted at lower-income districts and least-able students (lower-performing students).
to reform-induced changes in school spending depending on place and year of birth.
We use both the timing of passage of court-mandated reforms and the type of funding formula introduced by that reform as exogenous shifters of school spending. Specifically, for each district we predict the spending change that the district would experience after the passage of court-mandated school finance reform based on the experiences of similar districts facing similar reforms in different states. We then see if “treated” cohorts (those young enough to have been in school during or after the reforms were passed) have better outcomes relative to “untreated” cohorts (children who were too old to be affected by reforms at the time of passage) in districts predicted (based on the experiences of similar districts in other states) to experience larger reform-induced spending increases. Correlating outcomes with only the predicted reform-induced variation in spending, rather than all actualized spending, removes the confounding influence of unobserved factors that may both determine actualized school spending and also affect student outcomes.
In related work, Card and Payne (2002) find that court-mandated SFRs reduce SAT-score gaps between low-and high-income students. However, Hoxby (2001) finds mixed evidence on the effect of increased spending due to SFRs on high-school dropout rates, and Downes and Figlio (1998) find no significant changes in the distribution of test scores.4Looking at individual states, Guryan (2001), Papke (2005) and Roy (2011) find that reforms improved test scores in low-income districts in Massac
husetts and Michigan.5Overall,the evidence on the effects of SFRs on academic outcomes is mixed,and the effects on long run economic outcomes is unknown.
Our event-study and instrumental variables models reveal that increased per-pupil spending, induced by SFRs, increased the high school graduation rates and educational attainment for low-income children, and thereby narrowed adult socioeconomic attainment differences between those raised in low-and high-income families.While we find small effects for children from affluent families, for low-income children, a 10percent increase in per-pupil spending each year for all 12 years of public school is associated with 0.43additional years of completed education, 9.5percent higher earnings, and a 6.8percentage-point reduction in the annual incidence of adult poverty. In fact, a 25 percent increase over all school age years is sufficiently large to eliminate the attainment gaps between children from low-and high-income families.We
4However, Downes and Figlio (1998)find that plans that impose tax or expenditure limits on local governments reduce overall student performance on standardized tests.
5In a recent working paper, Hyman (2014) analyzes the same Michigan reform and finds that it increased college going for non-poor children in low income districts.

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