A theoretical general equilibrium analysis of local teacher labor markets under different compensation regimes

Abstract

Bargaining power of teacher unions over teacher wages has been either reduced or eliminated by several states in U.S. since 2011. This caused public school districts to move away from single salary schedules (fixed compensation regime) and adapt a flexible compensation regime at which teacher wage rises with quality (value added). In this paper, using a fully tractable general equilibrium model of local teacher labor markets, we theoretically analyze the effect of different compensation regimes on teacher efforts and average teacher quality in a district. In our model, teachers, heterogeneous in exogenously set quality, endogenously sort across two districts and also choose teaching efforts. Districts differ by endogenous teacher wages and exogenous revenues. The marginal disutility of effort for a teacher is different across the districts. Teacher labor markets clear in each district and teacher wages are determined. We solve for the unique equilibrium under each compensation regime and theoretically show that low(high) quality teachers exert the highest effort under fixed(flexible) compensation regime and exert the lowest effort under flexible(fixed) compensation regime. Also, we show that average teacher quality is highest in each district under flexible compensation regime and lowest in each district under fixed compensation regime. Our findings are consistent with several empirical studies.