COMPETITION AND TEACHER PAY

I. INTRODUCTION Recent policy initiatives are increasing the degree of competition in primary and secondary education. The number of charter schools is growing at an astounding rate. Vouchers are available to eligible children in Florida, Utah, and a number of cities including Washington, D.C. (Kafer 2005). School districts throughout the country are experimenting with subcontracting campuses to private firms. The increasing popularity of policies that foster school competition dovetails with a burgeoning literature on the effects of educational competition. Researchers have examined the effects of educational competition on academic outcomes, average public school spending, and school district efficiency. (l) This research has largely ignored the effects of increased competition on teacher pay. Yet, reductions in the market power of school districts could have a significant impact on teacher earnings. If school districts behave as typical monopsonists or oligopsonists when hiring, then a lack of competition suppresses wages, and policies that are designed to enhance competition among schools could lead to higher teacher salaries, ceteris paribus. (2) Alternatively, if a school district's position as a monopolistic provider of education services generates economic rents, there are few parties to whom those rents might be dissipated besides school district personnel. If teachers have been able to appropriate a share of the economic rents generated by the market power of school districts, then increased competition could lower teacher salaries. (3) This study uses individual data on more than 335,000 teachers from 670 Texas school districts to explore the empirical relationship between competition and teacher pay. The analysis suggests that a lack of competition in the public school system has led to significant market power for Texas school districts, resulting in lower wages for most Texas teachers but higher wages for teachers in relatively concentrated markets. II. THEORETICAL MODELS The elementary and secondary education industry in the United States is often highly concentrated. More than 30% of U.S. educational markets are served by a single public school district, and there are many more that are served by only a handful of educational providers. (4) The concentrated nature of education markets suggests two alternative models of teacher wage determination: the first is a classic oligopsony model and the second is a rent-sharing model. An Oligopsony Model of Teacher Wage Determination Boal and Ransom (1997) lay out a classic Cournot model of oligopsony that can be directly applied to the educational labor market. (5) Firms (school districts) choose an employment level ([L.sub.i]) to maximize the firm's revenue function ([R.sub.i]), given the employment level of all other firms in the market ([L.sub.i]*): (1) [R.sub.i]([L.sub.i]) - w([L.sub.i] + [L.sub.i]. )[L.sub.i]. The market wage is determined by the total employment of all firms. The first-order condition for each firm implies that it chooses [L.sub.i] such that: (2) ([MRP.sub.i] - w)/w = ([L.sub.i]/L)[[epsilon].sup.-1]. In this model, the gap between the marginal revenue product of firm i ([MRP.sub.i]) and the wage rate (w) depends on the firm's employment share ([L.sub.i]/L) and the inverse wage elasticity of labor supply for the market ([[epsilon].sup.-1]). (6) Assuming that firms have different marginal revenue products, the employment-weighted average across all the firms in the market is: (3) [summation over (i)] ([MRP.sub.i] - w)[L.sub.i]/wL = [[epsilon].sup.-1] [summation over (i)] [([L.sub.i]/L).sup.2]. The last term on the right-hand side is the familiar Herfindahl index of market concentration. Thus, wages are a function of market concentration (H), the (employment weighted) average marginal revenue profit per worker ([bar. …