The critical insight is that by basing hiring decisions and linking pay closely to local labor market conditions private schools have kept their costs low. Compensation in the government and private sector works in very different ways: teachers in the government sector are paid on the basis of a pay-scale that rewards experience and training, but does not respond to local labor market conditions. In contrast, the private sector values teacher education, but also compensates teachers according to their other available opportunities in the labor market. With fewer occupational opportunities women are restricted to the village in their job-search so they are paid less.<sup>22</sup> Bringing a teacher from outside the village means that the school has to pay more for travel, so non-local teachers are paid more. It is also interesting to speculate on why the market does not value teacher-training. In related work we show that there is no relationship between teacher training and either teacher competency or their children’s academic performance. A recent report confirms that training programs are in crisis and add little to the teachers’ efficacy (Ali Institute 2005). A striking, but perhaps valid, hypothesis is that the market does not value training because training does not add any value. There are thus two steps that account for the success of the private educational sector in Pakistan:

- Hire teachers whose characteristics do not command high salaries in the labor market. Private school teachers are overwhelmingly women and are less educated than in the public sector; if private school teachers had the same characteristics as those in the public sector, the market would reward them with a 63 percent increase in salaries (instead of the 518 percent that teachers in public schools currently enjoy).

- React optimally to local labor market conditions. Women and local teachers are paid less in the private sector, but not in the public sector.

# <u>Where have private schools located?</u>

The very factors that explain the success of private schools also embed their potential limitations. Private schools need a large number of children in the catchment population and they need a pool of potential teachers with a certain demographic profile (local women with secondary education). A matched database that combines village characteristics and private school existence allows us to examine village-level variables that increase the likelihood of a private school.

> 22 The data from the LEAPS survey is corroborated by data from the wider labor market beyond that of teachers. Wage differences between men and women in Pakistan are staggering. Analysis based on household surveys show that men receive four times as much as women when they have primary education and two times as much when they have secondary education (World Bank 2005). That educated women cost less is in large part due to different constraints on labor mobility of men and women. While men can (and often do) travel outside their residential areas to pursue employment opportunities, cultural constraints and issues of safety restrict work options for women to the settlement that they live in (World Bank 2005).

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