# **1 Introduction**

How to recruit and reward teachers is one of the most contentious questions in education today. Some believe that the best way to improve the quality of teachers is to hire the brightest college graduates by offering high salaries.<sup>1</sup> Others argue that public school teachers are overpaid, and with increasing fiscal stress in many countries, teacher salaries are a natural target for retrenchment (Biggs and Richwine, 2011). Understanding the characteristics that make an individual a good teacher and whether the same characteristics are also highly rewarded by the outside labor market is key to this debate. If, for instance, the brightest college graduates can earn high salaries in other professions but are not better teachers, they may be the wrong population to target for recruitment. This question has received considerable attention in the United States, but sparse data has impeded similar investigations in low income countries.

We examine both the question of what makes a good teacher and the link between wages and productivity using a unique dataset that we collected between 2003 and 2007 from the province of Punjab, Pakistan as part of the Learning and Educational Achievement in Pakistan Schools or LEAPS project. These data contain test-score information on matched teacher-child pairs, permitting teacher value-added (TVA) estimation for 1,533 public school teachers and 975 private school teachers from 574 public and 345 private primary schools, observed mainly in grades 3, 4 and 5. These data allow us to estimate the association between teacher characteristics and teacher wages in both sectors. We are also able to combine these data with an unexpected regime change at the beginning of the data collection period, which led all new hires in the public sector to receive temporary contracts with lower wages. By contrasting the TVA of teachers hired under the old and the new regime, we assess whether the change adversely affected TVA, either for those hired immediately after the change or those hired several years later.

The main results are as follows. First, teachers matter, and the variation in teacher quality is greater when we include both the public and private sectors. A 1 standard deviation (sd) increase in public sector TVA leads to a 0.16sd increase in mean student test scores, and a 1sd increase in overall TVA leads to a 0.21sd increase in test scores. This implies that moving a student from the 5th to the 95th percentile of the public sector TVA distribution increases test scores by 0.54sd, which can be compared to an average annual test score gain of 0.41sd in our sample. Although observed teacher characteristics explain no more than 5% of the variation in TVA – a common result in the literature on teacher effectiveness – we do find that the first two years of teaching experience are associated with a significant increase in TVA. Since we are able to examine experience

> 1An influential report by McKinsey, for instance, discussed the need to hire top graduates (Auguste et al., 2010): “Given the real and perceived gaps between teachers’ compensation and that of other careers open to top students, drawing the majority of new teachers from among top-third students would require substantial increases in compensation” (p. 7).

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