spending and performance outliers – Mexico and Greece. It is impossible to believe that the only difference between these two countries and the remainder is just their spending on schools. For example, there are four countries spending less than Greece but with their students significantly outperforming Greek students. Omitting Mexico and Greece, there is no relationship whatsoever between expenditure and performance (see the lighter regression line in Figure 6.1). On average, countries with high educational expenditure perform at the same level as countries with low educational expenditure.

This picture is only the most recent demonstration that spending alone is not associated with student performance. This picture can be found with previous international student tests like TIMSS.<sup>65</sup> As discussed previously, Hanushek and Kimko (2000) take into account other factors including parental education in their investigation of earlier test score differences but find no relationship with expenditure per pupil, expenditure as a fraction of GDP, or pupil-teacher ratios. Similarly, even when numerous family-background and school features are considered in cross-country student-level microeconometric regressions, these results hold.<sup>66</sup> Nor does the picture change when we look at changes in expenditure over time within individual countries. As depicted in Figure 6.2, an in-depth study of changes over time in educational expenditure and student performance has shown that educational expenditure per student has increased substantially in real terms in all considered OECD countries between the early 1970s and the mid-1990s.<sup>67</sup> Yet, comparing scores in 1970 and 1994/95 suggests that no substantial average performance improvements for students have occurred in these countries.<sup>68</sup> 65 See, for example, Wößmann (2002), Section 3.2.

66 See Wößmann (2001); Wößmann (2003a), pp. 117-170; Fuchs and Wößmann (forthcoming).

67 For details of the analysis, see Gundlach, Wößmann, and Gmelin (2001), pp. C135-C147; and Wößmann (2002), Section 3.3. Tests in the two time periods are linked using U.S. performance data. Increases in educational expenditure are adjusted not only for average inflation, but also for the so-called “Baumol effect” of increasing costs in service sectors without productivity increases. Three different approaches of calculating price deflator for the schooling sector that account for this effect are averaged in the depiction of Figure 6.2. Not adjusting for this and using U.S. national data, real current expenditure per student in the United States increased by 2.4 percent each year on average over 1970-2003.

68 One potential explanation for this bivariate pattern might of course be that students’ family backgrounds might have deteriorated on average. Today’s students may lack many of the basic capabilities required for a successful education and may thus be increasingly expensive to educate. Such effects may play a significant role in countries with a large inflow of immigrant students or with rising levels of poverty. But on average, parents in the considered countries enjoy higher incomes and are better educated than 25 years ago, and the number of children per family has declined. Hence children may 61