(at least) 35% has no negative impact on productivity as measured by TVA.<sup>10</sup> The much higher wage premium in Pakistan is consistent with the findings of Finan et al. (forthcoming), who use household survey data from 32 countries to show that the wage premium in the public sector is higher in poorer countries. Taken as a group, these studies all point to large and significant misallocations in the pay of public sector teachers in low-income countries, which we are able to demonstrate in the context of a large-scale change in the public sector recruitment of teachers.<sup>11</sup> The remainder of our paper is organized as follows. Section 2 describes the setting and context, and Section 3 discusses the data. Section 4 discusses TVA estimation, the results of regressions of TVA on teacher characteristics, and the robustness of the TVA measures. Section 5 discusses the link between teacher quality and teacher wages, and Section 6 concludes.

# **2 Setting and Context**

The data are from rural Punjab, Pakistan, the largest province in the country with an estimated population of 100 million. The majority of children in the province can choose to attend free public schools, or they can pay to attend private school, and at the primary level, one-third of enrolled children choose to do so.<sup>12</sup> Although funding for public schools has traditionally been small, in recent years, the government of Punjab has ratcheted up education budgets from 468 million dollars in 2001-2002 to 1.680 billion dollars in 2010-2011 (Ishtiaq, 2013). Much of this expenditure is on recurring budget items, and, similar to other low-income settings, teachers’ salaries account for 80% of spending (UNESCO Islamabad, 2013).<sup>13</sup> In Pakistan, teachers are part of the civil service and salaries are determined through the Basic Pay Scale that allocates teachers to ‘grades’ based on their position (primary vs. middle or secondary school teacher and regular teacher vs. head teacher) and provides a basic salary that depends on grade and experience. Appendix Figure A1 shows the most recent, official Basic Pay Scale in Punjab province.<sup>14</sup> In addition to this Basic

> 10Since we do not include future liabilities such as pensions in this accounting, the wage difference is a lower bound in our study.

> 11We must acknowledge that, although we get close to the natural experiment of a wholesale reduction in wages, if contract teachers believed that their chances of obtaining a permanent contract would increase with their effort, the policy change may have affected both remuneration levels and career incentives. Separating the two effects would require a separate experiment. If the career incentives channel is important, our results would show that temporary contracts induced a combination of teacher effort and quality that can yield the same learning at a lower cost, at least for some years, an issue we return to in Section 5.4 below.

> 12 Religious schools, or madrassas, account for 1-1.5% of primary enrollment shares, and their market share has remained constant over the last two decades (Andrabi et al., 2006).

> 13Bruns and Rakotomalala (2003) show, in a study of 55 low-income countries, that teacher salaries account for 74 percent of recurring spending by the government on education.

> 14The columns of the figure give the initial salary and pay increments for an additional year of experience and the rows denote the grade of the civil servant. Primary school teachers are grade 9, middle school teachers are grade 14, secondary school teachers are grade 16, and head teachers are grade 17.

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