Money Still Matters in Education

A new study published by the US National Bureau of Economic Research shows that money still matters in education. It found that school finance reforms in the US that increased expenditure in low income school districts increased high school completion and college entrance among Black students and females as well as increasing annual earnings.

We find that school finance reforms lead to increases in educational attainment and in mean earnings. These results hold when we consider the full state population, but we generally find larger effects for Black than for white students….We also find some evidence that effects are larger for female students. [p. 5]

The study analysed the impact of what are known as “adequacy”-based school finance reforms implemented since 1990. Courts in many US states have ruled that state constitutions require adequacy in school funding. This led to increased expenditure in disadvantaged school districts above the state average to compensate for the increased costs of educating children from disadvantaged backgrounds.

The study found that ten years of exposure to school finance reform increased high school graduation rates by two percentage points and increased the share of students who attend at least some college by 1.4 percentage points.

The effects were larger for Black student outcomes than for white students. Black students experienced a 3.4 percentage point increase in high school graduation and a 6.7 percentage point increase in the likelihood of attending some college. The effects for white students were smaller and only statistically significant for high school completion.

The education impacts were also larger for females than males. After a decade, female high school graduation rates increased by 3.2 percentage points and the likelihood of attending some college increase by 2.5 percentage points.

A year of additional exposure to a school finance reform increased annual earnings by $164 when those with zero earnings were included in the sample and by $199 when non-workers were omitted. The results implied a 3.6% increase in earnings for an additional ten years of exposure relative to the immediate post-reform cohorts.

Each year of exposure to a school finance reform increased average Black earnings by $108 (or by $118 if those with zero earnings are excluded). None of the effects were significant for whites. Both males and females had higher earnings following school finance reforms.

The study also estimated the annual average earnings return of extra years of high school as a result of school finance reforms. It found a small decline in the return to high school completion in the years leading up to a school finance reform. Following the reform, the return to high school increased by 3 percentage points and trend increases of 0.7 percentage points per year of exposure to the reform. By the tenth year after the reform, the return to high school graduation increased by about 10 percentage points relative to the pre-reform trend.

The return for high school completion increased for both Black and whites, but the effect was larger for Blacks. It was also larger for males than females.

The study also compared the earnings increase with the costs of the school finance reforms. It found that annual earnings at ages 26-39 increased by $163 for each additional year that a student was exposed to the reform. The total increase in earnings after 13 years of school for cohorts who entered school after the reform was $2,137 per year. Discounting this to age 5 and summing over ages 26-39 implied a cumulative present discounted value of the earnings increase of $13,367 per student, or a benefit-cost ratio of 1.5 to 1. If the earnings benefits extended to age 62, the benefit-cost ratio doubles to 2.9 to 1, which is a very high rate of return.

The study notes that because the benefits are likely to be concentrated among students from low-income school districts and families the social return will be even more positive. The social return takes account of society’s spending on education and the social benefits such as improved health.

The study concludes that the “evidence shows consistently that money matters in education”. The increases in school funding mandated by the courts in many US states have been “used productively and benefit students”.

The study adds to the weight of evidence that money matters in education. In the last 20 years some 25-30 highly sophisticated statistical studies have shown conclusively that money matters for disadvantaged students and minority students, and that increased funding delivers better school and post-school outcomes.

The problem is that Australia has not learnt the lesson. It’s putting more and more funding into private schools, who only enrol a small minority of disadvantaged students, while over 80 per cent of those students are in public schools, and over 90 per cent of disadvantaged schools are public schools.

Huge amounts of funding are being misdirected into private schools, which is the sector that’s least in need, Unless there iss a dramatic change in school funding policies, both by the Commonwealth and state Governments, public schools and their disadvantaged students are going to continue to miss out over the next decade.

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