Economics Assignment


The quality of school education is of substantial concern in most developed economies, including
Australia. Produce a report outlining the importance of teacher quality in achieving good
educational outcomes for children, and discussing the potential for a well designed compensation
contract to improve the performance of teachers.
In your report, you should refer to economic theory and empirical evidence. You should
discuss at least three empirical studies published in economics journals. The can examine either
the impact of teacher quality on educational outcomes, or the impact of teachers’ compensation contracts on their performance or educational outcomes (or a mixture of the two).




Introduction. 2

Importance of teacher quality in achieving good educational outcomes for children. 2

The potential for a well-designed compensation contract to improve the performance of teachers. 4

Conclusion. 6

References. 7


In most developed economies, one of the greatest concerns is the quality of school education. One of the issues that are being targeted in efforts to improve educational outcomes is teacher quality. It is widely assumed that the performance of teachers can be improved considerably if they operated on the basis of compensation contracts. Debate on this issue, which touches on economic theory, is ongoing. On this basis, varied opinions are being expressed. The aim of this report is to outline the importance of teacher quality in achieving good educational outcomes for children. The paper also discusses the potential for a well designed compensation contract to improve the performance of teachers.


Importance of teacher quality in achieving good educational outcomes for children

It is widely assumed that teacher quality is important for education. According to Rocko (2004), there is a lot of evidence that teachers’ credentials are important for student achievement only that it tends to be inconsistent. Rocko (2004) argues that it is imperative for variation in achievement arising from the characteristics of teachers to be measured accurately. Some of these characteristics are observable while others are not. In Rocko’s view, researchers need to prioritize on efforts to identify teacher fixed effects.

The importance of teacher quality in student achievement is an issue of great concern to all stakeholders in the education sector. Unfortunately, researchers are yet to obtain any evidence that links student achievement to teacher characteristics. The few studies that have examined this issue have yielded inconsistent findings. The inconsistency relates to the purported connection between “desirable” characteristics among teachers and improved performance among students. Surprisingly, research evidence shows that teachers with more desirable credentials are more likely to end up teaching in affluent districts where the level of student performance is high (Rocko 2004).

Efforts should be made to unravel the mystery of the relationship between teacher quality and student performance. There is a common notion that it is difficult or impossible to measure the characteristics that drive variation in teacher quality. However, this is not to say that teacher quality is not a crucial factor in determining student performance. Currently, efforts are being made to match student-teacher data with the aim of separating student achievement into different “fixed effects” (Rocko, 2004). The same approach is being used to explain the way teachers’ wages are determined, with matched data being used to determine the effects of different wage levels.

One of the most pressing problems in research on teacher quality is lack of adequate data. To acquire this data, the researcher needs to observe the achievement of both students and teachers for several years. In past studies, researchers used to collect information directly from selected district schools. The main finding of these studies was that quality of teachers affects the level of student achievement. Evidently, the problem of quality of data is one that recurs in almost all studies that investigates aspects of teacher quality and student performance. One major problem in these studies is that it is difficult for teacher effects to be separated from factors that apply only in specific classrooms simply because the researcher can observe the teacher in one classroom at a time.

Rocko (2004) sought to address the problem of access to data by choosing to collect information on test scores as well as teacher assignment. This data was collected in two district schools in New Jersey. This approach enabled the researcher to have access to data that showed the relationship between teachers and learners for twelve years. The data also covered many elementary grades in addition to giving the researcher access information relating to at least ten elementary schools.

Empirical evidence obtained from Rocko’s study showed that it is important for teacher quality to be raised. According to this evidence, raising teacher quality may be one of the most critical instruments in efforts to boosting student outcomes. However, the main problem in this regard is that numerous observable attributes exist that are not related in any way to teacher quality. This means that policies that target particular credentials as a basis for teacher recruitment may be less effective than those that reward teachers on the basis of their performance.

Another difficult hurdle for public school teachers in the US is shortage of teachers. This hurdle comes at a time when the number of teachers who are approaching retirement in the country is expected to continue growing. In the case of skilled females, a decline in supply has contributed to improvement in labor market opportunities and union wage compression. Given the fact that some teachers continue to leave the teaching profession for monetary reasons, there is a need for much research on ways of identifying, recruiting, and retaining high quality teachers.

The potential for a well-designed compensation contract to improve the performance of teachers

            Teachers play a critical role in the learning process. It is therefore important that they are given the necessary incentives to motivate them in their work. Teachers who are poorly paid are likely to develop a negative attitude towards their work. Moreover, it is often assumed that a well-designed compensation contract can lead to improvement in the performance of teachers. A number of studies have been undertaken to investigate how policymakers in the education sector can use pay structure to improve their performance. Some countries have even gone ahead and implemented the proposals made in these studies. However, one issue that remains contentious in is on whether the performance of teachers can be effectively improved by tying their pay to the performance of students.

            Two different views are normally held in literature on performance-related pay. One of them is that payment systems that are based on the performance of students can motivate teachers to put more efforts in their work. The other argument is that such an approach can be counterproductive. In the latter argument, problems are thought to emerge from the fact that agents may end up influencing the output measures in order to earn more money. It is also problematic that non-measured outputs may not be put into consideration in determining the pay, yet they may be as crucial as measurable ones. Kingdon & Teal (2007) argue that in the teaching profession, it may be possible for outcomes to be verified when exams are marked by external examiners. However, the problem of verifying whether the inputs of the teacher have an effect on outcomes remains somewhat problematic (Kingdon & Teal 2007).

Kingdon & Teal (2007) conducted a school survey to obtain data with a view to determine whether performance-related pay structures have an impact on student achievement. Kingdon & Teal (2007) found out that private schools benefit a lot from this system while public schools do not. Like Rocko (2004), Kingdon & Teal (2007) indicate that the researcher should put into consideration unobservable characteristics when assessing the level of performance by teachers. Performance-related pay structures work well in private schools because the managers there operate in a flexible environment where they can readily dismiss teachers who fail to deliver on the set targets. Such flexibility is lacking in public schools, hence the ineffectiveness of these pay structures.

According to Leigh (2012), an increase in teacher pay encourages more individuals to join the teaching profession. Leigh (2012) conducted an empirical study to investigate the relationship between teacher pay and the tendency by people to join the profession. The dataset obtained from students admitted to Australian National University for a period of fourteen years. Leigh found out that average pay is positively and significantly related to teacher aptitude. This is an indication that a well-designed compensation contract can play a critical role in improving teachers’ performance.


            In summary, many questions continue being posed regarding the relationship between teacher quality and educational outcomes for children. At the same time, concerns are being riased regarding the impact of performance-related pay structures on the performance of teachers. On the basis of the evidence gathered in this paper, raising teacher quality is essential to the process of improving student outcomes. However, with regard to performance-related pay, a major challenge entails putting into consideration numerous observable characteristics that are unrelated to teacher quality as well as non-measurable characteristics that are of utmost importance to teachers’ performance. Lastly, a well designed compensation contract is likely to bring about greater improvement in teachers’ performance in a private school than in a public school.


Kingdon, G & Teal, F 2007, ‘Does performance related pay for teachers improve student performance? Some evidence from India’, Economics of Education Review, vol. 26, no. 4, pp. 473–486.

Leigh, A. 2012, `Teacher pay and teacher aptitude’, Economics of Education Review, vol. 31, pp. 41-53.

Rocko, J 2004, ‘The Impact of Individual Teachers on Student Achievement: Evidence from Panel Data’, The American Economic Review, vol. 94, no. 2, pp. 247-252.

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