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Breaking the pay deadlock

By Andrew Leigh - posted Monday, 19 March 2007

Over recent weeks, Federal Education Minister Julie Bishop’s call for Australian schools to move to a system of teacher merit pay has faced stiff opposition from state and territory governments and teacher unions. In response, Bishop has stood firm behind her plan. With a federal election looming, the remainder of the year will most likely see both sides hunker down still further.

Is there a way to break the merit pay deadlock? One possibility is to strike what policy wonks have called a “grand bargain” over teacher merit pay - in which teachers who wish to stick with their current contract are free to do so, while those who wish to choose a merit pay contract can do so instead.

Such a grand bargain over teacher pay has several important advantages. First, it recognises that many of Australia’s 264,000 teachers entered the profession in the expectation that they would have security of tenure and certainty of earnings. Preserving uniform salary structures for those who want them honours that bargain.


By contrast, the new merit pay contract would look quite different. For a start, the new contract would carry greater rewards. At a conference I ran recently at the Australian National University, US researchers Eric Hanushek, Hamilton Lankford and Jonah Rockoff presented studies that analysed teacher performance in terms of test score gains. Their work suggests that difference between a high-performing and a low-performing teacher is substantial. Switching from a teacher at the 10th percentile to a teacher at the 90th percentile would raise a typical student’s grades by 10 percentage points. Yet experience explains only a little of that gap, and teachers with a Masters degree do not appear to obtain significantly higher test score gains.

One solution is simply to reward teachers whose students experience significant test score gains from year to year. Analysing the effects of an Israeli teacher bonus scheme, Victor Lavy (PDF 1.33MB) found that it significantly increased educational outcomes, but did not lead to adverse effects such as decreasing the performance of teachers who did not get the bonus, or causing teachers to manipulate test results.

Another alternative is to allow principals to decide which teachers receive the bonus. Work by Brian Jacob and Lars Lefgren (PDF 197KB) indicates that principal ratings of teacher effectiveness at the beginning of the school year are highly predictive of the teacher’s test score value-added. Moreover, principal ratings may capture aspects of teacher performance that are missed by a narrow focus on test scores, such as their ability to raise performance in non-tested subjects, or to mentor new teachers.

Whether the bonuses are determined by test score gains (objective, but narrow), or principal ratings (subjective, but broader), they should be large enough to make a real financial difference. At present, the best-paid teachers in Australia earn no more than $79,000 (less in most states). Like lawyers, doctors and politicians, why shouldn’t our best teachers make six-figure salaries?

In the United States, author Matt Miller goes further, putting forward a plan to make teaching poor children the most exciting career in America. The best teachers working in the most disadvantaged schools, he argues, should be able to earn up to $150,000 - allowing them to retire as millionaires. While rewarding results, we should also make it more lucrative for experienced teachers to work in tough schools. Unfortunately, uniform salary schedules do just the opposite - by paying all teachers the same, the best teachers tend to gravitate to the most affluent schools.

The new contract would carry not only greater rewards, but more risk. Unlike the current teacher salary contract, which carries virtually no risk of dismissal (for example, Victoria fired three of its 39,434 government school teachers last year), removal for poor performance would be a real possibility under the new contract. Every occupation faces the problem of the 1-2 per cent of workers who are just badly suited for the job. Teaching is no different. And allowing for the possibility of dismissal might also make it more feasible to recruit mid-career professionals into the teaching profession. Not everyone who wants to try will make the transition from the office to classroom - but we should open the door to those wish to give it a shot.


Striking a grand bargain with Australia’s teachers may be the only politically viable solution to the looming deadlock on merit pay. Putting another contract on the table provides teachers with a choice, not an ultimatum. As we learn more about what works best in measuring teacher performance, an increasing number of teachers will hopefully come to choose the new contract. And maybe then, more young people will regard teaching poor children as the most exciting job in Australia.

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First published in the Australian Financial Review on March 8, 2007.

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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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