[Excerpt] The 1983 report, A Nation at Risk, of the National Commission on Excellence in Education decried the state of public education in the United States and suggested a number of reforms. Among their recommendations was increased federal aid for education. The view was that this would lead to desirable outcomes such as reduced class sizes and higher teacher salaries, with the latter aiding in the recruitment and retention of high-quality teachers.
Somewhat surprisingly, previous research on the economics of education provides us with very few insights about what the effects of such proposals might be. For example, while there is an extensive literature on the determinants of cross-section variations in teachers' salaries and teacher/student ratios, virtually nothing has been written on how changes in aid levels influence changes in salaries, teacher/student ratios, other expenditure levels, and local tax rates. Similarly, while there are many studies of how grants-in-aid affect overall expenditure levels and some studies of the determinants of cross-section variations in the share of expenditures spent on various categories (e.g., instructional and administrative), virtually nothing has been written on how changes in aid affect the various expenditure shares.
To provide answers to some of these questions, our paper examines data from a panel of approximately 700 school districts in New York State over a five-year period (1978-79 to 1982-83) and tries to infer how school districts will respond to future changes in aid from how they responded to changes in state aid during the period. We focus on how past aid changes have influenced teacher salaries, tax rates, teacher/student ratios, and other staff/student ratios. The analyses exploit the fact that although school aid formulas change frequently in New York State, each district is usually guaranteed at least the same aid level as the previous year ("save harmless" provisions). As a result, over any given two-year period, the percentage increase in aid varies widely across districts. This provides a convenient form of natural experiment.