Why are teachers paid so little?

When you first take an introductory microeconomics class, you learn all about the basic theory of supply and demand. You learn that in a competitive market, prices are determined by both how easy something is to supply and how valuable it is to the people consuming it. 

You also learn that the same basic rules apply to the labor market. This is the justification that is given when the question is inevitably asked “why do people with more important jobs not make more money?” 

The answer to this question has always been that prices in the labor market (wages) are not just a factor of the job itself, but of how easy it is to find employees in those jobs. That is why even though grocery store cashiers got labeled as “essential workers” during the pandemic, they still often are among the lowest paid employees in the state. 

The same has also been said about teachers. Despite the fact that good teachers provide an extremely valuable service that everyone benefits from in the long run, the theory has been that it was easy to find teachers. Another reason that teachers are underpaid is that most of the benefits of teaching are externalities. The people who benefit from good teachers are children, while the people who pay for good teachers are taxpayers. 

Positive externalities will always exist with teaching, but now it is no longer true that teachers are easy to find. We are currently experiencing a  shortage of qualified teachers in most parts of the country. A policy brief from the Journal of Policy Analysis and Management by Jim Wyckoff from the University of Virginia looks at the teacher shortage in Virginia. He points to three major problems in the teaching workforce.

1. Teaching vacancies disproportionately affect a small number of schools. 20% of schools have 80% of the vacancies.

2. The schools that are most affected are the poorest schools, with the largest populations of BIPOC students. 

3. Shortages are more pronounced among specialist teachers. For example, in the 2022 Virginia data, 3% of all teaching positions were vacant, while 6% of special education teaching positions were vacant.

Clearly, it is no longer true that it is easy to find teachers. The labor market for teachers is currently experiencing a major shortage. The good thing is that shortages in markets are fairly straightforward to solve. You just need to increase wages. 

In his policy brief, Wyckoff also suggests that specialists who teach special education, math, and science should get an additional bonus of at least $5,000. Currently, most public school teachers get paid on a single schedule. That means that the only thing that determines wages is how long a teacher has been working. If we want to specifically address the shortage of specialist teachers, then we should be willing to pay them more. This bonus could also apply to teachers who choose to work in high poverty schools that are facing major shortages. 

Education is one of the most important public goods. Paying teachers more is an investment in the future, not just a cost today. It may be expensive in the short run, but once these students grow up they are going to be better prepared to participate in society. 

We know that education leads to so many positive outcomes for people who experience it. Paying teachers more is a rare policy that could potentially improve efficiency by correcting a market shortage, and equity by leveling the playing field when it comes to our education system. 

Can public policy cure loneliness?

In July, I ended my service as president of Gross National Happiness USA, an organization focused on changing the way we measure progress and success in the United States.

In the six years I have served on the board of the organization, I have learned a lot about the protective factors that contribute to high levels of subjective well-being among people. In layman’s terms, I have learned a lot about what research says makes people happy.

In our 2022 survey of happiness in the United States, far and away the most-mentioned contributor to happiness by people surveyed was “family.” A total of 45% of respondents mentioned family in their free response about contributors to happiness. The next most common was “health,” which 6% of respondents mentioned.

This is just another datapoint in a large body of research that underscores the key role of social connections in driving happiness among individuals.

This poses a problem for policymakers. As we consider the tools at the hand for policymakers, few are effective at building social connections between people. While governments like the UK are spurring new initiatives to tackle loneliness, initiatives in the U.S. to preserve marriages have not been successful so far.

My reading of the evidence is that there is hope on this dimension, though. While many of the initiatives that have failed before have focused on relationships between adults, there does seem to be evidence that relationships can be built early on for children.

I thought of this recently while reading about an evaluation of the long-term effects of a randomized controlled trial in Bogotá, Colombia. The program, Kangaroo Mother Care, is an intervention aimed at increasing skin-to-skin contact between preterm infants and their mothers. This specific evaluation showed that at age 22, infants who were randomly assigned to groups to receive this skin-to-skin contact had better socio-emotional skills than those who were not.

This follows some of the evidence we have on impacts of programs like home visiting, which give week-to-week counseling to expectant and new mothers. Giving parents tools to have positive interactions with their children can lead to long-term benefits for those children in the form of socioemotional development and eventually in test scores, criminal justice involvement, health, and earnings.

Other similar programs have been shown to have positive impacts on child development. A group of pediatricians and psychiatrists evaluated a program where therapists coached parents as they interacted with children, viewing their interaction through a one-way mirror and providing coaching through a radio earphone. The program was very effective at reducing cases of child abuse and neglect. Estimates by the Washington Institute for Public Policy found the program could have large impacts on future labor market earnings, criminal justice system savings, less spending on special education, and less PTSD.

Some public health researchers are saying now that we are in an epidemic of loneliness. We may yet find a “cure”--a killer public policy intervention to improve connections between adults today. But until then, we do have one tool to fight this problem: building relationships between parents and children.

Inflation as a policy choice

In March of 2020, right as the United States was beginning to shut everything down as the COVID-19 pandemic was ramping up, I went to a panel discussion led by some of the professors at Bates College talking about what the economic impacts of the pandemic might be. One of the panelists was a former professor of mine, Paul Shea, who taught a class on the Great Recession. 

One thing he said that stuck with me was that during the Great Recession, a fundamental flaw in the economy was exposed. Financial markets had gotten wildly out of control, and the only way forward was to address the root issues. After some new regulations and a very long and slow recovery, it seems like we have tools in place now to prevent such a major asset bubble from forming. 

In contrast, the COVID-19 pandemic wasn’t the result of something fundamentally wrong with our society. Because of this, Dr. Shea speculated that the recovery from the COVID-19 pandemic might be shorter. 

Of course, the pandemic was longer and more difficult than anyone could have imagined in March 2020. That meant that while it may have not been caused by some fundamental systemic flaw, it exposed a lot of flaws in our society that we have been able to largely ignore otherwise. 

I think this is the key difference between the Great Recession and the COVID-19 pandemic from an economic perspective. In 2008, we had to solve an underlying economic failure, while in 2020 we had to prop up other systems that could not bear the short term burden they were facing. 

The result of this difference can be seen in the recovery after the two downturns. One of the biggest challenges after 2008 was unemployment. Unemployment was a challenge during the pandemic, but emergency aid helped remedy the problem to some extent. After the Great Recession, it took nine years for unemployment to return to their 2007 levels. In 2020, it took only two years to recover. 

The biggest economic problem that came from the pandemic was the high inflation. During the great recession, there was actually a brief period of deflation as the economy grinded to a halt. 

The recent bout of inflation was a policy decision in response to the pandemic. In order to keep the economy from tailspinning into something worse, the government spent a lot of money to keep it going while people were cooped up in their homes. 

However, according to data released yesterday, inflation has finally fallen to below 3% for the first time since 2021. People are still reeling from the shock of prices rising so quickly over the past two years, but we are quickly returning to a more normal economic world. Interest rates are still high, but many people suspect that the Federal Reserve will begin to lower rates now that inflation appears to be under control.

It appears that at least to some extent, Dr. Shea was right. The economic recovery from the COVID-19 pandemic has been a lot faster than the recovery from the Great Recession. Hopefully, we can learn from the past four years and address some of the problems that were exposed. With a little effort, we can better prepare ourselves for the next major economic downturn.

Why antipoverty policy today is antipoverty policy tomorrow

One of the fundamental tradeoffs in public policy analysis is that between equality and efficiency. Theoretically, promoting equality (or “equity” for that matter) can come at the cost of economic efficiency. This is because safety net programs must be financed through taxing income or consumption and can create disincentives to efficient allocation of resources.

Recently, a growing body of research has been questioning the nature of this tradeoff in public policy. For instance, research on patent filings across the country show they are less likely to be registered in zip codes with less economic opportunity. This means that we tolerate poverty at the cost of new technological breakthroughs for everyone.

Similarly, research on cash transfers increasingly shows how putting cash in the pockets of low-income families can be key to future earnings, health, and crime outcomes for poor children. Last year’s winner of the journal article of the year in the Journal of Benefit-Cost Analysis was a study of the federal child tax credit suggesting this tax credit returns benefits in excess of $9 for every $1 of costs.

New research out this year provides more credence to this “domino effect” of antipoverty programs. A study published in the Journal of Human Resources in March used data from the Panel Study of Income Dynamics to estimate the impact of the earned income tax credit on future propensity to be in poverty.

The researchers found that people whose families received the earned income tax credit in childhood had a 5% lower chance of being in poverty or near poverty than those who did not receive the tax credit at that age.

Another finding from this study was that some of these people who received the earned income tax credit in childhood also drew less on public assistance in adulthood. This suggests that in the long-run, there could be dynamic effects from antipoverty spend that reduce the need for antipoverty assistance.

Intergenerational effects like this could have impacts on cost-benefit analysis of these types of programs. If antipoverty spending today means lower poverty rates in twenty years, that could mean less social costs down the road.

This could have positive long-term effects. Researchers at Washington University at St. Louis estimate child poverty costs the United States about 5.4% of its GDP–over a trillion dollars–every year in the form of loss of economic productivity, increased health and crime costs, and increased costs as a result of child homelessness and maltreatment.

These researchers also estimate that a dollar of spending on reducing child poverty could be worth $7 to $12 in reduced economic costs.

This growing literature on the intergenerational impact of antipoverty spending is key to understanding how we spend dollars today. While it is easy to dwell on the costs of antipoverty programs, understanding their benefits will give us a more complete picture of the policy decision to address poverty. In general, it seems the spending on poverty is a worthwhile investment. If we can fight poverty today and tomorrow at the same time, why would we choose not to?

Why can’t prices go back down after inflation?

Over the last two years, the biggest economic story has been very high levels of inflation in the United States and abroad. It may not have been as bad as inflation in the 1980’s, and it certainly was not as bad as some historical examples of hyperinflation, but people are feeling the effects of rising prices across the country after decades of stable prices.

A Pew Research poll from earlier this year found that 62% of respondents believed that inflation was a “very big problem” in the country today. This is despite inflation falling to 3.3% according to the Bureau of Labor Statistics, which (while still being slightly elevated) is not extremely concerning. 

Some of this can be attributed to the rise in political partisanship over recent years, but there are some valid underlying economic concerns leading to this economic discomfort as well.

Many people may think the best scenario would be for prices to return to pre-pandemic levels, undoing the harm of the past couple of years. However, ask any economist and they will warn you that deflation of any kind might be even more harmful than the last few years of inflation. 

This is because when prices are falling, there is a strong disincentive to spend money in the present. When prices are falling, the cash you currently have is becoming relatively more valuable every day. When deflation is expected, spending money is losing money. 

Compare that to inflation, where the incentive is to spend as much money as possible since cash becomes less valuable over time. During inflationary periods there is an incentive to participate in the economy, while during deflationary periods there is an incentive to stay home.

These relative changes in economic activity don’t really happen on the day-to-day level. Everyone still needs to go out and get groceries after all. But inflation and deflation can change the way big economic decisions are made. 

Another advantage inflation has over deflation is that we have macroeconomic tools to help balance the impacts of inflation. The Federal Reserve can increase interest rates to make money more expensive, reacting to the fact that during inflation money is more valuable than goods.

If we were experiencing deflation, then the Federal Reserve would have much fewer options. There is the option of negative interest rates, but those are extremely controversial. In other contexts, countries that have employed negative interest rates have been successful in keeping their economies moving while avoiding the worst case scenario. 

The risk of negative interest rates is that they make it costly for people to hold money in a bank. If everyone were to withdraw all their money, it could erode the stability of our financial system. 

Inflation has been an extremely difficult problem for many people, but prices are likely not going to fall to pre-pandemic levels. Trying to spark deflation would likely lead to even more problems than elevated prices. 

Instead, we should be looking for wages to rise to meet the higher prices. This may take some time since wages are notoriously sticky, but at the end of the day it is far better than dealing with any sort of deflation.

Why do economists dislike rent control?

In July, President Biden called on Congress to enact nationwide rent control legislation that would cap rent increases at 5% for corporate landlords (i.e. those with 50 or more units). In a recent U.S. Economic Experts Panel question on the topic, only 2% of economists thought that this would make middle-income households substantially better off over the next 10 years. 

Some of the respondents took issue with the word “substantially,” saying that there might be some or no effect. However, many economists felt quite strongly that rent controls are a harmful policy. As Dr. Anil Kashyap from the Chicago Booth School of Business wrote “We have tried this kind of policy many times and it will benefit some people who get locked in below market rates, but raise costs for others who need to rent apartments that are not capped and supply will fall.” His colleague Steven Kaplan was less kind, calling this rent control proposal “an embarrassingly bad idea.”

Why are so many high profile economists so pessimistic about what is often a very popular policy? The answer boils down to the fact that economic theory generally suggests that price ceilings distort markets. The end result is theoretically a housing shortage, and some research has suggested this actually happens.

Essentially, people who are currently renting see some pretty significant benefits. This comes at the cost of people who are not currently renting, who may find it more difficult and more expensive to rent a new place. 

This may not always be the case however. Especially if the rent control is not a binding price ceiling then there should not be any market distortion. One study out of the University of Southern California found that a rent control policy did not have an impact on rent prices and housing construction. This study is a bit of an anomaly in the literature, however. 

One issue with rent control is that it doesn’t help people who are currently housing cost burdened. It may begin to help them if they remain in the same place and are able to increase their earnings, but it doesn’t make their current situation any easier.

The literature shows that rent control is an effective tool for reducing rent–for people in rent-controlled units. But this doesn’t mean rent controls produce socially optimal outcomes. Much of the literature revolves around the problem with rent control not only for economic efficiency, but for distributional outcomes, too.

Rent controls are a poorly-targeted policy with the goal of helping low-income people. The problem with rent control is that many upper-income people benefit from them as well. Upper-income households tend to be less mobile and have the ability to stay in one place for longer. Because of this, rent controls often are more advantageous for them (or more feasible for them to take advantage of) than lower-income households.

If a policymaker is looking to make housing affordable, tools like zoning reform and basic income are likely more efficient, effective, and equitable ways to solve this problem. As policymakers spur these options, they settle for second-best policy interventions.

Exempting tips from Ohio income taxes won’t help many service workers

Last week, Ohio state Rep. Jay Edwards of Nelsonville introduced a bill to declare intent to exempt tips and gratuities from income tax.

This comes a month after Donald Trump announced his intention to exempt tips from income taxes if elected president this year.

On its face, exempting tips from income taxes makes sense for someone trying to ease the burden for low-income workers. Edwards represents a swath of southeast Ohio that contains some of the poorest counties in the state, including Athens County, which consistently ranks as the poorest county in the state, even after adjusting for its large population of college students. Providing support for low-income workers makes sense here.

Exempting tips from income taxes, however, has been panned by analysts at think tanks across the political spectrum, from the conservative Tax Foundation to the liberal Center for American Progress.

Howard Gleckman is one of the most thoughtful and pointed analysts of tax policy in the country. He is a Senior Fellow for the Urban-Brookings Tax Policy Center, the leading tax policy think tank in the country.

Gleckman wrote about the problems with exempting tipped wages from income taxes in a commentary last month. The most straightforward problem with the proposal is that low-income workers often do not have large tax liabilities, if they have any at all.

In Ohio, the average waiter or waitress makes only $33,930 per year. Since Ohio only starts taxing income at $26,050, this means many waiters and waitresses are not paying income tax in the first place. Couple this with credits like the state Earned Income Tax Credit which reduce tax liability and this problem becomes more acute.

This is not a death knell to the policy’s potential effectiveness for low-income workers, however. Edwards’s proposal is currently abstract. By designing the policy as a refundable credit, this equity problem with the policy could be overcome.

Another problem Gleckman raises with exempting tips from income taxes is the policy’s potential to compete with a more effective policy for supporting tipped workers: equalization of tipped minimum wage with standard minimum wage.

Ohio’s most viable minimum wage proposal is a citizen initiative called the Ohio Minimum Wage Increase Initiative. It failed to qualify for the ballot for 2024 but may be on the ballot in November of 2025. This minimum wage initiative would increase the state minimum wage for all occupations to $15. This would have a significant impact on non-tipped minimum wage workers, who currently make $10.45 an hour, but would have a larger impact on tipped workers, whose current minimum wage is $5.25.

While eliminating income taxes for tips will help many high-wage tipped workers (like waiters and waitresses at high-end restaurants), it is likely not the best tool for providing relief for low-income workers. Expansion of the state earned income tax credit or increasing the state minimum wage are much more likely to support low-income workers as a whole. That being said, it is encouraging to see policymakers focusing on the plight of low-income workers and working to design policy to support them.

This commentary first appeared in the Ohio Capital Journal.

What happens when policy analysts disagree?

In public policy analysis, competition can lead to higher-quality analysis. The best way to spur competition between analyses is not completely clear, however.

Often, at the state level, budgeting is driven by a competition of projections between the executive and legislative branches.

For instance, in the state of Ohio, the Governor’s Office of Budget and Management makes projections for what tax revenues for the state will be over the upcoming year. The Legislative Service Commission, the research arm of the Ohio General Assembly, makes their own estimates.

When I worked for the legislature, I was told legislative leaders usually used the Office of Budget and Management’s projections rather than the projections from the Legislative Service Commission. This was because the projections from the Legislative Service Commission tended to be more conservative than the projections from the Office of Budget and Management, even though the Office of Budget and Management projections were usually less accurate.

An alternative to presenting two separate forecasts and having policymakers decide which forecast to use is to create some sort of structure for creating consensus between forecasters.

The state of New York, for instance, has a system for creating a consensus report for its budget forecast between its executive and legislative branches. The state holds a consensus budgeting conference and members of the legislature and executive branches agree on a forecast based on testimony.

The essential tradeoff policymakers have when making policy that is relevant to policy analysts is the tradeoff between time and information. From the analyst perspective, the tradeoff comes from giving up the amount of analysis a policy analyst is able to do. But from a policymaker perspective, they often need to take competing opinions and decide which one to follow.

One way to think about this problem is to think about the policymaking process as one that encompasses policy analysis. Policymakers (those who make the decisions about policy) hire policy analysts to understand policy and to give them information on the impacts of public policy. It is then up to policymakers to confront tradeoffs between different public policy goals (like effectiveness, efficiency, and equity of competing policy options) and to make a decision.

If a policymaker has competing sources of information, which can be thought of as competing policy analysts, then the policymaker has to find a way to evaluate these policy analysts against one another.

One way a policymaker can evaluate policy analysts is through ethos heuristics. Basically this is asking the question “who do I trust the most?” This is driven by perceptions of objectivity and prestige of analysts. It also may be driven by whose “side” the analyst is on: a legislator is more likely to trust a legislative analyst than an executive office analyst, all other things being equal.

Another way is through a process heuristic. The example of the “use the conservative number” heuristic used by the Ohio General Assembly is an example of this. This can be useful if you have a good heuristic to fall back on that makes sense with the policy goal.

Consensus budgeting provides a different approach. It leans on our intuitions about “wisdom of the crowd,” hoping that good analysts will be able to fall back on reason and information when given the choice. Some states are deploying this approach with promising results.

The cost of analysis: when is more study worth it?

Last week, Rob and I were helping lead a workshop on uncertainty analysis for the Society of Benefit Cost Analysis. During this workshop, we discussed different methods that could be used to measure uncertainty, ranging from qualitative discussion about key assumptions to full-on probabilistic analyses that involve Monte Carlo simulations.

One question that the participants of this workshop kept returning to was “if all of these are ways to do uncertainty analysis, how do we know which one is best for our study?” 

This question is important not just in uncertainty analysis, but in all aspects of a policy analysis. We always have varying levels of complexity to try and apply, but how are we supposed to decide on what is best for a given problem? 

At the core of this question is a tradeoff. We can exchange additional resources, usually time and some prerequisite data, in exchange for more detailed information in our analysis. The question that we as analysts need an answer for is whether the additional information we are getting is worth the additional cost. 

One thing that I’ve noticed about this question now that I’ve been a policy analyst for a few years is that often the biggest unknown is about the cost of additional information. It appears to me as though by working on a project, I often have a fairly good understanding about what information we will get from additional work. For example, if I build a model and generally understand what the variance is on some of the inputs to that model, then I have a good intuitive idea of what additional information a Monte Carlo simulation will provide. 

The cost of additional information is much more variable and context specific. The two most common barriers I’ve encountered in my work so far are time and data availability.

Usually at Scioto Analysis, we have strict deadlines that we need to budget our time within. We always try to give ourselves some extra time to be flexible at the start of every project, but because that is such a limited resource for us we place a lot of value on it.

In our situation, we need to decide whether the cost of doing a more complex type of analysis is worth more than having more time to write and edit our final report. 

The other most common barrier is the cost associated with finding data to use. The majority of our work is based on publicly available data. The Census, the American Community Survey, tax data, these datasets are involved in almost every project we do. 

When we need data that isn’t publicly available, or that is difficult to access for whatever reason, the costs of our projects go up substantially. We often don’t have the capacity to try and get non-public data unless it is a clearly defined part of our analysis at the beginning. 

There are no specific rules about whether or not additional complexity is worth the costs on a project. Over time, we can get a better understanding of when more research is warranted and when the costs are too high.

Can a new kind of credit reduce property tax burdens in Ohio?

Last Monday, an innovative piece of bipartisan legislation was quietly proposed in the Ohio House.

House Bill 465 is a bill to create a tax credit for homeowners and renters whose property taxes or rent exceed a certain threshold in relation to income. This means that if you have high property taxes or rent in relation to your burden that you could be eligible for a new state tax credit.

Tax credits are among the most important anti-poverty programs in the United States today. The federal earned income tax credit pulls more working-age people out of poverty than any government program. The child tax credit expansion in 2021 led to the largest reduction in poverty on record in the United States and its expiration in 2022 led to its largest increase in poverty.

House Bill 465 provides resources for households in a new way, contingent on cost of housing. This is a new kind of credit for me–I haven’t seen a tax credit that focuses specifically on easing the burden of people who face housing costs. But there are a few elements of this proposed policy that make it an effective anti-poverty program.

First, it is generous and targets low-income households. The credit is worth $1,000 for households with resources of $60,000 or less, which comprises a little less than half of the households in the state. This then steps down $200 for every additional $10,000 a household makes before completely phasing out at $100,000 of household income. While this stepwise phaseout will create some work incentive problems on the margin, they are concentrated in middle-income households that don’t have as many “benefit cliff” problems as low-income households.

Second, it is refundable. This means that households could claim the credit even if it exceeds their state tax burden. This is especially important because the households that are most in need of this credit are most likely to not have large state income tax burdens since they are low-income in the first place. Making this credit refundable makes it certain households with the most need will be eligible for the credit.

Third, it applies to renters as well as homeowners. Believe it or not, property taxes are actually regressive taxes. This is because even renters have to pay property taxes since property owners can pass these taxes on to them. Since low-income people tend to spend a larger proportion of their income on housing than upper-income people, low-income people spend a larger proportion of their income on property taxes than upper-income people. The bill includes renters by allowing taxpayers paying 15% of their rent in excess of 5% of their income to also be eligible for the credit. 

By also allowing renters who pay toward property taxes for property owners to collect the credit, as House Bill 465 does, the burden of property taxes is relieved for people who need it relieved the most.

With 28 sponsors and cosponsors from both sides of the aisle, it looks like legislators in the Ohio House are taking this proposal seriously. Maybe the burden of property taxes is the encouragement the state needs to fund a significant program for poverty alleviation in Ohio.

This commentary first appeared in the Ohio Capital Journal.