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Teacher Salary Structure and the Decision to Teach in Public Schools: An

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 WORKING PAPER – PLEASE DO NOT CITE

Teacher Salary Structure and the Decision to Teach in Public Schools:

An Analysis of Recent College Graduates

Dan D. Goldhaber
University of Washington
and
The Urban Institute
dgoldhab@u.washington.edu

Albert Yung-Hsu Liu

The Urban Institute
aliu@ui.urban.org

March 28, 2003

Paper presented for the American Education Finance Association

This project is supported by a Field Initiated Study grant (#R305T010782) from the Office of
Educational Research and Improvement, U.S. Department of Education. The views expressed in
this paper do not necessarily reflect those of the University of Washington, the Urban Ins titute,
or the Department of Education. We wish to thank Eric Eide and Duncan Chaplin for helpful
comments on earlier versions of this paper.
 ABSTRACT

“…college graduates with high test scores are less likely to take jobs, employed
teachers with high test scores are less likely to stay, and former teachers with high
test scores are less likely to return.” – Murnane, et al, 1991.

In this paper, we explore the structure of compensation for women who recently graduated from
college to assess the opportunity costs of entering the teaching profession. Using the
Baccalaureate and Beyond Longitudinal Study, we estimate separate wage regressions for public
school teachers and those employed outside the teaching profession. We account for self-
selection into occupation and endogenous wages using the Heckman two-step correction. The
structure of salaries in teaching is such that women with stronger demonstrated academic skills
and technical majors face greater opportunity costs to enter the teaching professio n.
Furthermore, structural probit estimates indicate that opportunity cost influences the probability
of entering the teaching profession.
 A growing body of evidence confirms teacher quality as the most important school
attribute predicting student outcomes. While current education production functions research has
yielded inconsistent and sometimes controversial findings as to which indicators are appropriate
proxies for quality, researchers and policymakers have made much of the correlation between
student outcomes and demonstrated academic skills. The academic proficiency of the teacher
workforce is therefore of some concern. The most academically proficient college graduates in
the 1960s were equally likely to enter teaching as an alternative occupation, but by 1980, the top
academic performing college graduates were much less likely to enter teaching (Murnane, et al,
1991). Today, research shows that teachers are drawn from the lower end of the distribution of
standardized test scores (Hanushek and Pace, 1995; US Department of Education, 1996), more
likely to have taken remedial undergraduate coursework relative to their college graduate
counterparts (U.S. Department of Education, 1996), and more likely to graduate from less
selective postsecondary institutions (Ballou, 1996; Turner, 1998).
Teacher quality and teacher shortages have been the topics of much discussion among
researchers and policymakers (Goldhaber, 2002; Hassel, 2002; National Commission on
Teaching and America’s Future, 1996). Of particular concern are the quality and number of
teachers available in certain content areas and serving certain groups of students. There have
been teacher quality problems in math, science, and special education and in high poverty
schools (Hassel, 2002; Hare et al, 2000; Harrington, 2001; Shields et al, 2001). A RAND report
dating from 1962 describes a strikingly similar state:

[T]he problem facing the schools is not so much a shortage in the total numbers of
teachers available as it is a problem of shortages of well-qualified teachers in
specific subject- matter areas. The specific shortages vary in degree from one
subject to another and are more acute in some localities than in others. Some
shortages, such as those in mathematics and the physical sciences, are nationwide
and may become more acute in the future because of increasing demands, outside
of teaching, for people with college training in these subjects. (p. vii., Kershaw
and McKean, 1962).

In response to concerns about teacher supply and quality, some have called for local
education agencies (LEAs) to move away from the common practice of basing salaries on degree
and experience alone and toward a system where teachers of high demand subjects, those with
challenging teaching assignments, and those whose students achieve large learning gains receive

3
additional financial compensation (Ballou and Podgursky, 1997; Hassel, 2002). These
recommendations are not new: the same RAND report recommends that the most cost-effective
solution to teacher shortage and quality problems is to move away from the traditional
compensation system employed by public schools toward one that recognizes and reflects the
fact that individuals with different training may have different opportunities outside of teaching
(Kershaw and McKean, 1962).
Does the structure of compensation in teaching help explain the trend of teachers being
drawn from the lower end of the academic proficiency distribution, and does it provide insight
into the quality issues plaguing specific content areas? To explore these questions, we focus on
occupational choices made by a cohort of women who recently graduated from college. We
posit an economic model where individuals select their occupation based, at least in part, upon
the perceived economic rewards associated with those occupations, and focus on whether the
structure of compensation in the teacher labor market fails to reward academic proficiency and
undergraduate training as strongly as occupations outside of teaching. Because we suspect that
individuals choose their occupations based to some degree upon expectations of future salaries
and that future salaries are based on occupational choice, we estimate a Heckman (1979) two-
step procedure. We estimate a reduced form probit to model the likelihood of entering the
teaching profession, correct our wage models for sample selection to obtain consistent
coefficient estimates, and calculate predicted opportunity costs for a structural probit model of
occupational choice.
This study improve s upon previous research on the relationship between the structure of
compensation and occupational choices by simulating the systematic variation of opportunity
costs based on demonstrated academic proficiency and undergraduate training. We provide
estimates of earnings differentials based on individual attributes central to many teacher quality
debates. While previous studies have focused on selection into undergraduate majors, this paper
examines selection into occupation and the returns to teacher attributes correlated with student
achievement.
Our results indicate that there are differential rewards to individual attributes. In our
OLS models, public sector teachers are rewarded for experience, undergraduate GPA, and
certain types of undergraduate training. Correcting for sample selection, we little evidence of
such returns for each attribute except for experience. In contrast, the non-teacher labor market

4
provides rewards for experience, college selectivity, undergraduate GPA, and undergraduate
training in both the OLS and sample selection models. In particular, relative to non-technical,
non-education majors, we predict higher wages for technical majors and lower wages for
education majors.
The paper is structured as follows. In Section II, we provide background literature on the
choice of occupation and the relationship between teacher quality and salary structures in the
public sector teacher labor market and in other occupations that may compete in the market for
prospective teachers. Section III describes the methodology and data used in the paper. We
discuss our econometric results in Section IV, and offer concluding thoughts on our results and a
research agenda in Section V.

Salary Structure and Occupational Choice

Occupational choice has a tremendous effect on lifetime earnings, so it is feasible that

individuals consider the economic consequences of their occupational choices. This question has
been studied in various contexts (e.g. Boskin, 1974; Polacheck and Horvath, 1977; Siow, 1984;
Willis and Rosen, 1979; Zarkin, 1985), and empirical results generally support the notion that
future earnings over the life cycle matter in occupational decision- making.
In particular, several studies show that future earnings influence “teacher pipeline” career
decisions such as the decision to major in education, gain teacher licensure, and entry to or exit
from teacher labor market. Berger (1988) finds evidence that increases in predicted future
earnings for particular college majors raise the likelihood of choosing that major. Moreover, this
study illustrates the importance of accounting for sample selection in the estimation of wages
since there is positive selection into a major in education. The earnings of those opting for an
education major are higher than the earnings for an individual with the same characteristics
chosen at random. Dolton, Makepeace, and Van Der Klaauw (1989) estimate models of
occupational choice controlling for college major and find that predicted earnings do not
influence occupational choices. However, in models that do not control for college major, the
authors find the expected positive relationship between predicted earnings and occupational
choices.

5
 Murnane and Olsen (1989; 1990) find results consistent with the hypothesis that
opportunity costs influence the length of time a teacher will remain in the profession. Teachers
in high paying LEAs were less likely to leave the profession and teachers with better outside-of-
teaching labor market opportunities were more likely to leave. 1
Given that occupational choice appears to respond to economic incentives, we
hypothesize that the structure of compensation in an occupation influences the type of
individuals who pursue a career in that occupation. By structure, we mean the degree to which
individual attributes are rewarded financially. The compensation structure used in the
overwhelming majority of LEAs – the so called “single salary schedule” – bases teachers’
salaries within each LEA on only teacher experience and teacher degree level (Odden and Kelly,
1997). Teachers receive salary increases for additional years of experience and/or receiving an
advanced degree, but not for other measures such as student performance, field of specialization,
or the specific teaching assignment within the school district (e.g. the difficulty of the students
taught and grade level).
Despite the explicit structure of the single salary schedule, we may still observe
differentiation of teacher compensation along a variety of dimensions such as measures of
academic proficiency. For example, there is typically some flexibility, either formal or informal,
regarding where teachers are initially placed on the salary schedule. We might therefore observe
administrators placing teachers in high demand fields at different starting points in the single
salary schedule, effectively paying higher salaries to reward teachers in those fields. It is also
entirely possible that the teacher labor market as a whole could reward characteristics other than
degree and experience levels based on sorting between LEAs. Higher paying LEAs may tend to
attract teachers with higher college entrance examination scores or grade point averages,
producing a positive correlation between these characteristics and compensation.
At least by design, the single salary schedule appears quite different from the structure of
compensation in the non-teacher labor market. Bretz and Milkovich (1989) estimate that 93 to
99 percent of private sector firms use some type of pay for performance plan for salaried

1
It is, however, important to note that although compensation appears to be a significant factor in influencing the
decision to participate in the teacher labor market, it may not be the primary influence. Stinebrickner (2002), for
instance, finds that the single most important reason that teachers leave teaching is to have children.

6
individuals. 2 Pay for performance may be directly associated with productivity, such as when
salary is dependent on some measure of output. It also may take a variety of indirect forms
where individuals are rewarded for characteristics that tend to be correlated with productivity
such as college selectivity (Brewer, Eide, and Ehrenberg, 1999) or standardized test scores
(Murnane Willet, and Levy, 1995), both of which tend to be rewarded in the labor market as a
whole. The labor market also tends to reward technical college majors such as science more than
liberal arts (Berger, 1988), which may explain why some schools and districts have found it
particularly difficult to recruit teachers with math and science training (Hassel, 2002; Hare et al,
2000; Harrington, 2001; Shields et al, 2001).
The single salary schedule has long been criticized for not reflecting labor market
conditions influencing supply and demand and for not reflecting measures of teacher quality or
productivity (Kershaw and McKean, 1962; Ballou and Podgursky, 1997). 3 There is also a
concern that it provides a disincentive when recruiting highly academically proficient individuals
into the teacher labor market. For instance, Berger (1988) finds that higher IQ scores were found
to have a statistically significant negative affect on labor market earnings of education majors.4
Ballou (1996) finds that graduates from more selective colleges receive smaller pay premiums in
teaching than in other occupations and estimates that education majors who graduate from a
college in the top (of four) college quality category receive a salary premium of 2 percent over
those in the bottom category. This is a small premium when compared to the 5–10 percent
premium received by those majoring in accounting, business administration, engineering, or
psychology, not to mention the estimated 17 percent pay premium received by those graduating
from the top college quality category with a major in computer science. Thus, we might expect
these differences in pay structure to help explain why teachers tend to be less academically
proficient than college graduates who enter other occupations.
It is also appropriate to consider the non-pecuniary aspects of compensation. Dolton,
Makepeace, and Van Der Klaauw (1989) find that occupational choice depends not only on
wages but also on occupational status. Goddeeris (1988), in the context of examining the

2
Such plans are thought to attract and retain high quality employees (Milkovich and Wigdor, 1991) as well as elicit
higher levels of effort and productivity (Pencavel, 1977; Brown, 1990) from them.
3
For background on the relationship between teacher characteristics, teacher effectiveness, and student performance
see (Goldhaber, et al, 1999; Hanushek, et al, 1998; Hanushek, 1986; Greenwald, et al, 1996; Hanushek, 1989;
Ferguson and Ladd, 1996; Hanushek, 1992; Ehrenberg and Brewer, 1995; Ehrenberg and Brewer, 1994; Ferguson,
1991, 1998; Strauss and Sawyer, 1986).

7
decision to pursue public sector versus private sector law, finds that much of the differential in
earnings between these two (private sector earnings are considerably higher) can be explained by
compensating differentials attributable to lawyers’ preferences for non-pecuniary job
characteristics.
Studies of the teacher labor market likewise illustrate the importance of accounting for
the non-pecuniary aspects of teaching (Loeb and Page, 1998). Teachers, for instance, may
choose between LEAs and schools based on job conditions such as weather, crime, local and
state education policies, and student body characteristics. Both Levinson (1988) and Hanushek,
Kain, and Rivkin (2001) show that students’ socio-economic status and achievement play an
important role in explaining the schools in which teachers choose to be employed.

Methodology and Data

Methodology

Our analysis of occupational choice and compensation structures begins with the
assumption that individual monetary and non-pecuniary preferences for job characteristics
motivate occupational choices. While non-pecuniary job characteristics and other pecuniary job
characteristics such as benefits are certainly important, in this simple model, we choose to
explicitly model only base salary. 5
We assume that individuals choose between teaching in public schools and a generic
alternative non-teaching occupation. The utility of individual i in occupation j, Uij, is given by:
Uij = αYij + γZi + υij (1)
j = 1 for the teacher labor market and 0 otherwise
where Yij represents earnings in occupation j and Zi is a vector of individual characteristics that
determine occupational choice. Individuals participate in a labor market j based on the
maximization of expected lifetime utility. That is, an individual will choose to teach based on
the sign on the utility difference Ii* denoted by a categorical variable Ii :

4
This was also found to be true for those majoring in liberal arts.
5
This is partially to make the model more tractable but also because very little data exists on non-salary financial
remuneration in the form of health, retirement, or other benefits.

8
 I i = U i1 − U i 0
*
(2)
I i = 1 if I ≥ 0
*
i

I i = 0 if I i* < 0
We are particularly interested in the rates of return to individual attributes in each
occupation. The potential (log of) earnings for individual i in occupation j, yij, are defined by:
ln y ij = β j X i + ϕ j Lij + ε ij (3)
where X consists of two sets individual- level variables: a set of demographic control variables
including dummy variables for gender, race, parental income, parental education, marital status,
and a discrete variable for number of dependents and a set of academic skill measures including
college selectivity, cumulative grade point average, and dummy variables for undergraduate
major. Lij is a vector of labor market characteristics that includes the years of experience and a
set of state dummy variables. ßj and f j are the returns to individual and labor market
characteristics in occupation j. 6
Given the structure of compensation in teaching from previous empirical research, we
hypothesize that the returns to individual characteristics, ßj and f j, differ by labor market.
However, if we estimate each wage regression separately, the sample selection effect may bias
these estimates. Heckman (1979) and Lee (1983) have shown that we can correct this problem
by assuming the error term eij can be separated into the usual OLS assumption of E(? ij )=0 and a
second error term equal to the expected value of eij given that the equation is estimated only for
those individuals for whom occupational choice j maximizes:
λ ij = −ϕ (Φ −1 ( Pij )) / Pij (4)
where ?ij is the standard inverse Mill’s ratio, F(·) is the standard normal density function, f (·) is
the inverse of the standard normal cumulative density function, and Pij is the probability
individual i selects occupation j. Our earnings equation can then rewritten as
ln y ij = β j X i + ϕ j L j + σ i ρ i λ ij + η ij (5)
where s j is the standard deviation of ej and ?j is the correlation coefficient between ej and the
error of the choice equation.

6
Appropriate estimation of the rates of return to individual characteristics in the teacher labor market may be
particularly challenging. In the teacher labor market, job choice based on non-pecuniary factors is particularly
pertinent since wages are generally not determined competitively (Loeb and Page, 2002). Therefore, compensating
diffe rentials may not be fully reflected in wages. Failure to account for these issues may result in biased estimates
of individual characteristics.

9
 To properly estimate the sample selection model, we need to find an instrument Zi that is
correlated with the choice of occupation but not salary within occupations. We experiment with
a two identifying restrictions: the percent of undergraduate education majors in each degree
granting institution and parents’ occupation. Percent of undergraduate education majors may
serve as an indicator of the popularity of the major and how seriously individuals considered
teaching as an occupation, but controlling for other measures of academic proficiency, these
variables should have no direct effect on wages. The assumption underlying parents’ occupation
as an instrument is that children of teachers may be more or less inclined than other to teach
based on their (almost) first-hand knowledge of the lifestyle of teachers.
Thus, our approach is to first model a reduced form probit model that includes Xi and Zi
as regressors. We estimate Pij to calculate the self-selection variable ?ij for each individual who
chooses a particular occupation and include it in the wage regression. Lastly, we estimate a
structural occupation probit model. By combining equations (1) and (5), we have:
U = (ln y i1 − ln y i0 ) + γ ( Z i ) + (υ i1 −υ i0 ) (6)
That is, we estimate the probability of entering the teaching profession as a function of the
predicted opportunity cost and individual characteristics that reflect non-pecuniary preferences.
Although there are differing views about the degree to which individuals consider starting
salaries or project further into the future to consider lifetime earnings (Berger, 1988; Freeman,
1981), we focus on early-career earnings when we calculate opportunity costs. Berger (1988)
shows that individuals choose occupation based on the present value of lifetime earnings more
than starting salaries. However, to the extent that the earnings growth for teachers is flatter than
that of all other occupations, our calculated opportunity cost is a conservative estimate of the true
lifetime opportunity cost. Furthermore, estimating our models for individuals with more labor
market experience may be complex given intra-occupational changes and labor force exit for
higher education or family responsibilities, among other reasons.

Data

Our primary source of data is the First Follow-up to the Baccalaureate and Beyond
Longitudinal Study (B&B:93/94). The B&B tracks the experiences of a cohort of college
graduates who received baccalaureate degrees in academic year 1992-93 and provides
information on undergraduate enrollment, labor market experience, family background, and

10
other demographic characteristics. There are 10,080 respondents who participated in the First
Follow- up. As a secondary resource, we use the Second Follow-up (B&B:93/97) to impute
missing information whenever possible.
We restrict our analysis to the occupational choices of women because they represent a
substantial share of both elementary (90.2 percent) and secondary (53.7 percent) public school
teachers (reference). We then limit the sample to full-time employees working at least 30 hours
per week and exclude individuals whose occupation cannot be identified as a public sector
teacher or non-teacher and those whose SAT score cannot be converted. 7 Based on these
exclusions, our final sample size is 3,576 observations, of which 454 are public school teachers
and 3,122 are employed in occupations other than teaching.
Table 1 provides demographic statistics for our sample by occupation. Differences
discussed are significant at the p = .05 level unless otherwise noted.

[Table 1. Descriptive Statistics about here]

The dependent variable of interest is the natural log of salary in Ap ril 1994. Salaries are adjusted
for inflation and are reported in 1997 real dollars. Salaries are annualized if they were reported
as hourly, weekly, or monthly wages (see Appendix for details on variable construction). The
average salary for non-teache rs is $24,256, about $2,500 higher than that of the average salary
for public sector teachers. This difference is statistically significant under the assumption of
unequal variances.
Consistent with several studies (Ballou and Podgursky, 1997; Ehrenberg and Brewer,
1994; Hanushek and Pace, 1995; US Department of Education, 1996), we find significant
differences in several measures of the academic skills of public school teachers relative to non-
teachers. For example, the mean individual SAT score for pub lic school teachers is 937.1
compared to a mean of 979.4 for non-teachers.
We measure college selectivity as the average SAT score of the incoming freshman class
at each individual’s undergraduate institution in academic year 1989–1990. We use data from
Barron’s Profiles of American Colleges and the College Board. Public school teachers tend to
graduate from less selective colleges (as measured by the mean SAT of incoming college
freshman at the school from which individuals graduated).

7
ACT scores less than 11 cannot be converted to re-centered SAT scores due to small sample sizes.

11
 Interestingly, the average GPA for public sector teachers is higher than that of non-
teachers, although this may simply reflect differences in the grading standards of varying majors.
Our sample statistics suggest that there are relatively few individuals who have technical majors
who choose to teach, where technical major is defined as Engineering, Biological Sciences, and
Mathematics and Other Sciences.
We also use data from the Integrated Postsecondary Education Data System (IPEDS).
This data set administered by the National Center for Education Statistics allows us to determine
the percent of education majors of the incoming freshman class for each individual.
We are particularly interested in the relationship between undergraduate major and salary
since some school systems are facing particular difficulties recruiting math and science teachers
(Hassel, 2002; Hare et al, 2000; Harrington, 2001; Shields et al, 2001). Table 2 presents average
salary and measured academic proficiency by undergraduate major.

[Table 2. Salary and Demonstrated Academic Proficiency by Undergraduate Major about here]

There are no statistically significant differences in the average salary by major within the
public sector teacher labor market. In contrast, education majors make on average $7,861 less
than technical majors and $6,663 less than all other majors in the non-teacher labor market. We
also observe significant differences by major for our measures of academic proficiency. As a
whole, technical majors attend more selective colleges and have higher individual SAT scores.
These findings are consistent with earlier research on the standardized test scores of public
school teachers (Henke, et al 1996, 2000).
As an additional source of data, we use the Common Core of Data (CCD) in some
specifications of the wage regressions for public sector teachers. CCD contains information on
schools that we merge onto B&B:93/94 data set to explore the effect of non-pecuniary factors
such as student characteristics on wages (Loeb and Page, 1998; Hanushek, Kain, and Rivkin
2001).

Results

Ordinary Least Squares Earnings Estimates

12
 We begin in Table 3 by presenting selected results from estimating OLS log wage
equations. Column 1 reports the coefficient estimates for female college graduates in the public
teacher labor market and column 2 shows the results for women who were employed in non-
teaching occupations. A comparison of columns 1 and 2 shows preliminary differences in the
magnitudes and statistical significance of many of the reported coefficient estimates, suggesting
that the salary structure outside of education is quite different than that of the teacher labor
market. This is confirmed by a Chow test that rejects the null hypothesis of equal coefficients at
the one percent level, implying the log earnings models should be separately estimated.
The teacher labor market appears to reward some measures of academic proficiency and
training more than others. Teachers who achieve higher undergraduate GPAs are estimated to
receive a salary premium of approximately 10 percent for each additional letter grade of
achievement. However, consistent with Ballou (1996), there is little evidence of a premium
associated with attending a more selective college. The point estimate suggests that women with
technical majors receive a 19 percent higher salary relative to non-technical, non-education
majors. Education majors are also predicted to earn 12 percent more than non-technical, non-
education majors, suggesting that schools value the training conferred by the major. One might
expect this finding if having an education major is associated with greater teacher productivity.
However, educational production function studies that identify teacher major generally do not
find this to be the case (Goldhaber and Brewer, 1997).

[Table 3 ABOUT HERE]

Consistent with previous findings (e.g. Ballou, 1996; Brewer et al., 1999; Grogger and
Eide, 1995; Murnane et al., 1995), many measures of academic proficiency and training are
significant in predicting earnings for non-teachers (see column 2). Those who achieve higher
GPAs are estimated to receive a salary premium of approximately 14 percent for each additional
letter grade of achievement. This point estimate is higher than the estimate in the teacher labor
market, 4 percent, though the two estimates are not statistically different from each other. Those
who attend more selective colleges receive a premium of more than 2 percent for each 100 point
increase in the average SAT of college freshman of the attended college, however, this estimate
is not significantly different from the estimated return in the teacher labor market. Finally, there
are stark, statistically significant, differences in the estimated returns to college training.

13
Relative to non-technical, non-education majors, women with technical majors receive a salary
premium of 8 percent, whereas women with education majors are predicted to make 26 percent
less than non-technical, non-education majors. This may be evidence that the training conferred
by education majors is not easily transferable to the non-teacher labor market. 8
We also estimate OLS models that include individual SAT score in place of our measure
of college selectivity and that disaggregate individual SAT score into separate verbal and math
components. We do not observe any noteworthy differences between the coefficient estimates
for each labor market and do not report those results here.
Our baseline results suggest that individuals with college majors other than education
face higher opportunity costs to enter the teacher labor market. The positive and significant
return to college selectivity in the non-teacher labor market, in comparison with the non-
significant estimate in the teacher labor market, provides some additional evidence of different
opportunity costs, albeit statistically weak.
There are two important reasons to be cautious in interpreting these results. The first is
the possibility that our estimates of the true returns to these measures of academic proficiency
and training are biased because we have ignored non-pecuniary job characteristics in estimating
our models (Goddeeris, 1988; Hanushek et al., 2001; Levinson, 1988; Loeb and Page, 1998). To
account for this potential, we report in column 3 estimates of the model that include percent
minority student, percent free- lunch eligible students, urbanicity, and class size as controls. The
difference between each coefficient estimate with these school attributes is not statistically
different than the estimates without these school- level variables included.
A second reason to be cautious about the interpretation of these OLS results is that they
do not account for the fact that individuals select their occupations non-randomly. Unobserved
individual attributes correlated with both earnings and our measures of academic proficiency and
training will bias our estimated coefficients. Thus, in the next sub-section we describe our wage
regressions correcting for sample selection.

8
The choice of college or college major may itself be endogenous (Reback, forthcoming), and thus we also estimate
specifications of the model that exclude college selectivity, undergraduate major, and college GPA and instead
include only individual SAT. Though not reported here, the findings were quite consistent with those in the reported
specifications. Individual SAT is found to be statistically significant in the non-teacher labor market but not in the
teacher labor market, but there is not a statistically significant difference between the two point estimates.

14
Sample Selection Corrected Earnings Estimates

Our models assume individuals select occupations based, in part, on anticipated earnings.
Thus, it is necessary to account for this potential in estimating earnings equations. As described
above, we do this by first estimating a reduced form probit of occupational choice for the
purpose of constructing the sample selection variable ?ij, which is then inserted into the log
earnings equations. Percent of education majors and parent occupation independently predict
occupational choice in the first stage reduced form probit but as a set fail a test of overidentifying
restrictions. For this reason, below we report only the wage model results for each instrument
used separately.
The sample selection corrected earnings estimates are reported for each instrument in
columns 4 through 7 of Table 3. Overall, we find little evidence of self- selection into the teacher
or non-teacher labor markets since the estimated coefficient on ? is not statistically significant in
either model specification. However, in both specifications, the sign on ? is negative, suggesting
that the earnings of those choosing to teach is lower than the earnings for an individual less
likely to have made that choice.
Comparing the teacher labor market coefficient estimates from the baseline OLS model
in columns 1 and 3 with the sample selection correction estimates in columns 4 and 6, we see
that the estimates of the returns to college selectivity are consistently not significant. Notably,
the coefficient estimate for college GPA decreases and is no longer statistically significant in the
sample selection models, suggesting that there may indeed be a need to correct for bias. The
magnitudes of the coefficients of the college major variables also tend to be sensitive to the
particular specification of the model. In particular, the return to an education major in the public
teacher labor market is –7 percent and –5 percent in columns 4 and 6 respectively. Both are
statistically insignificant and different from the 12 percent premium predicted in the OLS model.
Similarly, the return to technical major relative to non-technical, non-education majors is not
significant when we use percent education majors as an instrument and only marginally
significant when we use parental occupation.
For non-teachers, the corrected coefficient estimates for the non-teacher labor market in
columns 5 and 7 are remarkably similar in sign, statistical significance, and magnitude to those
of the baseline OLS model in column 2. Those who attend more selective colleges receive a
premium of more than 2 percent for each 100 point increase in the average SAT of college

15
freshman of the attended college. And, each specification of the model shows the non-teacher
labor market to more highly value technical majors relative to education majors than does the
teacher labor market.
These findings suggest that correcting for sample selection eliminates some of the bias
from the coefficient estimates for college GPA and undergraduate training. Without correcting
for this bias, we would predict positive returns to these individual attributes in the teacher labor
market. However, when we account for the probability with which individuals choose particular
occupations, the returns to college GPA and undergraduate major in the teacher labor market
diminish.
We use the estimates reported in Table 3 to calculate the average salary differential
between teachers and non-teachers (the predicted earnings for teachers less the predicted
earnings for non-teachers). Positive values imply that the individual is predicted to earn more as
a teacher and negative values imply that the individual is predicted to earn more as a non-
teacher. Three different predicted salary differentials are reported. The first is the opportunity
cost based on our baseline OLS estimates. The second is the differential for a person with
observable characteristics that are the same as the sample mean and taken at random. That is, it
is the unconditional opportunity cost for an individual based only on observed characteristics.
The third is the conditional opportunity cost based on the specifications reported in columns 4
and 5 with the sample selection term included in the calculation of the predicted wages. Thus,
this represents the returns to both observable and unobservable characteristics, both of which
may have caused an individual to choose a particular occupation (Gyourko and Tracy, 1988).
These calculated differentials are reported in Table 4 for hypothetical cases of individuals
with different college majors. Other than undergraduate training, the hypothetical individuals
have characteristics equivalent to the characteristic values at mean of the sample.
[Table 4 ABOUT HERE]
In column 1, we see that the average individual is predicted to earn more as a non-teacher
than as a teacher. Such an individual with a technical major is predicted to sacrifice –$188 to
enter the teaching profession, and non-technical, non-education majors are predicted to sacrifice
–$2,501. The average individual with an education major, however, is predicted to earn $5,141
more as a teacher than as a non-teacher.

16
 When we examine the opportunity cost based on our unconditional model, we see that
individuals with various undergraduate majors are predicted to make much more as teachers.
That is, if we take a person at random with the average characteristics and calculate their
opportunity cost based only on that person’s observable characteristics, we would expect the
person to earn more as a teacher.
A comparison of columns 1 and 3 shows that controlling for self-selection tends to
decrease the estimated premium paid to teachers (or increases the estimated premium for non-
teaching). While the average individual with an education major is predicted to earn $577 more
as a teacher, the average individual with a technical or a non-technical, non-education major is
estimated to sacrifice higher annual salaries (–$659 and –$1,914 respectively) to enter the
teacher labor market.

Structural Probit Estimates of Occupational Choice

The final step in our estimation strategy is to use the predicted earnings for teachers and
non-teachers to estimate how anticipated earnings affect the occupational choice decision. In
Table 5, we report the marginal effects estimates of the impact of the earnings differential on the
probability of choosing teaching as an occupation. Though the estimated magnitude of the effect
depends on the particular model specification employed, our results are consistent with
expectations: as the economic benefits associated with teaching rise, the probability of selecting
teaching as an occupation increases.
[Table 5 ABOUT HERE]
In columns 1 and 3, we estimate the structural probit model where individual opportunity
cost is calculated from the conditional wage model. That is, we explicitly account for the
observed occupational choice and the impact of unobservables on wage determination. While
the magnitude of the coefficient is difficult to define, it is positive and significant, suggesting
that the greater the difference between one’s predicted salary as a teacher and one’s predicted
salary as a non-teacher, the greater the likelihood of entering the teaching profession.
In columns 2 and 4, we estimate unconditional opportunity costs by calculating the
opportunity cost without incorporating information on the likelihood of occupation on wages.

17
We see that the impact of opportunity cost on the decision to enter the teaching profession
decreases in magnitude, but is still positive and significant.

Conclusion

This paper analyzes the decision to choose teaching as an occupation and the role
differences in compensation structures play in that decision. Our results indicate that there are
significant differences in the structure of compensation in the teacher and non-teacher labor
markets. Although we find initial evidence of returns to GPA and undergraduate major in the
teaching profession, these estimates diminish in magnitude and significance one we correct for
sample selection. We find positive returns to GPA and college selectivity and differential returns
to undergraduate major for non-teachers in both the OLS and sample selection models.
Structural probit estimates of the decision to teach indicate that these earnings differences do
affect occupational choice decisions, implying that the salary structure in teaching tends to act as
a disincentive to enter teaching for those with demonstrated academic proficiency or non-
education majors while in college.
These findings should be taken in consideration when advocates maintain that teaching is
calling. Certainly there are non-pecuniary factors that determine occupational choice. Their
argument is that if we differentiate pay, we will in fact attract applicants who are less desirable.
Two points need to be made in response to this claim. First, when we examine teachers who are
not motivated by money, certainly some will leave as salaries become too low. Second, when
we differentiate between technical and non-technical majors, we will still lose some teachers due
to differences in reservation wages. All else equal, we will lose teachers.

18
Table 1. Descriptive Statistics

Public
Non-Teachers
Teachers
$21,723.81 $24,255.79
Annual Salary
(6165.71) (44082.63)
0.66% 0.86%
% Native American
(0.08) (0.09)
% Asian Pacific Islander 0.00% 3.33%
American (0.00) (0.18)
5.73% 6.85%
% African American
(0.23) (0.25)
9.25% 4.90%
% Hispanic American
(0.29) (0.22)
84.14% 83.41%
% White
(0.37) (0.37)
0.22% 0.64%
% Missing race
(0.05) (0.08)
47.57% 26.36%
% Married
(0.50) (0.44)
1.97 1.57
Number of Dependents
(1.20) (0.99)
955.80 997.23
College Selectivity
(107.17) (114.7)
937.14 979.41
Individual SAT
(180.55) (186.38)
Undergraduate Grade Point 3.29 3.09
Average (0.42) (0.49)
4.41% 10.19%
% Technical Major
(0.21) (0.30)
78.19% 10.44%
% Education Major
(0.41) (0.31)
17.4% 79.37%
% All Others
(0.38) (0.40)
0.98 1.00
Years of Experience
(0.33) (0.33)
N 454 3122
NOTE: Standard deviations are in parentheses
Source: U.S. Department of Education, National Center for
Education Statistics. Baccalaureate and Beyond Longitudinal Study,
“1993/1994 First Follow-up”

19
Table 2. Salary and Demonstrated Academic Proficiency by Undergraduate Major

Public Sector Teachers Non-Teachers

Technical Education All Other Technical Education All Other

Majors Majors Majors Majors Majors Majors
$22,397.49 $21,811.38 $21,159.74 $26,027.05 $18,166.19 $24,829.62
Annual Salary
(5406.42) (6076.42) (6754.15) (22832.59) (8814.94) (48641.43)
College 1015.3 958.4 952.3 1025 995.5 982.3
Selectivity (103.5) (120.8) (103.7) (129.4) (113.1) (106.1)
987.1 963.1 929.3 1055.4 970 967.6
Individual SAT
(201.2) (180) (179.1) (177.4) (187.3) (170.6)
N 20 79 355 318 2478 326

NOTE: Standard deviations are in parentheses

Source: U.S. Department of Education, National Center for Education Statistics. Baccalaureate and Beyond
Longitudinal Study, “1993/1994 First Follow-up”

20
Table 3. Log Annual Salary Selected Parameter Estimates

Public Public Public Public

Non- Non- Non-
Sector Sector Sector Sector
Teachers Teachers Teachers
Teachers Teachers Teachers Teachers
OLS Sample Selection
(1) (2) (3) (4) (5) (6) (7)

College 0.0163 0.0224** 0.0131 0.0245 0.0208** 0.0245 0.0236**

Selectivity*100 (0.0202) (0.0089) (0.0205) (0.0215) (0.009) (0.0196) (0.0089)
0.1036** 0.1440** 0.1108** 0.0642 0.1509** 0.0717 0.1383**
College GPA
(0.0441) (0.018) (0.0446) (0.0651) (0.019) (0.0468) (0.0186)
0.1904** 0.0800** 0.2269** 0.1519 0.0855** 0.1605* 0.0755**
Technical Major1
(0.0911) (0.028) (0.0933) (0.0968) (0.0282) (0.0860) (0.0280)
0.1188** -0.2595** 0.1273** -0.0723 -0.2010** -0.0496 -0.3045**
Education Major
(0.0482) (0.0277) (0.0487) (0.2487) (0.0623) (0.1284) (0.0500)
Years of 0.1486** 0.1598** 0.1560** 0.1743** 0.1547** 0.1714** 0.1637**
Experience (0.0539) (0.0260) (0.0543) (0.0601) (0.0262) (0.0526) (0.0259)
School
No No Yes No No No No
Characteristics
Percent Percent
Identifying Parent Parent
† † † Education Education
Restriction Occupation Occupation
Majors Majors
-0.1329 -0.0926 -0.1201 0.0757
Lambda † † †
(0.1699) (0.0885) (0.0858) (0.0704)

N 454 3,122 454 454 3,122 454 3,122

2
R 0.2245 0.1438 0.2398 † † † †
Wald ?2 † † † 830.4 1169.6 871.8 1231.0

Regressors include race, marital status, number of dependents, state fixed effects, parental income, and parental
education
NOTE: Standard errors are in parentheses
† Not applicable
1
Omitted category is non-technical, non-education majors
Source: U.S. Department of Education, National Center for Education Statistics. Baccalaureate and Beyond
Longitudinal Study, “1993/1994 First Follow-up”

21
Table 4. Simulated Opportunity Costs

OLS Unconditional Conditional

(1) (2) (3)

Average
-$755 $5,588 -$1,279
Characteristics

Technical
-$188 $7,347 -$659
Major
Education
$5,141 $6,998 $577
Major
All Other
-$2,501 $4,935 -$1,914
Majors

22
Table 5. Structural Probit Marginal Effects Estimates

Conditional Unconditional

Percent Parent Percent Parent

Identifying Restriction Education Occupation Education Occupation
Majors Majors

(1) (2) (3) (4)

0.3732** 0.3702** 0.1119** 0.2425**
Salary Differential
(0.0212) (0.0205) (0.0274) (0.0269)
Log Likelihood -1126.9 -1348.2 -1282.6 -1274.5

NOTE: Standard errors are in parentheses

Source: U.S. Department of Education, National Center for Education Statistics. Baccalaureate
and Beyond Longitudinal Study, “1993/1994 First Follow-up”

23
Table 6. Simulated Probability of Becoming a Teacher

OLS Unconditional Conditional

Average
.0959 .2489 .0850
Characteristics

Technical
.1072 .2754 .984
Major
Education
.2651 .3250 .1255
Major
All Other
.0675 .2270 .0759
Majors

24
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Appendix

This appendix details construction of the variables used in our analysis. Italics denote variable
names from the B&B:93/94 and B&B93:97. Questions regarding the survey should be directed
to the National Center for Education Statistics in the U.S. Department of Education. Unless
otherwise noted, variables with missing data are coded to 0 and flagged.

Demographic Characteristics

We identified the gender of the respondent using B2RSEX from the B&B:93/97 and
supplemented it with the gender variables RSEX, GENDER, SEX, and M_STGEN from
B&B:93/94 and NPSAS:93.
We use B2ETHNIC to create a set of separate dummy variables for race for the
categories Native American, Asian and Pacific Islander American, Black, Non-White Hispanic,
Other, and White.

Demonstrated Academic Skills and Educational Attainment

Respondents’ college selectivity is defined as the average SAT score of the incoming
class of AY 1989-1990 at the undergraduate institution from which they graduated. Data were
imputed from the Barron’s Profiles of American Colleges. If only ACT scores are available, we
convert these scores to SAT using the conversion table found at
http://www.collegeboard.com/sat/cbsenior/yr2001/pdf/ten.pdf. Missing values are supplemented
with data supplied by The College Board.
We use B2BAMAJR to construct a set of separate dummy variables for undergraduate
major for the categories business and management, education, engineering, health professions,
public affairs / social services, biological sciences, mathematics and other sciences, social
science, history, humanities, psychology, and other. We then construct a composite technical
major by combining engineering, biological sciences, and mathematics and other sciences majors
together. Of the remaining majors, education is coded as such, and all other majors are
aggregated into non-technical, non-education majors.

28
 For undergraduate grade point average, we use NORMGPA from the transcript survey if
it is available. Otherwise, we use data from CUMULGPA in B&B:93/94, which asked
respondents about their cumulative grade point average.

Family Status

Marriage status in April, 1994 is derived from B2MAR494. Single, divorced, separated,
windowed, and living in a marriage like relationship are considered not married. The total
number of dependents (including the respondent) is derived from TOTNUMDP.

Labor Market Experience

We calculate labor market experience using the employment array EMPLOY01-

EMPLOY30. We consider an individual employed in a given month if the month is after the
graduation date and before or equal to the relevant month of employment (see Salary and
Employment).

Parent Background Variables

Parents of a subset of the NPSAS:93 respondents were interviewed about the financing of
their child’s undergraduate education. MOMOC and DADOC contain the occupation of the
mother and father respectively. We code a flag if parent occupation is “school teacher.”

Salary and Employment

For B&B:93/94, respondents providing earnings data on their primary job in April, 1994.
Data were reported as a real dollar figures in APRANSAL, which we converted to 1997 dollars.
We assume a 260 day work year, a 52 week year, and a 12 month year. We derive hours worked
per week from AJOBHRS.
For each salary figure, respondents were asked about their occupation. Because the
occupation codes for the two follow-ups differ, MPR reconstructed the variables to match the
coding scheme of B&B:93/97. These two new variables, AJOBOCCR and B2AJOBR, are
available from MPR.

State of Employment

29
 B1STATE provide information on residence at the time of the interview. Individuals in
Puerto Rice, Virgin Islands, or other countries were coded as other, and those with missing
information were coded as missing. We construct a set of separate dummy variables for each
state.

Teacher Sector

For respondents in B&B:93/94 we use TCHSCHL, which provides the NCES code for
the school taught at most recently. We assume that the questions for April, 1994 salaries
correspond to this school. Schools without NCES codes but for which there was sufficient data
on name, city, and state of school were imputed with codes from the Common Core of Data and
the Private Sector Survey.

NCATE and Percent Education Majors

Data on NCATE accreditation comes from its 1989 publication. An institution is coded
as being NCATE accredited if it is certified in at least one education program at the
undergraduate level.
The percent of education majors is derived from the 1992-1993 IPEDS data set from the
National Center for Education Statistics. IPEDS contains information on the number of
graduating students and the distribution of majors for each college and university.

30

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