The Long-Term Spillover Effects of Changes in the Return to Schooling

We study the short and long-term spillover effects of a pay reform that substantially increased the returns to schooling in Israeli kibbutzim. This pay reform, which induced kibbutz students to improve their academic achievements during high school, spilled over to non-kibbutz members who attended schools with these kibbutz students. In the short run, peers of kibbutz students improved their high school outcomes and shifted to courses with higher financial returns. In the medium and long run, peers completed more years of postsecondary schooling and increased their earnings. We discuss three main spillover channels: diversion of teachers’ instruction time towards peers, peer effects from improved schooling performance of kibbutz students, and the transmission of information about the returns to schooling. While each of these channels likely contributed to improving the outcomes of peers, we provide suggestive evidence that the estimates are more consistent with the effects operating mainly through transmission of information.