Schooling Spending Differences are not the Source of Income Inequality

Summary of working paper 7450
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Growth in math and reading scores between the fourth and eighth grade is not related to spending differences across states.

Analyses of income inequality invariably highlight the central role of education and "human capital," leading naturally to parallel policy concerns about differences in school quality. Despite controversy about the impact of spending on school quality, government policy and court actions continue to focus on altering resources for schools. In Schooling, Inequality, and the Impact of Government (NBER Working Paper No. 7450), Eric Hanushek and Julie Somers investigate spending differences both across and within states and find little support for a link between governmental school spending policies and labor market inequalities.

The authors note that about two-thirds of the variation in spending on schools comes from differences in average spending levels across states. Federal spending has been small (7 percent of the total) and has focused mainly on disadvantaged populations, but it has led to little equalization of overall spending across states. More importantly, the differences in spending have not had an important effect on the growth in student achievement in the states. Using achievement data by state for the 1990s from the National Assessment of Educational Progress (NAEP), Hanushek and Somers find that growth in math and reading scores between the fourth and eighth grade is not related to spending differences across states, although it is related to parental education levels. This is also consistent for white, black, and Hispanic students, suggesting that spending is not the explanation for the racial and ethnic convergence of overall NAEP scores during the 1980s.

To date, most of the attention to spending inequalities has focused on variations within states, though. For the three decades following the landmark Serrano v. Priest case in California, lawsuits have drawn attention to inequalities in spending across state school districts. But, although courts in a third of states have overturned their state funding laws, little is known about the effects of spending inequality or equalization efforts on outcomes.

The authors directly investigate the effects of spending disparities on subsequent labor market inequality. They begin with school spending variations within each state for different classes attending high school between 1968 and 1996 and combine these data with data on family backgrounds. They then investigate the effect of both on variations in1990 earnings.

They find that for white men and white women, there is a statistically significant negative relationship between variations in school spending and variations in later earnings; that is, the more uniform school spending is, the more inequality appears in subsequent earnings. For black men, the relationship between spending and earnings is not significant. Only for black women does reducing variation in school spending appear to reduce earnings inequality.