Investment in Schooling Responds to Changes in Returns

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Kibbutz ... pay reforms that reduced the effective tax rate increased high school completion rates ... by 3.3 percentage points.

In Israel prior to 1998, all kibbutz members received equal wages -- the wages of those working outside the kibbutz were pooled with the kibbutz profits and the sum was divided equally among the members. After 1998, some kibbutzim began basing their members' wages on the market wages for workers with similar occupations, skills, education, and experience. To create a minimum wage safety net for the elderly and low-wage earners, a kibbutz tax was still deducted from members' gross wages, but it was much lower than the effective 100 percent tax on higher earnings that prevailed before the reforms. In other words, the reforms raised the returns to kibbutz members who acquired more human capital by investing in education or other skills.

In How Responsive is Investment in Schooling to Changes in Redistribution Policies and in Returns (NBER Working Paper No. 17093), Ran Abramitzky and Victor Lavy compare educational outcomes for high school students living on kibbutzim before and after these pay reforms. The researchers show that pay reforms that enabled kibbutz residents to keep a greater share of their increased wages raised high school completion rates, already over 95 percent, by 3.3 percentage points. They also increased the mean score on the Bagrut, the nationwide qualifying exam for both the highly regarded Bagrut high school diploma and for entry into university, by 5 percent and increased the fraction of students with university-qualified Bagrut scores by 6 percent.

The authors further find that the effects of pay on schooling vary with the extent of the pay reforms, parents' education, students' gender, and the length of time since the reform came into play. The effects of the reforms were relatively small for students from highly educated families, in contrast to relatively large effects for students from families with lower parental education who had been covered by the pay reform for all of their years in high school. This group's high school completion rates increased by 4.4 percent, their mean exam score went up by 8.3 points, their qualification rate for the Bagrut diploma increased by 19.6 percent, and the fraction of students with university qualifying scores increased by 16.8 percent. The authors also present evidence suggesting that boys were most strongly influenced by the change.

The pay reform produced larger increases in educational outcomes than monetary bonuses for Bagrut diploma qualifying scores, a school choice program that allowed students to choose their high school in seventh grade, or a teacher bonus program that paid teachers of math, English, and Hebrew bonuses when their students did well on the Bagrut.

--Linda Gorman