Compensation Matters: The Case of Teachers

The 2008 financial crisis sharply reduced the assets and funded levels in state and local pension plans. he drop in funding means that state and local governments have to raise additional revenue to fill the gap. At the same time, the ensuing recession eroded state and local revenues and increased the demand for public services. In response, governments have looked to cut benefits to their workers in order to reduce pension costs. Since, in many cases, state laws prevent any reduction in b enefits for current employees, much of the cost-cutting activity has been aimed at new employees. As discussed below, studies have shown that total compensation is roughly equal in the public and private sectors, so a reduction in pension benefits will make total compensation lower in the public sector than in the private sector. Economic theory suggests that lower compensation will reduce the quality of workers attracted to the public sector. To assess the impact that recent cuts to pension benefi ts may have on the public sector workforce, this brief examines how total compensation differences within the public sector affect the quality of newly hired teachers.