Local amenities, unobserved quality, and market clearing: Adjusting teacher compensation to provide equal education opportunities

Local school districts differ in their ability to pay for teacher quality, and in the amenities they offer as places to live and work. Market clearing with heterogeneous quality yields geographically varying teacher salary levels that confound scarcity with unobserved differences in quality. The paper discusses identification and estimation of a model of quality-adjusted teacher salaries in local markets with unobserved market-clearing prices. Exogenous variables in the model include community and district characteristics, job characteristics and working conditions, and individual characteristics. We apply the model to estimate the relative cost of providing comparably qualified teachers for urban and rural public schools in the state of Alaska, which has high geographic variation in amenities and local financial resources. The quality-adjusted geographic salary differentials implied by the results suggest much larger compensation differentials for isolated rural schools than most of these school districts can afford under current levels of state support.