Teacher pay, class size and local governments: evidence from the Latvian reform

This paper employs a rich collection of survey and administrative datasets, including linked
school-teacher payroll data, to document the reform of teacher compensation and school
network implemented in Latvia amidst the economic crisis of 2008-2010, immediately after
territorial reform. We explore diverse responses by local governments in terms of proportion
of state subsidy transferred to schools, extent of redistribution of state funds between
schools, degree of autonomy in compensation policies given to schools, and municipal
contribution to school wage bills. Other things equal, municipalities tend to redistribute funds
from schools with high student-teacher ratio (S/T) to ones with low S/T. Nevertheless, the
reform has changed the effect of the local student-teacher ratio on teacher earnings per
workload from negative to positive of the same size. Survived schools feature strong
heterogeneity in terms of workload and staff reduction, change in class size, and
compensation strategies. We provide evidence for a substantial incidence of using
performance-related criteria for teacher base salary differentiation. We analyze school and
individual level determinants of teacher pay using mixed models with municipality and school
level random effects.