Teacher hiring decisions: How do governments react to an exogenous redistribution of education funds?

Highlights • Municipalities benefited by the FUNDEF redistribution increased teacher salary. • Municipalities harmed by the redistribution increased expenses by hiring teachers. • The amount transferred led to an increase in teachers and a decrease in salaries. • The net value was more important to salary levels than the absolute value. • Results suggest that bargaining power is an important factor in hiring decisions. Abstract This paper examines the teacher hiring decisions of Brazilian local governments in response to an education funding reform, called FUNDEF. The reform redistributed funding across municipalities and determined a minimum spending on teachers. While several papers have already examined the overall effect of the FUNDEF reform, this is the first analysis of the effects of the municipalities' relative positions after the redistribution on hiring decisions. Using a simulated difference-in-differences model, I find that FUNDEF only led to salary increases in municipalities that benefited from the redistribution. Contrary to its initial goal, municipalities harmed by the redistribution responded by increasing hiring. Additionally, employing a simulated instrumental-variable model, I find that the amount received in FUNDEF transfers did not lead to pay increases. Models of government-union interaction are used to explain these results, suggesting that the bargaining power is the main driver of teacher pay. [ABSTRACT FROM AUTHOR]