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How does a large unconditional increase in salary affect employee performance in the public sector? We present the first experimental evidence on this question in the context of a unique policy change in Indonesia that led to a permanent doubling of base teacher salaries. Using a large-scale randomized experiment across a representative sample of Indonesian schools that accelerated this doubling of pay for teachers in treatment schools, we find that the doubling of pay significantly improved teacher satisfaction with their income, reduced the incidence of teachers holding outside jobs, and reduced self-reported financial stress. Nevertheless, after two and three years, the doubling in pay led to no improvements in measures of teacher effort, and had no impact whatsoever on student learning outcomes. Thus, contrary to the predictions of various efficiency wage models of employee behavior (including gift-exchange, reciprocity, and reduced shirking), as well as those of a model where effort on pro-social tasks is a normal good with a positive income elasticity, we find that large unconditional increases in salaries of incumbent teachers had no meaningful positive impact on student learning.

Double for Nothing? Experimental Evidence on the Impact of an Unconditional Teacher Salary Increase on Student Performance in Indonesia