Precarious Slopes? The Great Recession, Federal Stimulus, and New Jersey Schools - Federal Reserve Bank of New York

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Precarious Slopes? The Great Recession, Federal Stimulus, and New Jersey Schools

2014 January 2012 Number 538
Revised September 2012

JEL classification: H4, I21, I28

Authors: Rajashri Chakrabarti and Sarah Sutherland

While a sparse literature investigates the impact of the Great Recession on other sectors of the economy, there is virtually no research that studies the effect of the Great Recession, or past recessions, on schools. This paper starts to fill the void. Studying school funding during the recession is of paramount importance because schools have a fundamental role in fostering human capital formation and economic growth. We exploit rich panel-data and trend-shift analysis to analyze how New Jersey school finances were affected during the Great Recession and the ARRA federal stimulus period. Our results show strong evidence of downward shifts in both revenue and expenditure following the recession. Federal stimulus seemed to have helped in 2010, however, both revenue and expenditure still declined. While total revenue declined, the various components of revenue did not witness symmetric changes. The infusion of funds with the federal stimulus occurred simultaneously with statistically and economically significant cuts in state and local financing, especially the former. Our results also show a compositional shift in expenditures in favor of categories that are linked most closely to instruction, while several noninstruction categories, including transportation and utilities, declined. Interestingly, budgetary stress seems to have led to significant layoffs of untenured teachers, leading to a rightward shift of the teacher salary and experience distributions. Heterogeneity analysis shows that high-poverty and urban districts sustained the largest falls in the post-recession era. The findings of this paper contribute valuable insight regarding schools’ financial situations during recessions and can serve as a guide to aid future policy decisions.

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