Economics of Education Review 21 (2002) 579–588 www.elsevier.com/locate/econedurev The effects of school quality on income Kathryn Wilson * Department of Economics, Kent State University, Kent, OH 44242, USA Received 6 December 1999; accepted 6 June 2001 Abstract This paper uses a unique data set created by merging the Panel Study of Income Dynamics with school data from the Common Core of Data to examine the relationship between school expenditures and earnings. I find that school expenditures are related to earnings, and also positively affect the returns to schooling. This is particularly important given recent papers that have found no effect because this study is able to observe wages at later ages and is estimated for males and females. Robustness estimates find that if the sample were only observed at young ages, or estimated for white males, as has been done previously, the results would not hold. Therefore, it appears that even using an individual-level data set with students educated in this half of the century, school spending affects earnings.  2002 Elsevier Science Ltd. All rights reserved. JEL classification: I2 Keywords: Expenditures; Human capital; Rate of return 1. Introduction Economists have been very interested in the effects of school spending on educational attainment. Given the large role of education within federal, state and local budgets, over $287 billion dollars, it is important to understand how these funds affect education. While the relationship may seem obvious, more money is associa- ted with high educational attainment, there is certainly not a consensus on the answer to the question in the empirical economics literature. Hanushek (1997) has reviewed 90 individual publications on the question, including 377 separate production function estimates, and concludes that there is not a strong or consistent relationship between resources and performance. 1 Hedges, Greenwald, and Laine (1994) examines many of the same studies and reaches a very different con- clusion that indeed school resources do matter. * Tel.: +1-330-672-1093; fax: +1-330-672-9808. E-mail address: kwilson@bsa3.kent.edu (K. Wilson). 1 See also Hanushek (1991, 1986, 1989). 0272-7757/02/$ - see front matter  2002 Elsevier Science Ltd. All rights reserved. PII:S0272-7757(01)00048-6 In recent years, in part in response to the ambiguity of the literature on academic performance, the focus of the question does money matter has been expanded to look not just at academic outcomes such as test scores and quantity of education, but to look at labor market outcomes. As Card and Krueger (1996) point out, “To economists, however, the labor market is the natural yardstick for measuring the effectiveness of schools.” Betts (1995) expresses the same concept in stating, “Indeed, if earnings are the metric by which economists measure success in the labor market, it makes more sense to use wages or earnings to gauge the effectiveness of schooling” (p. 231). However, in the studies of the effect of school spending on labor market earnings, once again no clear consensus emerges. This paper uses a unique data set to examine the effects of school spending on the labor market outcomes of a cohort of young adults. By combining neighborhood data from the US Census and school expenditure data from the Common Core of Data, to the extensive family background data of the Panel Study of Income Dynam- ics, many of the flaws that plagued previous papers in this area can be avoided. In their summary of this area