Ever since Margaret Thatcher was returned to power for a third term in 1987, with a radical agenda to reform state education, the main thrust of government policy in this country has been to create a quasi-market of competing schools.

Various reforms, culminating in the 1988 Education Reform Act, have led to the creation of a system in which schools are now in direct competition for pupils, with parents enjoying considerable freedom to choose which schools to send their children.

The logic underpinning this new “market” is that the increase in competition between schools will ultimately lead to an overall improvement in the quality of education - especially in terms of examination results.

That’s the theory, but does it work?

A comprehensive study of all non-selective English secondary schools has recently been completed by researchers at Lancaster University’s Management School. This review focuses on the impact which the introduction of a quasi-market in education has had on school efficiency. Its findings suggest that many of the policy changes have been beneficial.

Using a method known as data envelopment analysis (see box), the study evaluates the technical efficiency of all non-selective secondary schools in England.

The specific measure of efficiency used in the study is based on how schools convert inputs such as the social mix of pupils and the quality of staff into outputs such as examination results and attendance rates. The analysis covers the years from 1993 to 1998, drawing on information provided by the Department for Education and Employment’s school performance tables.

In all, the impact on school performance of a large number of variables has been considered. These include measures of school type, finance, local area characteristics and competition.

The effect of competition on school performance is especially strong. Other things being equal, schools which compete with a large number of other schools in the local area tend to be more efficient than schools which do not. Moreover, schools with a relatively efficient local competitor themselves tend to have enhanced efficiency.

The competition effects have become stronger over the period under study. In 1993, the existence of a competitor within a kilometre of a school tended to raise that school’s efficiency by 0.3 per cent on average. By 1997 the corresponding figure was 0.8 per cent.

So, at the level of the individual school, competition seems to have encouraged greater efficiency. This is the first piece of good news.

In the largest exercise of its kind so far conducted, the analysis has been extended to provide a cross-year comparison - a dynamic data envelopment analysis. This allows a check to be made on how the experience of individual schools has contributed to a change in the overall efficiency of the secondary education system over time. It reveals that, over the 1993-98 period, efficiency increased by an average of 1.3 per cent. This is the second piece of good news.

It is possible, of course, that the good news has come at a cost. It is conceivable that the overall increase in efficiency conceals a disturbing widening in the quality of schools. While some pupils are getting a better deal than ever before, others may be suffering a reduction in quality.

The evidence provided in the study suggests that this is not so. To be sure there are no doubt cases of individual schools where efficiency has declined. But on average there is a “regression towards the mean” effect. This includes a tendency for those schools whose performance was worst in the early period of the study to improve their efficiency relative to other schools as time passes. Competition improves performance at the bottom end of the ladder even more than at the top. This is the third piece of good news.

Other results obtained from the Lancaster study are also of interest in the context of current policy. There has been a lot of debate about the effect of class size on pupil performance. Many academic reports have, surprisingly, noted that the pupil-teacher ratio has little or no effect on academic attainment. Two features unique to the Lancaster analysis suggest that this view should be strongly challenged.

First, there are many differences between schools which affect the performance of their pupils but which standard sets of data cannot capture. The Lancaster study employs special statistical techniques which allow for these unobserved differences. Once this is done, it becomes clear that an increase in the pupil-teacher ratio significantly worsens the average performance of a school.

Secondly, while earlier studies have considered the impact of the pupil-teacher ratio on exam performance alone, the measure of schools’ efficiency used by the Lancaster team is much broader than this. A cut in the pupil-teacher ratio may, for example, increase the rate of school attendance. A fall in truancy may have significant wider social benefits.

The study estimates that an increase of one pupil per teacher would serve to reduce a school’s overall efficiency by around 0.8 per cent.

A number of initiatives have been launched in recent months which involve expenditure commitments in education. One is the introduction of incentive schemes within the teaching profession. Another involves a government donation to all schools to cover the purchase of books.

The study results tentatively support the notion that expenditure on teachers raises school efficiency. This is partly because of the effect of the pupil-teacher ratio, but may also reflect a tendency for teachers to improve with experience - more experienced teachers are more costly.

Expenditure on books and materials, on the other hand, appears to have a negligible effect on school performance. It should be stressed that this is not a result likely to hold for all schools at all times. But it does suggest that, for the typical English secondary school, at the margin, new money is more effective if spent on strengthening the teaching staff.

The education sector has witnessed a lot of changes in a short time. Sometimes many of us within the industry itself, who have to bear the brunt of the change, question the benefits. It is reassuring to find that, after introducing the quasi-market, many of the promised benefits have indeed been delivered.

HOW THE CONCLUSIONS WERE REACHED

THE researchers used a process called data envelopment analysis, used widely by economists to measure technical efficiency in industry. Using a complex mathematical formula, it explores the relationship between two school “inputs” (pupils’ backgrounds - taking the proportion ineligible for school meals as a measure - and the proportion of qualified teachers) and “outputs” (GCSE results and attendance rates). The study also analysed the effects of five “variables” - school type (excluding grammar schools), the effects of competition (measured by the number of schools in a fixed radius), gender, local environmental factors (including population density, unemployment rate and proportion of residents with professional and managerial occupations and spending on teaching and books.

Steve Bradley, Geraint Johnes and Jim Millington are at the centre for research in the economics of education, The Management School, Lancaster University. Copies of the report from Steve Bradley