A high-risk, low-reward system affects the supply of teachers

Ofsted, the government body charged with inspecting educational institutions in England, has faced growing criticism in recent years. Of particular concern are the high stakes attached to the judgments in its reports, as well as unease about fairness, consistency and the pressure they place on school staff.

The Labour government has recently reformed the inspection framework. A key element of this reform is the replacement of single-word overall grades with more detailed report cards. While much of the debate has focused on how schools are assessed, less attention has been paid to the consequences of inspection outcomes for school leaders.

Our research shows that Ofsted ratings have substantial labour market effects. Downgrades lead to significant salary reductions for headteachers and increase the likelihood that they will leave the profession altogether. Upgrades, in contrast, bring little measurable reward. Inspection ratings do not simply evaluate schools: they reshape leadership careers.

We study English secondary schools during a reform of the inspection framework from 2006 to 2008, when Ofsted dramatically reduced the notice period before inspections from several months to just a few days.

Following the reform, schools could no longer prepare extensively. As a result, scrutiny tightened and rating downgrades became significantly more common: while around 20% of schools inspected each year between 2003 and 2005 had experienced a downgrade, between 2006 and 2008, around 40% of schools inspected each year were downgraded.

This reform provides a setting in which to examine what happens when schools experience unexpected changes in their ratings. Using linked administrative data covering around 1,700 inspections and workforce data providing detailed payroll records for school leaders, we follow headteachers for three years before and after inspection.

We compare headteachers whose schools experienced rating changes with those whose ratings remained unchanged. Before inspection, these groups followed similar trends in pay and career outcomes. But after inspection, their paths diverged sharply.

The economic and professional cost of a downgrade

We find that the consequences of a downgrade are substantial and persistent. Three years after a school receives a lower Ofsted rating:

• Headteachers' salaries fall by around 5%.
• The probability of remaining in the headteacher role is 9.5 percentage points lower.
• The likelihood that the headteacher leaves the state school sector is 8.2 percentage points higher.
• The likelihood that the headteacher retires is 5.1 percentage points higher.

These effects show that a downgrade is not merely a reputational setback; it materially alters earnings trajectories and increases leaders' likelihood of leaving the profession. By contrast, doing well enough to be upgraded only led to modest and statistically insignificant changes in headteacher pay or retention. Thus, the labour market responds far more strongly to deterioration than to improvement, suggesting that greater weight is placed on penalising decline than on rewarding progress.

While such responses may partly reflect accountability for underperformance, the degree of asymmetry raises a broader question for policymakers about how accountability systems should balance incentives. In particular, it highlights the importance of ensuring that inspection systems not only deter poor performance, but also provide meaningful rewards for improvement.

Asymmetric accountability makes improvement risky

This asymmetry is one of the most important findings of our study. If accountability systems are designed to motivate improvement, we might expect rewards and penalties to move symmetrically. Instead, the system appears heavily weighted towards downside risk.

For policymakers, this matters. When deterioration is penalised significantly, but improvement brings limited rewards, school leaders may rationally prioritise avoiding visible decline over pursuing ambitious reform. Strategic risk-taking becomes less attractive when the potential costs are high and the gains uncertain. Inspections shape behaviour not only through what they measure, but also through how they reward rating improvement and penalise decline.

Ofsted ratings are multi-dimensional. Alongside an overall judgment, inspectors assess specific areas, including the quality of leadership and management. This allows us to ask a more precise question: are labour market responses driven by general school performance, or by signals specifically about leadership quality?

Ratings influence parental demand for schools, which in turn affects funding and governing board decisions

Our findings show that the distinction matters. When the overall school rating remains unchanged but the leadership sub-rating declines, the probability of headteacher exit rises by 7.7 percentage points on average in the three years following the inspection. In contrast, changes in overall ratings that do not involve leadership downgrades have no effects.

This suggests that school governors and the wider labour market are not responding to headline grades alone. They interpret leadership-specific signals and attribute responsibility accordingly. School inspection systems that rely on professional judgment can, therefore, generate information that is both meaningful and targeted, allowing accountability to be directed towards specific roles within the school, particularly leadership. But as our results show, the consequences of this targeting are highly asymmetric.

Ofsted inspection outcomes do not operate in isolation. Their consequences are shaped by local competition. We find that rating downgrades have larger effects on pay and exit in areas where schools face stronger competitive pressures. Where parental choice is more intense and enrolment has greater financial consequences, reputational shocks translate more directly into labour market penalties for school leaders.

This reflects the fact that ratings operate within a system where schools compete for pupils and funding. Indeed, we find that changes in Ofsted ratings lead to changes in enrolment at the school level. Ratings influence parental demand for schools, which in turn affects funding and governing board decisions. These dynamics are unlikely to disappear with changes in grading format alone.

Inspection systems do not simply measure performance: they actively shape the incentives, behaviour and stability of leadership across England's schools

Questions that policymakers should ask

Recent changes to the school inspection framework were introduced in November 2025 in response to growing concerns about the reliability of single-word judgments and their impact on the entire school community. These reforms - specifically the abolition of single-word headline judgments in favour of a school report card - aim to provide a more nuanced understanding of performance while reducing high-stakes pressure on staff.

But our findings highlight a structural reality that a change in grading format alone may not resolve. This is because school funding is tied to pupil enrolment, and inspection ratings act as a market signal shaping parental choice of schools. As a result, inspection outcomes continue to shape both school funding and the career outcomes of school leaders.

Consequently, inspection outcomes do more than evaluate performance: they function as a signal shaping labour market outcomes for school leaders, including leadership retention and pay. Crucially, we find a stark asymmetry in how this market operates. This asymmetry may also weaken incentives for improvement, as strong performance is not matched by comparable rewards. From an economic perspective, this unbalanced incentive structure makes leadership in challenging schools a highrisk, low-reward role.

The policy risk is not therefore the existence of accountability itself, but the instability it can generate. If career progression is tied to reputational shocks that reflect underlying school challenges rather than leadership quality alone, the system inadvertently penalises those working in the most difficult environments. This discourages experienced heads from remaining in the schools that most need stable leadership.

A downgrade is not merely a reputational setback: it materially alters earnings trajectories and increases the likelihood of heads leaving the profession

For policymakers, the key question is not only how Ofsted inspections are conducted, but how their outcomes feed into the wider economics of pay, retention and accountability decisions. Inspection systems do not simply measure performance: they actively shape the incentives, behaviour and stability of leadership across England's schools.

Recognising this dual role of inspection - as both an evaluative tool and a driver of labour market outcomes - is essential for understanding how accountability frameworks operate in practice and how they might be refined in future reforms.

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19 June 2026     Paper Number CEPCP738

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This CentrePiece article is published under the centre's Education programme.

This publication comes under the following theme: School performance: Institutional environment