Many parents and teachers agree that smaller class sizes produce better educated students.

But new research says reducing average class sizes does not significantly improve schooling, or reduce the amount of bullying and absenteeism.

The review, by Melbourne-based think tank The Grattan Institute, looked at students' performances in reading, mathematics and science and compared it with educational spending.

It found government spending increased by more than 40 per cent between 1995 and 2006 and much of that money was spent on reducing class sizes.

But during that time, pupils' performances stagnated in mathematics and significantly declined in reading compared to other developed nations.

The Grattan Institute spokesman Dr Ben Jensen says governments are making the wrong investments in education.

"What we should be doing is taking that money and investing it into teaching effectiveness," he said.

"If you think about your own school education, what people think about their own schools, is they remember the great teacher that had a great impact on them.

"They don't remember the class that had fewer students."

Dr Jensen says the focus should be on evaluating a teacher's effectiveness and rewarding those who produce results.

"The evidence overwhelmingly shows that teacher effectiveness is a much greater predictor of student performance than the size of a class," he said.

"I realise this goes against a lot of common belief.

"The evidence both in Australia and overseas overwhelmingly shows that money invested in class sizes doesn't have a positive impact on students.

"A recent example in Florida shows that the government spent $1 million per school per year reducing class sizes by about two-and-a-half to three students.

"That was found to have no impact, not only on student learning but on other factors such as bullying in schools and crime and absenteeism."

Dr Jensen says the report does not point the finger of blame at teachers.

"This is not a report that says that it is the responsibility for teachers for our lack of performance of some students," he said.

"This is saying that the best investment we can make as a country is to invest in teachers and provide them greater support and development."

Dr Jensen says there has been a "strong reaction" to the report.

"Both positive and negative to the report so far and I think the reason for this is that some people say that actually we don't need smaller classes, that that is pulling money out of education," he said.

"What we are saying is that actually we need to invest our money in education in improving teachers and improving the development, support and recognition they receive.

"That is money better spent than just reducing class size by two or three students."

Angelo Gavrielatos from the Australian Education Union says there is no "one fix" for improving education.

He says a combination of reducing class sizes and better teachers is the right approach.