Should We Care? This is one of the biggest debates in labor/education economics:
Here is an excellent essay by Ehrenberg, et. al., that is a comprehensive treatment of the theory, the evidence and the policy implications.
My reading of the literature is that for traditionally disadvantaged individuals (e.g., low income US and developing countries) it matters more than for non-disadvantaged students - for whom it might not matter much at all. Overall, however, the mass of evidence seems to pretty clearly support the idea that large classes are detrimental to student achievement. But, as always, much more work needs to be done.
A thought: if Novel H1N1 is bad this year with significant absences, might this provide a natural experiment to study the class size effect in Oregon schools?