The costs of producing education

As part of the coming ‘zero budget’, the Government has pre-announced changes in education. Reported changes are an increase in total funding, a cap on teacher numbers, an increase in the pupil/teacher ratio, and performance pay.

Also, ‘[a] post-graduate qualification will be introduced as a minimum for all trainee teachers’. This policy interacts with the new student loan policy: higher repayments, but also no student allowance for those studying longer than four years (which is more likely when you are earning a post-graduate qualification).

The plan, therefore, is to make it harder and more expensive to become a teacher, make the job more difficult, and reduce the disposable incomes of new teachers. In return, teachers will have performance pay (currently unspecified). Given the increase in funding, they should also have access to more technology and better facilities.

Let’s think about the market for teachers in New Zealand. First, it isn’t a closed market. Candidates come from around the world, and we can export teachers, too. A market with both importing and exporting suggests that the product is not homogeneous. Teachers are seeking the job conditions (and lifestyle) they prefer, while education systems are seeking the best teachers they can afford.

The new plan affects both the supply and demand for teachers domestically. It will be more expensive to produce teachers, reducing domestic supply and shifting the supply curve inward. The quality demanded is also higher, which can be proxied by an outward shift of the demand curve. (This isn’t exact, because of lack of homogeneity). Possible impacts are higher prices (wages) for teachers, fewer teachers, or more imported teachers. The net impact will depend on the the relative elasticities of demand and supply. Domestic supply is somewhat inelastic (only so many teachers are graduated each year) and demand is also inelastic (determined by class ratios and demographics). If this were a market, prices would be volatile and determined by thin volumes, especially the by amount of imports.

So let’s look at the price (wages) of a teacher by using a production function. The factors of production in this case are land, labour, capital, and human capital. Land is the school building; labour is the ‘amount’ of teachers, the class size ratio; capital is the technology available; and human capital is teacher quality. Assembling these factors into a production function, we then produce ‘pupils’, which is a combination of the number and quality. The plan is to increase the production of ‘pupils’, specifically increasing the quality. We will do this by reducing the land (larger classes), reducing labour (larger classes, again), increasing capital (investment in technology), and increasing human capital (better teachers). The expectation is that increased human capital and technology will more than substitute for less land and labour.

The Beehive says, ‘Evidence shows the single most important thing we can do to raise achievement is to improve teaching quality.’ This suggests that the increase in the factor ‘human capital’ with have the biggest impact on the product ‘pupils’. If factors of production are paid according to their marginal contributions, then the (change in) payments to human capital should be larger than the (change in) payments to any other factor.

Which leads to three conclusions:

• This better be one serious performance-pay plan or the market won’t clear
• There should be an analysis of whether fewer, better teachers is the most cost-effective way to improve pupil performance (what are the partial derivatives?)
• Production planning when you control both sides of a market is a right royal pain (where’s a Soviet economist when you need one?).