Sunday, November 3, 2013

We need more teacher pay inequality

A recent conversation with a relative who I am quite sure is a very good teacher got me thinking about the conventional wisdom regarding teacher pay--specifically, that teachers are underpaid.

While I feel strongly about this particular teacher's abilities, I do not feel as strongly that she is "underpaid" despite being in a position of relative low pay when considering hours and effort that go into her job. Likewise, I don't think she herself necessarily believes she is "underpaid", though that would be a common and understandable instinctive feeling. If I have to guess, I would say she is indeed underpaid, but as you will see that is not a guess I can arrive at lightly nor can I have much confidence in it.

Here are my thoughts:

A status of being low paid is only meaningful in a relative sense. However, a status of underpaid is also a relative status, but the two are not congruent. Underpaid is a deeper sense of relative--kind of a second derivative in a manner of thinking. To be low paid simply means having a lower absolute level of income in some comparison. To make that comparison more meaningful one should seek a good apples-to-apples arrangement. Obviously comparing a $40,000 a year job to a 10,000 Euro per month job doesn't tell us much. We get more information in comparing a $20 per statutory hour job with a $30 per statutory hour job, but we don't get a whole lot more. Most professionals including many teachers put in time beyond the standard work day.

Suppose we could get a standardized denominator of effort hours (we can't just use hours because an hour spent scanning people in at the local gym is not the same as an hour spent fighting a fire). How meaningful would that comparison of pay then be? The answer is "a lot more meaningful but still significantly short of deep economic significance". Certainly that information would help guide a lot of career decisions, but it still doesn't tell us if someone is underpaid. To get that comparison, we need to know if a particular person should make more. The person should make more (technically speaking, command a greater share of society's resources) if the value of her teaching (resource she creates) is worth more than the total pay she receives (resources she uses). Our best bet to know this answer (and this is a loose use of the term know since we actually can only hope to have a really good guess) is through a market process--and you thought I was going to say government omniscience.

Notice that the market answer is usually the standard to judge the righteousness of outcomes not because we define optimal resource allocation as the outcome the market creates but because we believe (with really good reason) that under the right conditions the market will elicit optimal resource allocations. Those right conditions are when markets are deep, cheap, and esteemed (lots of knowledgeable buyers and sellers with low transactions costs where property rights are firm, clear, and respected). We need a substantial degree of all of these to describe a market as a free market. The free market is not God. The free market is our way of discovering how a benevolent, omniscient dictator (a god-like super creature) would allocate resources.

But the education market is not conducted under very favorable conditions to elicit good allocations. Transactions costs are high and knowledge is expensive. Government separates buyer and seller insulating sellers from the discipline the market would otherwise provide*. We can probably expect a few outcomes from this as it relates to teacher pay. Pay differentials will become compressed where bad teachers are overpaid and good teachers are underpaid. Resource allocation communication and decisions will be further polluted pushing good teachers out of the profession or encouraging them to shirk while inducing bad teachers to enter the profession.

Because of this, I am led to believe that my relative is indeed likely underpaid (I have a lot of inside information about how good a teacher she is). However, (and now isn't this ironic?) for the same reason I believe she is underpaid, I cannot have much confidence in this judgment. That is at the heart of the problem with heavily government-influenced markets--they obfuscate knowledge inhibiting the communication process the market wants to provide.

*Nature abhors a vacuum and the market abhors bad resource allocation. In this sense the market naturally works toward being a free market. It is because of this positive feedback loop, a virtuous cycle, that markets are so powerfully good.

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