Nov 30 2007

Shanghai American School and the imperfectly competitive market for international teachers

Published by at 11:27 pm under AP Economics,Labor Market,Resources,Wages

Shanghai American School Employment – Available Positions

No article here, just some food for though about a meeting all SAS teachers attended today during lunch. Our director, Dennis Larkin, announced the changes being made to teachers’ salary and compensation packages for next school year. As anyone in international education knows, the market for teachers is a very competitive one these days. When I say competitive, I mean schools are forced to compete with one another for a rather scarce supply of teachers who are out there looking for work.

SAS has set as a goal to rank among the top five international schools in Asia with regards to compensation for teachers. It dawned on me during the meeting today that Dr. Larkin’s presentation illustrated a clear example of an imperfectly competitive labor market, the characteristics of which are a few large firms (in this cases schools) competing with one another to attract workers (teachers) to their firm, in order to meet a growing demand for the product being provided (students’ education). In East Asia, where schools all over China, Korea, and Japan continue to grow as more and more employees sent by foreign firms to oversee company operations in the region arrive with their families in tow, demand for more international school seats leads to demand for more international school teachers (remember, resource demand is derived demand). Rising tuition fees (price of the product) cause the marginal revenue product of teachers to increase (remember, MRP = PxMP), and since MRP is synonymous with demand, schools’ demand for labor also increases.

All this means that in order to attract more teachers in a labor market in which SAS is one of only a handful of schools competing to attract scarce teacher candidates, it must continually increase the wages it pays its teachers year after year. SAS, along with the five or ten other schools of its size in Asia, are clearly “wage-makers”. Today’s meeting was clear evidence of this fact; Dr. Larkin announced the second annual across the board increase in teacher pay, and at the same time pointed out that over the last four years SAS has hired an average of 72 new teachers per year.

As demand for an SAS education grows in response to the size of the market (more foreign families in Shanghai), the price of an SAS education goes up (tuition increases), meaning the demand for teachers increases (MRP=PxMP). As additional teachers bring greater revenue to the school than in the past, the demand for those teachers also increases. Finally, since SAS is one of only a few large schools hiring such large numbers of teachers, it must increase the wages it pays to all its teachers regularly in order to continually grow its staff of teachers.

Today’s meeting illustrated perfectly the scenario of a monopsonistic labor market in which the marginal resource cost to a firm of hiring additional employees exceeds the additional wages it has to pay the new employees. This is because pay increases go not only to the next 70 teachers SAS hires, but to all 350 of us already working here. SAS is a “single-wage employer” so to speak, since discriminating between new and experienced teachers, paying new teachers higher wages, would likely cause extreme resentment among experienced teachers.

Discussion Questions:

  1. What makes demand for teachers in international schools “derived” demand?
  2. Why does demand for teachers increase as the tuition levels payed by families increase?
  3. What evidence is there that the market for international school teachers in East Asia is not purely competitive?
  4. What would happen to SAS if it froze further increases in teacher wages for, say, the next five years?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

19 responses so far

19 Responses to “Shanghai American School and the imperfectly competitive market for international teachers”

  1. Jessica Ngon 01 Dec 2007 at 1:07 pm

    Demand for teachers in international schools are so-called "derived demand" because teachers are a type of labor resource for schools, and the demand for resource is derived demand, so the demand for teachers has an inverse relationship between the price of the resource and the quantity of the resource demanded. Since the growing of international schools and the demand for more seats in these internation schools, the demand for teachers go up as well.

    Hiring more teachers increase the cost of production. Thus, tuition level fees go up. This causes the MRP to go up, and since MRP=D, school's demand for teachers go up as well. As additional teachers bring greater revenue, demand increases. But since the market for teachers (a labor resourouce) is so competitive, SAS must increase the wages of teachers in order to keep their increasing number of teachers and staff. If the wages freeze for the next five years, then SAS will gradually lose teachers to the other international schools.

  2. KatherineYangon 01 Dec 2007 at 11:03 pm

    Demand for resource (teachers) relys on the demand for the product (education), therefore, the demand for teachers is "derived" because it depends on demand for the product. As demand for education increases, the demand for educators increase, which causes an increase in tuition in order to increase wages to attract educators from other schools

    Not all teachers are the same, some are more qualified than others, some have more experience. In a purely competitive market, theoretically, all teachers should be mostly identical in experience and qualifications.

    If SAS were to freeze it's increase in teacher's wages, then it will begin to experience an increase in demand for teachers, as many of their teachers will be attracted away to schools paying higher wages.

  3. Helenon 03 Dec 2007 at 1:31 am

    Demand for teachers in international schools is a derived demand because it depends on the demand for the product that the resource produces, which in this case, is international schools in which teachers play a vital role in forming the education provided. If the demand for international school seats had not increased, the demand for teachers would not have increased.

    Demand for teachers increase as the tuition levels paid by families increase because the increase in price of the product (the tuition of the school) also raises the productivity of teachers, as MRP is the marginal product of the resource times the price of the product. And because MRP is synonymous with resource demand, the increase in MRP of teachers also means an increase in demand for teachers.

    The market for international school teachers in East Asia is not purely competitive because the wage rate does not stay constant for an individual firm (SAS) when it wants to hire more labor. SAS is subject to the upward sloping supply curve, as it has to raise its wages in order to attract more teachers. This also means that the MRC and the wage rate is no longer the same, as in a perfectly competitive market, as the increase in wage rate designed to attract new teachers also means an increase in wage rates for all existing teachers.

    If SAS were to freeze further increases in teacher wages for the next five years, then it would lose a large share of the growing demand for international school seats. This is because it would experience difficulties hiring new teachers, as teachers would be attracted to schools with higher wages, and thus without new teachers, it cannot keep up with consumers' growing demand.

  4. Angel Liuon 03 Dec 2007 at 6:59 pm

    SAS is a monopsonistic firm, meaning it is a wage taker in a market consisting of only a few competitors. Since expant families are increasing, international schools are expanding, and as a result, more teachers (labor) are needed to educate students (output).Assuming that all teachers have the same level of productivity (maybe we should exclude mr.welkers! :D), the only way that demand or MRP will increase is when price increases. In order for price (wage) to increase, parents must pay a higher tuition. All together, we are paying more and more tuition, which is distributed to our teachers and school. The only unhappy people here are our parents lol. If school does not increase wages in the next five years, school makes parents happy, teachers unhappy, and school itself unhappy ^^

  5. kxc.024on 11 Dec 2007 at 2:45 pm

    If the market for international school teachers in East Asia was perfectly competitive, then the wages wouldn't be shooting up in these recent years and the tuition for students wouldn't keep increasing as well. But if the school was to freeze its wages in the next half decade or so, the teachers will start leaving SAS and go to other schools that give higher wages for the same amount of work.

    The demand for teachers is a "derived demand" because it is dependent on the level of education that people seek, in the sense that if there aren't a lot of people going to SAS, then there wouldn't be over 300 faculty members in our school. Yet, as the years go by and more and more families move to China in hopes of attaining some of that globalization riches, more children are enrolled into international schools. Since SAS is one of the most prestigious schools, it is inevitable that there is an increase in students attending the school, which leads to a larger demand for teachers.

  6. yunqimokon 15 Dec 2007 at 1:10 pm

    Teachers are a form of labor, and since all labor markets are "derived demand," the market too for teachers is derived demand. As the demand for better schools increases with more students and families, the demand for teachers also increases as they are the resource schools need to employ to meet the demand of the students

    If SAS decided to freeze wages, all the teachers would simply pack up and go where the wages are higher. Since teachers are a scarce resource, firms/schools need to fight for them and attract them with higher wages…thus wages of teachers keep going up, along with tuition fees.

  7. Christinaon 31 Dec 2007 at 12:47 am

    The demand for teachers is a derived demand because teachers are fundamentally a form of labor, and the demand for labor is always derived. The demand for teachers varies directly with the demand for the product teachers help produce (education) so as expats arrive "with families in tow," the demand for international school education increases, thus increasing the demand for teachers as well.

  8. Teemar Ratanasirigulon 06 Jan 2008 at 4:47 pm

    I believe SAS was the third highest paying school in regards to teachers in the Far East, with Seoul International school as the highest. And SAS is still increasing its teacher salary and compensation packages?

    Interesting…

  9. Dana Yeonon 09 Jan 2008 at 2:13 am

    Teachers are a form of labor as they educate students and thus contribute to the society which will lead to a kind of marginal benefit. Furthermore, all labor markets are "derived demand." Thus, logically thinking the market for teachers is a derived demand.

    In the long run, hiring more teachers leads to higher costs of production which leads to higher tuition fee. As MRP which is equal to demand rises,demand for teachers increase as well.

    Teachers in International Schools in Asia are not purely competitive as 1) There is no set wage that everybody refers to for teachers: it varies according to school with American School in Japan paying one of the highest wages as prices across Japan are tremendously high, 2) Teachers have different experiences, different specialties, some of which get reflected in their wages.

    If the wages were to freeze, the teachers looking for higher wages will find their higher paying jobs elsewhere. Thus, SAS's source of teachers will reduce.

  10. meon 20 Jan 2011 at 6:48 am

    I don't think the teachers wages are comparable to the cost of the educational fees.

    Some people are cashing in and I don't think it is the teachers.

    Getting a decent school for your children is most of the stress of moving to Shanghai.

    SAS admissions dept. have attitudes similar to Oxford or Harvard.

    It is crazy business and even the foreigners have been taking bribes.

    Asia parents want to send their children to Yale and have 10 years plans to do so.

    American Citizens/via the USA!!! just want their children to make friends and develop…..

    The schools were created for expats and western citizens who come to work in China/////

    The schools were NOT created for Asians trying to jump ship into the US work force.

    Stop the madness.

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