The conundrum of paying high performers in education

Dr Eric Crampton
The Post
25 August, 2025

Everyone is familiar with the term ‘monopoly’. It gets used a lot, often inappropriately. It refers to a market where there is only one provider of a good or service.

Its counterpart on the buyer side is less well known. If only one organisation buys all the goods or services in a market, that organisation is a monopsonist.

For example, the Ministry of Education can reasonably be viewed as a monopsonistic purchaser of teaching services. Or, at least, it coordinates and centrally funds salaries for the vast majority of teachers, with school boards then as employers.

Monopsonistic markets are strange. Let’s leave education to one side and work through the basic model.

Imagine that your company makes and sells gadgets. To make gadgets, you need to buy widgets. Yours is the only company using widgets to make gadgets. Nobody else buys widgets. That makes you a monopsonistic purchaser of widgets.

At first glance, that seems like a wonderful position to be in. You can drive hard bargains with widget suppliers – they have no other customers.

But there is a catch if you ever consider expanding your production.

Buying more widgets requires encouraging more widget-suppliers to come into the market, or existing suppliers to make more. You are large enough that your orders move the price of all widgets.

Suppose a very large gadget order came in from a new customer.

If you could buy more widgets without affecting overall prices, you would be happy to expand gadget production. You would make money from the deal. Even if you had to pay a bit more per widget for that last batch of widgets, the deal would still be worthwhile. But not if it pushes up the price of all the widgets you buy.

Widgets are one thing. Who cares about widgets anyway – they’re just made up for this example. Economists more typically worry about monopsony in labour markets.

Organisations in competitive labour markets can hire additional staff at a wage rate comparable to their existing staff’s pay rates. If demand increases, a firm can scale up without much effect on overall pay rates.

And if it underpays, it loses staff to other employers and learns it needs to meet the market.

When a monopsonistic employer hires a lot more workers, it has to attract those workers in from other sectors. To do that it must increase pay rates, and it will be hard to avoid extending that salary increase to its existing staff. The pay rate for the new hires is the new market pay rate for the sector.

Weird results can ensue.

A monopsonistic employer might decide not to pursue an expansion that would otherwise be profitable, if the expansion requires a pay bump for all its existing staff.

It is hard to find private-sector monopsonies worth worrying about, particularly where labour is mobile across regions.

But the Ministry of Education is so dominant in coordinating the purchase of teachers’ services that it is simplest to think of the Ministry as a pure monopsonist.

And the Commerce Commission is presumably disinclined to propose structural reform which would break up the Ministry of Education’s monopsonistic position.

Enter the monopsonist’s dilemma in education.

The cost of bringing in more and better-trained teachers is not just the higher salary that the Ministry must offer to attract those teachers. The new salaries are the new baseline rate, extended to existing staff. And suddenly the budget explodes.

Increasing pay to attract the next hundreds of secondary school teachers increases the salary bill for about thirty thousand existing secondary teachers. And the government already spends about $3.4 billion on salaries in primary education, and $2.5 billion in secondary.

For a sense of scale, a ten percent across-the-board salary boost for teachers is the equivalent of a third of the Pharmac drug-buying budget, or an increase in GST from 15% to about 15.3%. And so much smaller settlements are offered.

Worker shortages can be good, in a bad way, for a monopsonistic employer – because avoiding the shortage would be very expensive.

There is a potential solution.

The government could set a new, higher pay scale for new teachers meeting a higher standard while inviting current teachers to apply for promotion to that higher pay scale. Or set separate budgets for recruitment and retention incentive payments. Or create promotion tiers for exceptional teachers, without loading on management duties.

Every other service sector manages to link pay to performance. It is not always easy, but it is always possible. Doing it in education would allow the government to attract and retain superb teachers at less than enormous cost.

Without that flexibility or other solutions to the education monopsony, superb teachers will never be paid what they deserve. They will leave. And children’s education will suffer.

To read the full article on The Post website, click here.

Stay in the loop: Subscribe to updates