The Pandemic’s Disruption: The Changing Labor Market

Volume 47 No. 7 ● September 1, 2022 ● Member Sneak Peek

Early in the pandemic, the ISM consulting team asked a critical question: Will the pandemic be an event to simply endure, or will it forever change the marketplace for private schools? It is now clear the pandemic is a disruptor, and school leaders, executives, and Trustees must be prepared for significant changes.

In a previous I&P article, we discussed the marketplace reality that the number of private schools has doubled over the past 25 years, while the percentage of Americans who pay for K–12 education has remained flat. Compounding this reality is a declining birthrate. The number of private schools is too large for a flat market. Financial aid has not increased the number of families interested in paying for K–12 education.

In most markets, this situation is causing schools to be fiscally weak because they are under-enrolled. Or, to fill seats, schools have to over-discount. We predict the number of schools must dramatically decrease over the next five to 10 years, creating fewer, larger private schools. This correction is fundamentally necessary because a more significant disruptor, a labor shortage, is on the horizon.

The New York Times published evidence of this in an article on March 27, 2021, “As Pandemic Upends Teaching, Fewer Students Want to Pursue It.” The American Association of Colleges for Teacher Education reported there was a 19% decline in undergraduates with teaching credentials and an 11% decline of graduate-level teaching students in the 2020–21 school year. Further, before COVID-19, Education Week reported that about 8% of teachers were somewhat or very likely to leave the profession. Today, 33% of teachers are somewhat or very likely to leave the profession. The U.S. Bureau of Labor Statistics noted in the February 2022 Jobs Report that there were 575,000 fewer local and state education employees in October 2021 compared with February 2021, and 65,000 public education employees left the industry in the months of September and October 2021 alone. In 1979, Ed Source reported teachers earned 7.3% less than other comparable college graduates, but in 2018 that gap grew to a record high of 21.4%. The Economic Policy Institute reports similar statistics.

ISM has used William Baumol’s cost disease theory to help schools understand why tuitions outpace inflation. Baumol explains that education is a stagnant, rather than progressive, business model. Progressive businesses focus on creating operational efficiencies combined with cutting-edge enhancements to increase productivity, drive profit, and afford higher wages. The stagnant business unit cannot increase efficiencies, and innovative enhancements are few, meaning these businesses cannot continually enhance productivity and higher wages are not easily afforded. However, Baumol warns that wages must increase in the stagnant sector at a rate similar to the progressive sector or a talent crisis may occur.

The ISM team believes we are now at the inflection point of a talent crisis. For years, schools have limited faculty salaries to match inflation or near-inflation increases, while other similarly educated professionals have enjoyed robust wage growth over their careers.

Consider the career of a Certified Public Accountant. This four-year college degree professional has a starting wage today of $73,560. A CPA with 20 years of experience can earn upward of $128,000 annually. Starting salary for registered nurses in Delaware is $76,000 per year, while the average nurse in Delaware earns $97,000. With just more than 10 years of experience, an RN will earn $115,000 in Delaware.

Most college graduates are not interested in a career in teaching because the compensation typically would not support the lifestyle they envision. They must invest the same dollars into their college and graduate degrees, but the wages they earn are much lower than other college graduates. Baumol’s statement, that wages must rise in the stagnant sector at similar rates as the progressive sector, appears to be correct. (We refer to this problem as the wage penalty.)

Compounding the wage-penalty problem is the self-imposed limitation many schools face to keep tuition increases low for parents. But the impact of this decision is now becoming clear—younger college graduates are not interested in suffering the wage penalty. At the same time, the parents of the children they educate attain higher living standards.

What is the solution? The ISM consulting team does not believe there is a one-size-fits-all solution to this perplexing problem. However, we do think the industry has to address competitive wages at rates more like the progressive sector, or our future difficulties will increase. Simply stated, teacher salaries probably need to double.

A first step to correct the wage penalty is to reduce the number of schools to be in line with market demand. By reducing the number of schools, we decrease competition. There will be less pressure on tuition-increase decisions because the market will be balanced, and schools can more easily charge the right tuition for their services based on their actual costs, not the under-represented costs so many schools currently use. Without this occurring, correcting the wage penalty will be impossible.

Beyond addressing the number of schools, we also think the time has come for schools to better distinguish themselves from one another. Instead of every school having a two-semester program with six teaching periods in a day, it’s time for schools to build programs and schedules that best match the learner profiles of the students they attract and serve.

Additionally, the pandemic has taught us that virtual learning can be highly effective for middle and upper school students. Certainly, schools should consider ways to incorporate virtual learning to decrease operating costs.

The ISM team proposes that now is the time for private schools to come together and assess a complete re-architecture of the way education is administered, developing multi-student-centered approaches with schools with robust enrollment and sound fiscal design. Schools cannot correct the wage-penalty problem using the current outdated model. If schools continue to ignore the wage penalty, in a few years they are going to find themselves pressed to close because they will not have enough teachers to conduct their programs.

Current workforce values are changing. This is the real driver for fundamental change in the job market in our country. This is a reality for every business in the United States. The Great Resignation did not begin merely because of the pandemic. It started because industries ignored all the electronic tools that could make work and life balance better for years. Instead, companies held onto the 40-hour, office-bound work week, supported by business-centric policies and procedures, rather than people-centric ones (just like the Kodak Company held on to their film and flashbulb business).

In the private school market, we have compounded the problem with wages that are substantially lower than annual salaries found in the corporate sector.

Ask yourself a simple question: How would your school respond to a four-day workweek? If you immediately thought “that can’t happen” or “my school won’t ever do that,” then be aware. Perhaps, instead, you’re thinking, “Wow, what an interesting question. How would we handle that?” If so, your school is probably positioned to think creatively about redesigning an outdated model to meet the needs and demands of the new labor realities.