Anatomy-of-College-Tuition

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industries the time of the service provider isthe service, and economizing on that timereduces the quality of the service. Yet theseservice industries hire from the same labormarket and buy electricity from the sameutilities as other industries. Any industrythat experiences lower productivity growththan the national average will see its costsgo up more rapidly than the overall inflationrate, and this has been the fate of mostservices over the past century.This fact does not mean services havebecome less affordable. To the extentproductivity growth in other sectors israising per capita national income, thisgrowth supports rising spending on allgoods and services. Cost disease is not thecause of affordability problems in highereducation. As we will show later, affordabilityproblems are driven more by changesin state subsidies and in the Americandistribution of income than by rising cost.Our standard measures of productivityare often misleading in most personalservices. If you measure labor productivityby counting students taught per professorhour,we couldeasily raise laborproductivity bydoubling class size.But a discussionbasedfreshmanseminar with 15students is notmade better byadding 15 morestudents, thoughit may be lesscostly. Meaningfulproductivity growthmust at leastpreserve quality, which is why productivitymeasurement is so difficult in personalservices.At present, students interacting directlywith professors and other students in smallCost disease is not thecause of affordabilityproblems in highereducation.groups remain a benchmark of quality ineducation. Ask any family if they want theirson or daughter to learn in small groupseminars taught by tenured professors, orif they prefer giant impersonal lectures oronline chat rooms monitored by adjunctswho answer lots of email questions.We think most contemporary critics ofhigher education fail to credit the power ofthe cost disease argument in explaining thelong evolution of higher education costs.The artisan nature of higher educationexplains much of this past experience.Distance education is the current hopefor breaking the grip of cost disease andgenerating meaningful productivity growthin higher education. But as long as mostpeople are convinced that quality programsrely on providing strong personal interactionbetween professors and students, collegecosts will tend to rise faster than the overallinflation rate.The Cost of Employing Highly EducatedService Providers: The second leg of ourtripod is how technological forces havereshaped the U.S.labor market.Higher education,like many otherpersonal services,relies on a highlyeducated workforce. Roughly70 percent of theemployees at auniversity holdat least a collegedegree. Thefigure for mostmanufacturingindustries is much lower. If the gap inearnings widens between those who have acollege degree and those who do not, thatis another force acting to push up cost inThe Anatomy of College Tuition 5
those personal services compared to otherindustries with less educated work forces.Claudia Goldin and Lawrence Katzof Harvard make a convincing casethat the kind oftechnologicalinnovations thathave revolutionizedthe economy overthe last centuryhave raised thedemand for peoplewith ever moreyears of formalschooling. At thesame time, thegrowth in thesupply of that kindof labor began to slow in the late 1970s. Inthe race between the demand for educatedlabor and the supply, demand has won thelatest round. The result is a rising earningsgap in favor of the college educated.Industries that rely on highlyeducated service providers have all facedcomparatively higher labor costs startingin the 1980s. The cost pressure on highereducation (and on other educationintensiveservices) is comparative. If thegap in total compensation (salaries andbenefits) between the highly educated andthe less well-educated grows, then the costof producing a service that uses highlyeducated labor must also grow. Collegesand universities also employ a lot of highlyeducated people outside of the classroom,and these people have many alternatives inthe private sector.The Standard of Care: Technologicalchange does affect higher education directly,but the effect of innovation in many serviceindustries tends not to be primarily of thelabor saving and cost reducing kind that wehave seen in manufacturing and agriculture.Instead of reducing the number of laborUniversities do notreally have the option touse older but cheapereducational methods.hours it takes to produce a class, newtechnologies alter what we teach and howwe teach it. For example, students in scienceand technology fields must be familiar withcurrent tools thatdefine modernlaboratories. Thesetools are muchmore expensivethan the chalkand blackboardworld of the past.Universities donot really havethe option to useolder but cheapereducationalmethods.Just like modern medicine, collegesand universities must meet a standard ofcare. For higher education the standardof care is set by the labor market that willemploy our graduates. As a consequencecolleges and universities cannot choose touse technology the way other businesses do.Other industries only adopt new technologyif it will improve the quality of the firm’sproduct or reduce the costs of producingthe product. Colleges and universities haveto adopt new practices and new technologyeven if doing so results in higher costs.These curricular reforms actually lowerlabor productivity measured as studentstaught per professor-year. This raises cost.But if innovations like these also raisequality by better preparing students for thekinds of cognitive tasks that will define thelabor market of the next 30 years, then thesereforms may pay a handsome dividend.Summary: Our three-part explanation of thetechnological forces that have transformedthe entire economic landscape helpsilluminate the 65 year evolution of highereducation costs. Our story explains the longupward trend in cost, and it can also explain6 American Council on Education
Page 3 and 4: the average while others will exper
Page 8 and 9: the pause and slight reversal durin
Page 10 and 11: Figure C compares current fundexpen
Page 12 and 13: the 1990-91 academic year. 7 Althou
Page 14 and 15: have any direct effect on the tuiti
Page 16 and 17: need-based tuition discounting mode
Page 18 and 19: up its list price to preserve reven
Page 20 and 21: Endnotes1 The data for this figure

Anatomy-of-College-Tuition

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