The cost of higher education

My former colleagues Bob Archibald and David Feldman recently wrote a book on the costs of higher education. David Leonhardt interviews them, asking why college tuition has risen so fast in recent years.

Archibald answers that "The biggest reason that these services have experienced prices that rise more rapidly than prices in general is that increasing productivity in many services is very difficult." This is essentially the "Baumol effect" - rising productivity in the goods-producing sector pushes wages up there; wages have to rise in the service sector to match the rise in wages elsewhere, but there since productivity gains are hard to come by the effect is to increase prices instead.

Feldman says that what technological improvements do occur in education result not in lower costs but in more sophisticated instruction techniques. In this sense higher education is like medicine, where much of the technological improvement comes in the form of more sophisticated medical procedures.

I don't disagree with Archibald and Feldman, but I think that the ultimate source of higher costs is even more straightforward. Over the last forty years or so the value of a higher education - the wage premium offered workers with college degrees versus high school graduates - has increased. At the same time, financial aid - both from government and from university endowments - has increased dramatically as our society has made a commitment to make higher education accessible to a wider segment of the population. Both of these phenomena have increased demand for education. Since productivity has not risen at the same pace, prices have increased.

It's also apparent to anyone who has worked in higher education (at least at private colleges and universities) that a large amount of the money flooding into this sector has not gone toward providing more or better education. Rather, it has been used to provide increasingly luxurious amenities for the students - dorm "suites", state-of-the-art athletic centers, student union buildings, and so on. With financial aid freely available for so many students, colleges no longer need to compete on price. Instead we compete on amenities, since there's nothing like a really cool athletic center to convince an eighteen year old to choose you instead of the institution down the road. This creates its own cost dynamic - colleges are engaged in an arms race over amenities, and to the extent that they are unable to finance everything from fund raising some of the costs are passed on to the students.