Mike the Mad Biologist

An Explanation for Why College Prices Are Rising So Much

Posted by Mike on October 29, 2010
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I’ve often wondered why college tuitions are rising so rapidly ever year. While in the ultimate sense, they rise because they can–there are enough wealthy people who can pay full freight, it’s not clear what internal cost require such massive, regular price increases.

Well, Robert B. Archibald and David H. Feldman propose that these increases are part of larger economic trends. First, college has to be understood as a service industry (italics mine):

First, higher education is a service industry. From 1947 to 2009 the average annual price increase for services was 4.0 percent, while for goods the average annual price increase was only 2.4 percent. Economists have understood why this happens for a long time. Technological progress has not reduced the number of labor hours required to provide most services. By contrast, technical innovation has significantly reduced the number of labor hours and kilowatts of power needed to produce most manufactured goods and agricultural products. As a result, the cost of a service such as a year of college must rise compared to the price of a basic car or a basket of groceries.

This is the well-known “cost disease” phenomenon.

Second, educated workers have seen consistent wage increases:

In the late 1970s, the wages of highly educated workers began a sustained rise. All personal services that rely heavily on this sort of labor have experienced a surge in costs. This is actually hopeful, since there is no reason to believe that this trend must necessarily continue. In fact, if the United States could do a better job of funneling college-capable students through the system, the increased supply of college-educated workers could ameliorate this part of the problem by reducing the rate of increase in salaries.

Not sure I like the sound of that recommendation. Anyway, onto the third factor:

But instead of reducing the number of labor hours it takes to produce a class, new technologies alter what we teach and how we teach it. To take but one example, the contemporary physics student must be familiar with current tools that define a modern physics laboratory. These tools are more expensive than the chalk and blackboard world of the past. Just like modern medicine, colleges and universities must meet a standard of care, and that standard is set in the labor market that will employ our graduates.

I’m trying to find a copy of their book. It sounds interesting.

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  1. #1 BaldApe
    October 29, 2010

    It doesn’t help that demand for a college education is relatively inflexible, and loans are trivially easy to get.

    My kids’ educations were financed largely through PLUS loans that a reasonable loan officer would have said I couldn’t afford, but not sending my kids to college was a non-starter. (Little Shitpile, maybe?)

    Now I have about $80,000 in college loans to pay off.

  2. #2 RB
    October 29, 2010

    we just did some analysis of our schools “money spending”

    Salaries don’t explain our increase tuition (and largely our increase in sticker price has been offset by increases in the discount rate, for all but “dumb rich kids”) As percent of institutionaly spending, our salary line has dropped every year since 2000. Even more striking the percent spending on instructional salaries has dropped even faster. Benefit (esp. in healthcare) costs have risen some, but even looking at total compensation (not just salaries) our institution spends less now (as a percentage) than it did 10 years ago. We have seen a huge increase in non-instructional support staff (think technology) these folks are pricey (they can work lots of places and students demand technology and high technology that functions all the time so that they can play there world of warcraft….I mean do research for classes). Other regulations have impacted cost of maintaining space.

  3. #3 The Phytophactor
    October 29, 2010

    The main reason public college tuitions have been increasing at a rate greater than inflation is that in addition to real increases in cost, states have been gradually withdrawing support, usually in the form of no increases, unfunded mandates, and transfers of responsibility. In Illinois over the past 30 years state support has dropped from covering 68% of the cost of education to less than 25% of the cost. Tuition has to make up the difference in addition to the other “new” costs and real increases in costs. But the truly “cute” thing is how the politicians who knowingly did this turned around and dun the colleges for letting costs, and faculty salaries, get out of hand. When corrected for diminished state support, and the rest, our institution is much more efficient that it was 30 years ago, but rather than getting a medal, we get hoodwinked parents complaining.

  4. #4 Seth
    October 30, 2010

    Piggybacking on Phytophactor–

    Along with reduced state support here in PA’s state-owned universities, the size of management has skyrocketed. Since 2000, system-wide, management has grown more than 400% faster than faculty (and at a median salary nearly twice median faculty salary). But somehow we’re the expensive ones.

  5. #5 A
    November 1, 2010

    A proper market-based explanation (apart from the mainly service cost aspects considered by Archibald and Feldman) may be offered by the following narrative:
    One ‘larger economic trend’ is indeed that ‘there are enough wealthy people who can pay full freight,’ and the ‘elite’ colleges set the trend. (How often do you hear in the news about Harvard, and how often about the community colleges/ state colleges nearby with 10 to 100 times as many students?)
    Here one must mention that the product of the Ivies and such is not so much education, but exclusivity and access (to other wealthy people’s offspring), and transforming wealth and privilege (tuition) into perceived merit (diploma from famous university). Middle-class parents perceive darkly, that (big) success in U.S. society depends on access and connections more than education itself. Your reasonably-talented student of accounting and business administration will end up with a well-paying job offer from a famous investment bank, hedge fund, or similar, with access to instant riches (the young traders, e.g. see http://krugman.blogs.nytimes.com/2010/10/30/sex-and-drugs-and-markets-role/ ) or a career track to senior management/CFO, based on the friends he or she makes at Harvard; or, through his friends at community /state college, he/she becomes a moderately-paid accountant at a small local business, at the vagaries of the business cycle, which by now has even reached many former well-to-do. Hence upper middle-class parents want their children to go to the most famous university they can get admitted to, no matter the cost. That allows the elite institutions to charge more, and actually requires them to do so as to demonstrate exclusivity. Then, of course, these institutions have to cater to the children of the spoiled rich, and offer first-class amenities, as dormitories, weight rooms, sports facilities. And to offer token ‘scholarships,’ most often just a small rebate on the tuition, to show some ‘social conscience’ and also to bind parents to them [I hear from many proud parents of Ivy students that their child went there on a 'scholarship;' so they could not possibly pass up this great opportunity, although, on further inquiry, the 'scholarship' is only a rebate on the tuition, and the student and his parents still have to borrow tens of thousands per year.])
    State universities are following this trend to higher tuition and better auxiliary services, and are getting de-funded by their respective states to allow lower taxes on the rich. So they can make this up by charging higher tuition; as long as it is substantially below that of elite private colleges, parents will willingly pay it, helped by the availability of student loans. The latter make up for the previous direct state funding of universities, and shift the cost and risk (of getting/not getting wealthy based on your education) on the individual.
    Small colleges will lose students, if their amenities don’t keep up with those of ‘better’ private and the best state schools.
    The large amount of student loan debt is also a means of social control: If you now owe 200k$ that you’ve finished college, you’ll be forced to take a paying job, and leave jobs in community organizing or anything political/controversial to those who are rich enough to be able to afford it. (One more reason why our political class is dominated by wealthy people). So that is how it is, but most certainly not, for most people, how it should be.

    We all,including the rich, did better, when the state and states subsidized higher education directly as in the 1950ies, and with subsidies such as the GI Bill which allowed many to be the first in their family to go to college, with many benefits to the overall economy, and these subsidies pay for by higher taxes paid by those, who became successful through their education, and that of their workforce.
    And actually, if you compare how, e.g., the state of California expanded the U.C. system (by spending billions) and how much the Harvard (or other Ivy League) endowment grew in the same time (billions too), and how many more students got access to higher education of great quality (now ~ 191,000 U.C. students total), the U.C. system was pretty efficient, compared to the Ivies).
    But it seems that currently we are ruled not even by enlightened capitalists, but by ‘we got ours and lower our taxes’ morons. So I don’t see any return to cheaper education paid for by higher taxes (as they still do in Europe).

  6. #6 Katharine
    November 2, 2010

    I still think Ireland, as much as the country is a conservative wasteland otherwise, got it right on education: let the smart ones in and give them a free education, no matter what their family income, and the rest are left to fend for themselves.

  7. #7 Katharine
    November 2, 2010

    And tax the shit out of everyone to support it.

    I’m tired of society coddling anyone with an IQ less than, say, 100, no matter their income, race, sex, or whatever mental/physical illnesses they’re being treated for.

  8. #8 A
    November 2, 2010

    Katherine: “let the smart ones in and give them a free education, no matter what their family income, and the rest are left to fend for themselves.” Well, the rest also benefits if those profiting from the free education open new businesses, start industries employing the rest of us… and get appropriately, that is progressively, taxed on their bigger income.
    “I’m tired of society coddling anyone with an IQ less than, say, 100, no matter …” That’s about half the population! Actually, a society that gives the increase in productivity over the last 30 years to those in the uppermost 0.1% income class (U.S.) can afford to ‘coddle’ those less lucky in the IQ lottery. I’d say it has the obligation to provide chances for all. (And consider: you might have a child which -no matter that your IQ is 150 – does less well than average.)