Big Question #4:
“How do institutions and students contribute to the cost disease and how can they contain costs?”
Lloyd Smith
Productivity and Cost Disease:
The productivity of American colleges and universities, in terms of academic degrees granted, is declining. Since the early 1990s, real expenditures on higher education have grown by more than 25 percent, now amounting to 2.9 percent of the gross domestic product, greater than the percentage of GDP spent on higher education in any of the other countries, which is blatant costs disease (Clotfelter, 1996; Hauptman & Kim, 2009). While the proportion of high school graduates matriculating to college has risen dramatically, the percent of entering college students finishing a bachelor’s degree has stagnated. A comparison of the class of 1972 and class of 1992 high school cohorts indicates that eight-year college completion rates declined by 4.6 percentage points during that time (Bound, Lovenheim, & Turner, 2009).
Finding ways to improve the efficiency and productivity of the American higher education system is a top priority. What accounts for declining productivity in this sector? Theorists say it could stem from increases in the quality of higher education, but there is little evidence to suggest that is the case (Archibald & Feldman, 2008). The economic returns to education have been rising, but this is more likely due to shifts in the demand for skilled labor (Goldin & Katz, 2008) rather than changes in the quality of degrees. A number of other explanations have been given for this trend. The most commonly cited is cost disease (Baumol & Bowen 1966). This theory say that productivity gains are more difficult to achieve in service sector, especially where the quantity of the service is defined in terms of the amount of time spent with customers.
In American higher education, degrees are granted based on credit requirements, and credits are based on seat-time, or time spent in class. Although, manufacturing enterprises can increase productivity by reducing the amount of labor hours spent in the production process; these productivity increases in turn lead to wage increases in non-service sectors, which the service sector, including universities, have to compete with by raising salaries for faculty and other staff. With the amount of time in the classroom fixed, and wages increasing, costs continue to rise while output remains unchanged; making it appear that productivity is constantly on the decline. This is why productivity declines are much smaller after taking into account the gradually increasing wages and productivity in the economy as a whole. This problem is not limited to higher education—for example, legal services have seen larger cost increases than higher education while physician costs have risen at about the same rate (Archibald & Feldman, 2008). Some argue that cost disease is due to the increases in the accessibility to higher education by enrollment of less-qualified and less-motivated students (Bound et al., 2009). This may reduce graduation rates, but there is little evidence to support this argument (Bound et al., 2009). Cost disease has become a plague in higher education, which if left uncontrolled, or contained, will have lasting results in our society.
References:
Archibald, R.B. & Feldman, David H. (2008b). Why do higher education costs rise more rapidly than prices in general? Change, May/June, 25-31.
Archibald, R.B. & Feldman, David H. (2008a). Explaining Increases in Higher Education Costs. The Journal of Higher Education, 79 (3), 268-295.
Baumol, W. J., & Bowen, W. G. (1966). Performing arts: The economic dilemma. New York: Twentieth Century Fund. Bound, J., Lovenheim, M. & Turner, S. (2009). Why Have College Completion Rates Declined? NBER Working Paper No. 15566.
Clotfelter, Charles T. (1996). Buying the Best: Cost Escalation in Elite Higher Education. Princeton: Princeton University Press.
Goldin, C. & Katz, L. (2008). The Race Between Education and Technology. Cambridge: Harvard University Press.
Hauptman, Arthur & Young Kim (2009). Cost, Commitment, and Attainment in Higher Education: An International Comparison. Lumina Foundation and Jobs for the Future: Boston, MA.
