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The rising cost of college: What can be done?

Parents today understandably worry about the steadily rising cost of sending their kids to college. After all, one would be hard-pressed to find any other sector of the American economy that has raised its costs five times as fast as inflation in the last three decades.

The reasons for the sustained increase in the cost of a college education are many and varied, and to comprehend these myriad reasons, it is necessary to examine higher education in the context of the American economy. This is a central point made by the economists Robert Archibald and David Feldman in their recent book, "Why Does College Cost So Much?"

Archibald and Feldman credibly claim that the pricing behavior of colleges is more similar to service than to manufacturing industries. In addition, higher education prices behave similarly to the prices charged by other service providers such as dentists, lawyers and physicians. Given that higher education is essentially a service industry, a standard line of reasoning holds that calls to increase industry productivity while not sacrificing quality are likely to fail because of the "cost disease" that afflicts this industry.

The "cost disease" theory was first put forth by the economists William Baumol and William Bowen in the 1960s. This theory says that service-sector firms such as colleges whose "products" involve interactions with customers (students) will have difficulty enhancing their productivity because these interactions generally involve a fixed amount of time with the customer. By contrast, firms outside the service sector routinely raise their productivity by using new technologies and reallocating labor. Therefore, the wages of workers in these non-service firms typically increase as productivity increases.

In a recent paper, Andrew Kelly rightly points out that as wages increase in other sectors, service-sector firms (in this case, colleges) must pay their own employees more to prevent them from moving to industries where the pay is higher, even though these employees are not producing more of their "product." Raising the wages of these service-sector workers leads to increasing costs with no increase in product or output, and this state of affairs results in declines in productivity.

A final salient point made by Archibald and Feldman is that the use of new technologies is unlikely to lead to noteworthy productivity gains or cost declines in higher education. There is clearly considerable merit in the perspectives put forth by these two economists. This notwithstanding, recent research by Vance Fried of Oklahoma State University suggests four actions that can be taken to substantially reduce the cost of attending college in the United States.

First, we need to separate the funding of teaching and research. Even though research is a valuable public good, Fried argues with some justification that undergraduates ought not to pay for this worthwhile activity. Second, following the lead of business and law schools that have done well with large classes, colleges can reduce costs by increasing student-teacher ratios. Third, Fried persuasively argues that programs that attract few students ought to be consolidated or eliminated. The Economist notes that the cost of administration per student increased 61 percent in real terms between 1993 and 2007. These administrators typically neither teach nor conduct research. Hence, it is not surprising that Fried’s final recommendation is to substantially reduce administrative bloat.

At a time of increasing national concern about the affordability of a college education, it is incumbent upon colleges to take action along the above lines to reduce costs. By doing this, colleges will ensure that access to higher education is maintained not just for wealthy Americans but for all Americans.

Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology, but these views are his own.

8/26/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail rbj@rbj.net.



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