Why is the price of college so high?

I’ve been posting about the various legislative hearings on the higher education portion of Gov. Mark Dayton’s budget.

Time and again, the implicit question I hear is: Why is college so expensive? Why is the cost of it rising faster than inflation?

Critics tend to point to bloated administration, luxurious student amenities, and overpaid, underworked faculty members. University officials also decry the lack of state spending, which pushes tuition up. Others blame government as well for driving up demand for college by pumping in too much money for cheap student loans.

But in their book, Why Does College Cost So Much?, economists Robert B. Archibald and David H. Feldman write that such finger-pointing only advances what they call a “dysfunction narrative” that turns out not to be true — or at least woefully incomplete.

Instead of looking at the institutions themselves like others have — and thus ignoring outside factors — they look at higher education in context. They say higher ed is, predictably, being shaped by economic forces that are hitting other sectors as well.

So what are their two big reasons for the ever-higher prices? Skilled-labor costs and technology.

Roughly stated:

  • Skilled-labor costs. Higher ed is essentially a personal-service industry, and the cost increase of its highly skilled labor is similar to that of doctors, lawyers and the like. And service industries generally do not benefit from productivity savings the way manufacturing does.
  • Technology. Higher education pays high costs for equipment and training. But again, unlike in manufacturing, technology improves the quality of teaching and research. It doesn’t expand the productivity of teaching either through increased speed or expanded capacity. Service industries find it difficult to increase productivity without decreasing quality. (At the moment, college officials I’ve talked to say most online education programs aren’t any cheaper than the standard classroom experience. The authors see little productivity gains unless teaching is totally changed, which could very well lead to a decline in quality.)

Other points are raised, but I’ll stop here for now.

I’ll leave you with an excerpt of an interview that Archibald and Feldman had with The New York Times on the subject, as well as their Inside Higher Ed essay. The Times also has a link to a summary of the book by the University of Washington.

Q: The costs of all kinds of other services, like health care and live entertainment, have also risen much faster than inflation. What are the biggest reasons all these services have become so much more expensive?

A: 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. The service often is the time of the service provider, and you cannot use less of the provider’s time without compromising the quality of the service. Also, the service providers in many of the relevant industries — doctors, lawyers, dentists and college professors — are highly educated, highly skilled workers. In the last quarter of the last century, economic forces generated rapidly increasing wages for highly educated, highly skilled workers. The combination of these two factors, slow productivity growth and rapidly expanding wages, results in rapidly rising prices. This should not be a surprise to most economists.

… The primary effect of technological change in higher education is not cost reduction. Instead, new technologies and techniques change what we do and how we do it. In many ways, colleges and universities are “first adopters” of new technologies because our faculty needs these tools to be productive scholars and teachers. Our students need these tools because they are used in the labor market they will be entering. In a sense, universities must meet an evolving standard of care in education that is set externally. The term “standard of care” is not an accident, since it reflects the way new techniques also affect the kindred service of medical provision.