Monday, October 7, 2013
Last month, in the LinkedIn group on Legal Education and Law Schools, I had a wonderful exchange about the so-called "cost disease" as it applies to higher education. First discussed by William Baumol and William Bowen, the cost disease attempts to explain why costs rise faster in industries where productivity gains are scarce than in industries where such gains are more common. They used the example of the performing arts to illustrate their argument; the following passage from A Handbook of Cultural Economics summarizes their point:
Costs in the live performing arts will rise relative to costs in the economy as a whole because wage increases in the arts have to keep up with those in the general economy even though productivity improvements in the arts lag behind. It is not suggested that artists must be paid the same hourly wage as workers in other jobs, since working conditions and the non-monetary satisfaction obtained from employment differ across occupations. Rather, the argument is that all industries, including the arts, compete to hire workers in a nationally integrated labour market and that artists’ wages must therefore rise over time by the same proportion as wages in the general economy to enable the arts industry to hire the workers it needs to carry on.
The application to higher education is straightforward. Even though productivity gains in higher education are difficult or rare, colleges and universities must give wage increases to compete for labor with industries where productivity gains are more common. Because higher education cannot offset the cost of higher wages with productivity gains, tuition prices rise faster than do the prices in other industries. If this cost disease is not cured, firms (here, colleges and universities) will at some point price themselves out of the market.
Application of the cost disease to higher education raises several questions that I will explore in future posts, including: How do you measure productivity in higher education? How have other industries addressed the cost disease? What effect does rising incomes have on the cost disease? How can technology help address the cost disease? Do factors other than the cost disease better explain the rising cost of higher education? William Bowen's recent book Higher Education in the Digital Age addresses some of these questions, and I look forward to discussing his insights. I will also discuss the Washington Post's recent 10-part series entitled "The Tuition Is Too Damn High," which covers the cost disease among other points.