The Baumol Cost Disease Orthodoxy

An alternative theory.

November 12, 2017

My Spidey-sense starts tingling every time I start to hear the same thing from everybody. Baumol’s cost disease as the explanation for the rising costs of higher education seems to be our latest orthodoxy.

By now, even the most indifferent students of higher education can recite the basics of our cost disease.

Baumol theorized that the costs of people-intensive services will inevitably rise with overall economic productivity, even as those industries that depend mostly on people don’t get more productive.

Technological advances allow other industries to build more things with few workers, with these productivity gains being passed on to those workers in the form of higher wages. Industries such as higher education that are challenged to leverage technology to educate more students with fewer professors will not see much in the way of productivity gains, but will be pushed to match the wage increases of more productive sectors.

We could go on about Baumol’s cost disease, talking about string quartets and the limits of class size, but most of us are pretty good with the outlines of the theory.

The question that keeps nagging at me is how much does Baumol’s theory actually fits our reality?

First, It is not all that obvious that wages in high productivity industries are all that relevant at determining the wages within higher education. The description of postsecondary costs being driven by greater salaries certainly does not match the reality of the adjunctification of the professoriate. Nor is it the case that full-time academic employees, both faculty and staff, can all that easily jump from higher ed to highly productive industries.

Second, Baumol seems largely silent on the impact of declining public investments. Costs have gone up in the last thirty years for tuition and fees and both public and private institutions, but the relative price of attendance has increased more rapidly in the public sector. The burden of paying for a public education has shifted away from the public (in the form of tax supported state subsidies), and towards the individual. The result has a predictable increase in student debt.

Baumol’s cost theory seems to place the rationale for rising postsecondary costs on the supply side higher education. The theory predicts that the supply of labor - the main component of producing higher education - will inevitably become more costly.

An alternative theory would explain why people-intensive industries become ever more people-intensive (needing to hire more and more highly skilled workers), even if the compensation of those working in a particular industry stagnate or decline.

Such an alternative theory might emerge from the demand side of the higher ed cost equation.

Higher education is a competitive business.  Most traditional 18 to 22 year old students have options. In order to compete for a finite number of applicants, and especially for the shrinking number of students from families able to afford today’s college prices, schools must demonstrate quality.  This quality manifests itself in the form of reputation.

A largely unrecognized element of the arc of change in higher education is that the quality of higher education keeps improving. Everything from learning to student life is better today than when I entered college in 1987.

This increase in quality (that I see) has depended largely on the hard work of the people who work at our universities. In a people-intensive service industry such as higher education, the only real way to improve services is employ more  talented people.

It is probably true that the cost increase of higher education has been largely driven by the growth of non-faculty employees.  It is also true, I’d argue, that the quality increase in higher education has also been driven by staff growth.  (And hear I’m not talking about administrators such as provosts or deans etc., I’m talking about all those higher education professionals who work directly on issues relating to student life, instruction and learning, technology, etc. etc.).

Schools could get rid of everyone but the faculty, and costs would come down. Many professors - and maybe you -  would argue that this is a great idea.

It is an open question, however, if cutting staff would also result in a decrease in institutional quality? Would getting rid of staff to reduce costs also lead to a commensurate drop in reputation, applicants, and full-paying students? 

The real higher ed cost disease seems to be one of rising expectations, and not the impact of an economy-wide productivity driven increase in the cost of labor compensation.

Might it be that competition, and not the lack of productivity growth in higher education, is the real reason that postsecondary costs keep rising? That in order to provide a compelling product on a reputation/experience front, schools have needed to hire more people to improve the quality of what is on offer?

Can we say that higher education has gotten more expensive because, by and large, higher education keeps getting better?

My suspicion is that you will disagree with most if not everything in this post.  Good.

I’ve assumed that staff are critical partners with faculty in producing a quality higher education experience.  This ignores the claim that many staff are not necessary to quality, and are hired and retained due to regulatory burdens, poor leadership, or institutional inertia.

I, for one, welcome a discussion on the value that postsecondary staff bring to our institutions.

Also left off the table are other alternatives to Baumol, such as the rise in health care costs and the impact of non-differentiating spending on technology.    

My intent is that our community engage in some critical unpacking of Baumol.

Rising expectations, competition, and the need to hire more people to improve quality to grow and protect reputation (and hence attract students) is an alternative explanation.  I’d like to hear others.

Where do you come down on Baumol?

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Joshua Kim

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