Rising College Costs

This article in the New York Times (22 August 2013), like many others, suggests that Baumol’s Cost Disease [1, 2] is a big contributor to the rising cost of higher education. However, inflation-adjusted salaries for college and university faculty and staff (non-management personnel) have been flat or declining for 20 years. Salaries, therefore, do not account for the doubling of tuition (inflation adjusted) over that same time period at 4-year state universities.

Baumol’s Cost Disease is not relevant when salaries are stagnant or declining, because higher salaries, the driving force for the need to improve productivity, decreases. This isn’t to say that faculty should not try to be more productive. They should, because stagnant productivity can cause other problems. The point is that the need to improve productivity weakens when salaries stagnate or decline. (Note: On a macroeconomic basis, Baumol’s Cost Disease has been cured in recent years by rising productivity and stagnant or declining wages).

Any productivity gains made by faculty and staff under such conditions are great to have. But the gains will be small because, for most faculty, the intrinsic and extrinsic incentives to improve will be low.

A much better way to improve productivity is by adopting Lean principles and practices for administrative and academic processes. However, those gains have to flow through to both students and non-management personnel (faculty and staff). The outcome must be lower tuition prices for payers and higher value, as well as higher salaries for workers (inflation-plus).

While colleges and universities clearly have a responsibility to control costs (and should do so absent any incentive), for which they have been delinquent, the companies that pay middle-class workers their wages and salaries are also part of this problem. The enormous shift in wealth from the middle class to the top income earners over the last 30 years has left the middle class with less and less ability to pay for tuition (or their home mortgage or car payment or food) due to flat or declining wages and salaries. So even if colleges and universities reduce costs and lower prices substantially, tomorrow, employers have to do their share and increase wages and salaries for the middle class, now, to address the wage crisis.

Other prescriptions for fixing the higher education cost crisis are rife with difficult problems that will be slow to overcome and likely create unfavorable unintended consequences. Lean university and Lean teaching, done right, is faster, simpler, and better for everyone.

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