Two economists at Harvard’s National Bureau of Economic Research (NBER) have put to rest William Baumol’s theory of cost-disease as an explanation for the steep rise in college tuition over the past thirty years.
Baumol’s theory attempted to explain why salaries rose in service industries, especially the arts. Usually, higher wages reflect higher productivity, due to economies of scale. But a symphony orchestra is always about the same size, and so is the audience, and playing a symphony takes the same amount of time, so there can be no reduction in costs from economies of scale.
Yet the conductor’s salary keeps going up. Why? Productivity does increase in other industries, and the conductor’s wage must go up in order to keep him or her from escaping to a better-paying industry.
That concept has been applied again and again to colleges (as if there could be no economies of scale in teaching). In any case, Grey Gordon and Aaron Hedlund discovered that the reason for steep increases in tuition since 1987: the surge in federal loans. In fact, that can explain all the increase, they say.
Needless to say, not everyone agrees. You can read about the debate in today’s Inside Higher Ed.