follow the instruction and finish the Essay 3

Lecture 6

Secondary and Post-Secondary Education

Joseph Rossetti

Dept. of Economics, the Ohio State University

06-22-2017

Today

I Cost of college I Student debt/College Premium

Tuition Trends

Many observers have been pointing to a tuition spiral or college bubble, what do the numbers say?

I Undergraduate real tuition increases 1982-2012 I Private: 3.5% I Public: 5.1% I 2-year: 3.5% I Compare to inflation of 2.7% I Caveat: starting tuition at private was much higher so $

increase was larger

Tuition Trends

However, many people do not pay the full cost of tuition but get some scholarship or grant money:

I Net tuition cost paid by the average student 1990-2012 increases:

I Public: 4.1% I Private: 3.4% I 2-year: saw a decline (number unreported) I Compare to inflation of 2.7%

Trends in Spending

I Private universities are spending a significant amount of tuition on financial aid,

I Average tuition discount rate: 42% in 2008, 26.7% in 1990

I The share of full-time faculty has declined I 80% in 1970 to 51.3% in 2007

I Share of full-time non-tenure track faculty has increased I 18.6% in 1975 to 37.2% in 2007

State Subsidy Trends

I State subsidies have fallen 19% from 1987-2010 I Net tuition revenue plus state appropriation per student

I roughly equal in real terms between 2010 and 1987 I tuition revenue increased to cover the decline in state subsidies

Spending

Spending

I Research: I Changes in federal grant requirements have made it harder to

recover indirect costs of research I Grants are now more likely to require matching funds I Start-up costs for new STEM researchers is higher and harder

to recover from later grants

I Share of total cost of research paid by institution has risen from 12% in 1976 to >20% in 2008

Spending

I Student services I admissions and registrar activity I student activities, cultural events, newspapers, intramural,

clubs, tutoring

I Growth rate of this category is double growth in instructional spending

Spending

I At lower ranked institutions serving less advantaged students I re-allocating money from instruction to these activities would

lead to higher graduation rates

I Re-allocating from instruction to student services had a limited effect when the graduation rate was already above average

Spending

I Academic support services I libraries, museums, and computing I Library costs have been rising by 2% more than inflation I New technology is not adopted by Universities to cut costs

Spending

I Institutional support services I legal, accounting, auditing, HR, alumni affairs, public relations,

etc I Government mandated reporting increases costs

I Report on human/animal subject research, hazardous

materials, conflict of interest

I Facilities and maintenance is also a serious issue I Ehrenberg reports that Cornell plans to cut admin expenses by

5% of operating budget

Spending

I Lowest growth rate in instructional spending I Spending on salaries for faculty and instructors

I A big part of this change is the changing composition of faculty

I Shares of non-tenure and part time have increased across types of schools

I Is it important to have tenure-track faculty?

Tenure

I Tenure protects professors who research controversial ideas or who provide expert testimony

I This is extremely important

I Tenure promotes mentoring of junior faculty I tenured faculty do not need to worry about competition for

jobs

I Tenure acts as a winner-take all tournament that increases work effort

Tenure

I Tenure serves as a substitute for salary when attracting faculty I at least in economics departments

I As faculty specialize they reduce outside options for employment

I job security from tenure becomes needed to incentivize this potentially valuable specialization

Tenure

I Rising non-tenured and part-time faculty shares are correlated with falling first year persistence and graduation rates

I Controlling for many institutional characteristics

I Two year institutions that expose students to more part-time faculty

I reduced transfer’s to 4-year schools I reduce completion rates of 2-year degrees

I At Ohio public 4-year institutions students taking freshmen courses that are more likely to be taught by non-tenure track or part-time lecturers

I Become more likely to drop out after their first year

Tenure

I Some studies have found that students in some fields respond to adjuncts positively by taking more courses in that field

I Adjuncts may represent a cost in student graduation rates, but they also cost $10,000 less on average

I Non-tenure track faculty are supposed to be able to focus on teaching

I Face heavy course-loads and may have a limited ability to work one on one with students

I Reduces the amount of time they can spend staying on the cutting edge

I Not everyone can be a star teacher I Lower salary and benefits may reduce the ’efficiency wage’

effect

Tenure

I Top institutions granting Ph.d.s have access to the best labor I This mitigates the negative effects of non-tenure track faculty

I Concentrating the negative effects on lower ranked institutions I Crowding out by top institutions makes their search for top

teaching talent difficult

Explaining Rising Tuition

I Note: we have been focused on rising costs since 1980, but costs have been going up since WW2

I Baumol: I Higher education is a non-traded service I It relies heavily on human interaction and is labor intensive I Is not complemented by new technologies I Its price should rise faster than inflation, rising not with the

average good, but directly with the wages of its inputs

Explaining Rising Tuition

I Baumol: I While increased manufacturing productivity might lead to

rising wages and lower prices I Lagging sectors must raise wages to attract workers and raise

prices to cover higher costs I Rising costs of services (like health care, education and public

admin.) I

Are in some sense inevitable as long as these services remain

labor intensive

I There are likely other explanations (instruction wasn’t the fastest growing spending category)

Explaining Rising Tuition

Explaining Rising Tuition

Theory of Higher Education

I Clotfleter: Rising demand for high skilled workers and inelastic supply of college graduates

I Supply was likely elastic due to excess capacity for students in the 80s (leftover from baby boom)

I Bennett: Federal govt. acts as 3rd party payer, market participants don’t pay, so won’t hold down costs

I Problem: share of 3rd party payments is small, students end up paying loans

I Increasing recently, but not enough to account for long trend)

I Some other commentators suggest colleges are collusive

Theory of Higher Education

Hoxby (1997) tells a different story:

I Argues that higher education has become more competitive not less

I Market imperfections have diminished

I Argues that, counter-intuitively, more competition has led to higher prices

Theory of Higher Education

Hoxby (1997) tells a different story:

I Story hinges on transition from many local autarkies I To a geographically integrated market

I Two things happened simultaneously: I Colleges lost monopoly power I Colleges lost monopsony power

I Think of colleges as choosing quality of education rather than quantity

Theory of Higher Education

When a college loses monopoly power:

I It loses rents I It increases quality and value

Theory of Higher Education

When the college loses monopsony power:

I Must pay higher wages to its inputs–like faculty/capital I Students are an input

I Network effects and student ability affect returns to degree I Higher ability students can get higher ’wages’ i.e. more

scholarship money

I All investments in quality (not just high ability students) payoff better in the larger market

I Remember loss of monopoly power

I Higher average quality of education results in a higher price being able to be charged

I value does not fall

Theory of Higher Education

I In each autarky colleges were vertically differentiated I But not all quality levels may have been provided

I In the integrated market students are able to match their ability to college quality

I Within college diversity falls, between college diversity rises I Vertical differentiation increases

I Tuitions and scholarships will increase in variance I Price/quality ratio may improve, but students are spending

more

Theory of Higher Education

Theory of Higher Education

Theory of Higher Education

Theory of Higher Education

Hoxby finds that the data agree with all of the predictions of her theory:

I Within college variance in incoming SAT scores fell while between college variance rose

I Increases in tuition track the basic predictions of our graphical model

I Decreases in market concentration and in-state/out-of state student ratios are associated with

I Higher tuition in private colleges and an increase in the variability of tuitions

I Higher tuitions in public colleges

I Scholarships to all students have risen I And the most selective colleges have raised their subsidies to

students more