The Baumol Cost Disease Orthodoxy

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…

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