The Economics of Higher Education: Why Does It Cost So Much?
We hear a lot about how expensive higher education has become. The common wisdom is that higher faculty salaries and a growing cadré of administrators are the reasons why. The common wisdom is wrong. In this, the first article in a series on college/university finance, the real reasons for higher costs are presented.
Tuition and other costs have increased, but not primarily because of higher faculty salaries or more administrators. While these have gone up a small amount, fringe benefits, most notably health benefits, have increased more. And higher faculty costs have been offset by employing more part time faculty and increasing the use of teaching assistants. Student costs have increased substantially because of falling state and local government subsidies. In addition, higher education costs have risen significantly because of the hiring of a large number “non-teaching professionals.”
a. Reduction in Government Support
A major factor impacting school costs is the reduction in governments support and in particular, the reduction in state and local government assistance for public institutions. Table 1 shows that with the exception of private colleges, the subsidy share of tuition has fallen by very significant margins, meaning students must pay more. A good example of this is what happened at public universities. Since 2001, tuitions have only increased by 5%, but the average student payment net of subsidy has increased by 65%.
Table 1. – Costs of Attending Colleges/Universities (in 2011 $s)
b. Growth in College/University Costs
Table 2 shows what happened to major school expenses per full-time equivalent (FTE) student in 2011 dollars. Several patterns are apparent. The fiscal squeeze resulting from the reduction in government support show up in the numbers for public and community colleges. And with the exception of these colleges, “student service” costs have increased dramatically. Private universities spent a lot more money on research, probably paid for by research contracts.
Table 2. – Total Expenditures per FTE Student, 2001- 2011 (in 2011 $s)
Source: American Institutes for Research, Delta Cost Project, “Trends in College Spending: 2001–2011”
Table 3 provides summary data on employees. The reduction in both Public University and Community College staffing is a manifestation of the reduction in government assistance. It is also notable how much higher the staffing levels of private institutions are than public.
Table 3. – FTE Employees per 1,000 FTE Students
Source: American Institutes for Research, Delta Cost Project, Donna Desrochers and Rita Kirshstein, “Issue Brief”, February 2014.
But what has happened to staffing? In relative terms, what has grown the most? Table 4 provides answers, and two things stand out. The large increase in “Other faculty” suggests a major substitution of full-time faculty by this group. It includes part-time as well as teaching assistants.
The other large increase in employees comes in “Professional.” This group includes staff that provides student services, academic, or professional support. Specific examples include business/financial analysts, human resources staff, computer administrators, counselors, lawyers, librarians, athletic staff, and health workers.
Table 4. – Growth in Staffing by Category, 1990 – 2012
Source: American Institutes for Research, Delta Cost Project, Donna Desrochers and Rita Kirshstein, op. cit.
Table 5 provides data on what has happened to college/university wages and salaries. There have been substantial jumps in salaried research, but the funds for many of these payments come from funded research sources. The increase in payments for student services and maintenance are also notable.
Table 5. – Change in Wage/Salary Expenditures per Total FTE StaffFY 2002-FY 2010 (in 2011 $)
Source: American Institutes for Research, Delta Cost Project February 2014, Donna M. Desrochers and Rita Kirshstein, “Labor Intensive or Labor Expensive? Changing Staffing and Compensation Patterns in Higher Education”
e. Faculty Salaries
It has been argued that faculty salaries have played a major role in driving up the costs of higher education. This is questionable. The College and University Professional Association for Human Resources does an annual survey on faculty salaries. For the period, 2002-12, they report that overall, the salaries of professors increased by 17.9%. For that same period, the US Consumer Price index grew by 27.9%. Disposable personal income, a measure of family buying power, grew by 53% during that time. In real terms, that would mean Professors’ salaries fell by 10% while disposable incomes rose by about 25%.
As Table 6 shows, the real increase in faculty costs came in fringes, not salaries.
Table 6. – Annual Change in Faculty Compensation, by Type (in 2010$s)
Source: American Institutes for Research, Delta Cost Project, February 2014, Donna M. Desrochers and Rita Kirshstein, “Labor Intensive or Labor Expensive?” op. cit.
The evidence presented above indicate that for the 2001 – 2012 period, the costs of higher education grew, but not by much and not by the reasons usually cited – increased administrative staff and/or higher faculty salaries. The increases were felt because students are having to pay a significantly larger share of the tuition bill because government support has been declining. College/university costs are rising as the result of the hiring more non-faculty professionals. Faculty cost increases have been mitigated by hiring more part-time faculty and teaching assistants.
It is important to note that only operating expenses were examined above. Could overall costs be increasing because of capital outlays, most notably on real estate development? This and the effects of large endowments disparities on spending will be examined in future articles.