Book Chat: Dean Baker’s comments from the CEPR

Our Book Chat with David Leonhardt also drew an interesting comment from Dean Baker, the co-director of CEPR. Here are his comments in full:

Why Do Free Traders Never Talk about Free Trade when the Losers are Likely to be People Like Them

Baker notes that haircuts and higher education have followed a somewhat different price trajectory over time. From this he concludes that the “service price story doesn’t get us far.” Mr. Baker has missed the forest for the trees. Like most services, haircuts have risen in price faster than the inflation rate. The service price story (also known as Baumol’s disease) most certainly does work. As a group, service prices have risen 60% more than the overall inflation rate in the years between 1947 and 2006. By contrast, durable goods prices rose more slowly than the inflation rate over the same time period. By 2006 durable goods had fallen in price by 67% compared with the overall price level.

In our response to David Leonhardt’s first question, we noted carefully that personal services that rely on highly educated labor have seen the greatest cost pressures since roughly 1980. At about that time, the gap in earnings between people with a college degree and those without one began to widen. Any industry that uses a lot of highly educated labor has experienced cost pressures. And personal services have felt the pressure intensely, precisely because most of these services are largely immune to labor-saving productivity growth.

Our favorite example of a personal service industry whose costs have behaved much like higher education is dental services. We used this argument in our earlier article in the Times (College Costs, The Sequel), but Mr. Baker must have missed it. Though it is by no means unique, as the diagram below shows, the last sixty years of price information for dental services reveals an almost uncanny similarity to price growth in higher education. In our book, and in earlier papers in the Journal of Higher Education and Change Magazine, we carefully show that this is not a coincidence.

In the diagram below, we have superimposed the price series for barbers’ services, dental services, and higher education. The prices of barbers’ services track higher education and dental services quite closely until roughly 1980, when the rising return to schooling begins to separate services that use less educated labor from services that use highly educated labor. Mr. Baker’s data is drawn exclusively from the post-1980 time period in which the wages for highly educated workers had begun to diverge rapidly from wages of less well educated workers.

Mr. Baker goes on to argue that a lack of foreign competition is an important factor in explaining rapidly rising higher education costs. He says, “… one important reason that the cost of a college education rises so much more rapidly than other prices is that university professors are largely protected from foreign competition as a matter of conscious policy, unlike most other workers in the economy.” The underlying assumption is that “… university professor in developing countries would be willing to work for much lower pay than university professors in the United States just as auto workers in developing countries work for much lower pay that auto workers in the United States.”

This claim is just silly. It ignores the vast quality differences in the credentials of university professors in developing countries and university professors in the United States. In fact, a large number of professors in the United States are from somewhere else in the world. The best of the foreign professoriate is in fact in the US or other developed countries. There are few barriers keeping these people out.

As a matter of fact, there is lots of competition for professors and students, and this competition focuses on quality not on quantity. The best foreign professors and the best foreign students flock to the US and other developed countries. Higher education could lower cost if it were a mass produced good, but it is not. An effective professor has to be able to communicate with his or her students. An effective professor has to be able to understand and advance knowledge in his or her field. The barriers to entry in this field are not substantial. Few people with the talent and inclination to succeed in the professoriate are kept out.

Book Chat: Tyler Cowen’s comments from his blog Marginal Revolution

David Leonhardt, the New York Times economics writer, graciously ran a “Book Chat” about our new book.

Here’s the link: Economix: Book Chat

Two economists have penned interesting comments that motive us to respond.

The first is Tyler Cowen, who writes the Marginal Revolution blog. Here are his thoughts:

Marginal Revolution: Why Does College Cost so Much?

Tyler Cowen clearly disagrees with our aerial view of the higher education industry. Instead of assigning a large role to big economic forces such as cost disease, the rising wage premium for highly educated workers, and new technologies, he sees barriers to entry and market dysfunction as the primary issue. This statement sums up his case:

“I never see the authors utter the sentence: “There are plenty of wanna-bee professors discarded on the compost heap of academic history.” Yet the best discard should not be much worse, and may even be better, than the marginally accepted professor. Such a large pool of surplus labor would play a significant role in an economic analysis of virtually any other sector.”

This is a very intriguing claim, offered up with no comparative evidence. Does a great Reserve Army of the Unemployed exist in higher education, but nowhere else in the economy? We’re sure there exist juicy anecdotes of Anthropology Ph. D.s driving a cab, but this is not evidence that the labor market in higher education is particularly inefficient compared to any other interrelated labor market in the US economy.

To the extent that marginally employed faculty do affect the higher education market, it’s in the adjunct sector. Adjunct faculty are increasingly used to hold down the cost of higher education. But this trend is very worrying to many people, precisely because of it’s potential to have a strong negative effect on quality.

There are few barriers to entry on the labor supply side of the academic labor market. Anyone with the intellectual chops and a desire to acquire a Ph. D. in English Literature can attain one, so the barriers that matter for wages must be on the demand side. Usually it’s unions that restrain trade in a labor market, leaving unemployed workers in their wake as they prop up the wages of incumbent job holders. We don’t know of any good evidence that the American Association of University Professors has been particularly effective in generating a meaningful wage premium for the professoriate.

Secondly, if the AAUP (or some other competition-busting institution) were so effective at raising professorial wages that it can account for a lot of the rise in college cost, then its effectiveness seems to have begun right about 1980, as the wages for highly educated labor began to rise dramatically everywhere in the economy. During the 1970s, real wages of university professors fell by roughly twenty-five percent. This timing of the newfound power of the academic union, or the growth in other anti-competitive practices, seems suspicious.

Next, we don’t see strong barriers to entry on the institutional side either. In 1970, eight million students were enrolled in two thousand American colleges and universities. Today, over eighteen million are enrolled in roughly forty-three hundred institutions (source: Digest of Educational Statistics). There has been a veritable explosion of places at for-profit and not-for-profit institutions alike. To take one example from the traditional non-profit sector, the University of Central Florida has mushroomed from a startup to one of the largest institutions in the nation in a relatively short period of time.

Competition among universities has also grown more intense. As Caroline Hoxby has noted, the fraction of students attending schools within their own state, or attending schools within a narrow geographic radius of their homes has declined steadily since the 1940s. This is not an argument about faculty salaries, but the idea that the higher education market as a whole is somehow increasingly less competitive doesn’t stand up to much serious scrutiny.

Lastly, faculty salaries actually have not grown as fast since 1980 as salaries of people with comparable qualifications elsewhere in the private sector. But as we are at pains to point out, faculty are not the only highly educated labor employed by colleges and universities. Like most firms elsewhere in the economy, colleges and universities have been shedding unskilled labor and acquiring skilled labor. For academic institutions, traditional typists and secretaries are largely gone, replaced by IT workers, accountants, psychologists and people skilled in financial management.