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:
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.