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.