Episode 6

Do Professor Salaries and Baumol (Service) Cost Disease Explain Why College Costs So Much?

What is Baumol’s Cost Disease and how does it affect what we pay for college?  How much do professors’ salaries increase the price we pay for college?  We will answer these questions on today’s episode.  I am Larry Bernstein and welcome to Charging U.

 “We need to go 2-1,’ the chair politely explained, ‘because otherwise we can’t hire anyone.’  Then Dean, now Provost, John T. McGreevy, Notre Dame University, in 2019, referring to the number of courses taught each semester by faculty

In most organizations, labor costs constitute a very large proportion of total costs and higher education is no exception. In particular, the labor involved in instruction is expensive.  In most areas of the economy, especially in goods producing fields, there has been an increase in productivity, so that a worker is able to produce more goods in a period of time than his predecessor did.  Therefore, he can be rewarded with an increase in wages. Due to technological advances, a worker or group of workers can create an automobile in less time and with less cost than it could previously, so those employees can be paid more money. In certain areas, especially in the services sector, there has not been a large increase in productivity, yet wages still rise. Giving a haircut has not changed much over the last few decades, yet the wages of barbers continue to go up.  In order to perform a Beethoven symphony, an orchestra still requires the same number of musicians as it did 100 years ago. A musician still plays only one instrument. A violinist does not also play a trumpet.  The performers do not play faster and complete the symphony more quickly today than they did fifty years ago.  They do not give two concerts today in the same amount of time that it took to give one back then.  Though the pay of musicians is much higher now than it was 50 or 100 years ago, there has been no increase in productivity, and that's why it is so expensive to go to the orchestra.  This theory has been called Baumol Cost Disease or the Baumol Effect, after the late Princeton economics professor, William Baumol. 

How does this relate to colleges? Because the labor involved in instruction is expensive and apt to represent an even higher percentage of total costs than in other fields, there are many who attribute the rise in college costs to the Baumol Effect.

Despite the emergence of online courses, most college courses are delivered in person by a professor or instructor, just as they were 100 years ago. The size of the classes has not changed dramatically, so there has NOT been a significant increase in the productivity of professors.  Their salaries have risen about the same as inflation and benefits have risen faster than inflation, so overall compensation has gone up slightly faster than inflation.  Of course, even that modest increase in cost gets passed on to students. In any event, because professor total compensation alone rises only slightly greater than the rate of inflation and it represents no more than half of the total college budget, it alone cannot account for the dramatic rise in college costs. A study by Robert Martin of Centre College and R Carter Hill of LSU suggests that up to 20% of the increase in tuition comes from the Baumol effect.

But the Baumol effect makes several assumptions which may not be valid, and that may cause the effect to be even lower than 20%.  Those assumptions are:

1. The professors’ teaching load is constant. 

2. The composition of the faculty is constant. 

3. The faculty brings in no other revenue to the school.

4. The faculty incurs no other cost to the university.

Let's examine these one at a time:

1.  The professors’ teaching load is constant.

In 2019 Notre Dame Dean John McGreevey wrote an article entitled The Great Disappearing Teaching Load in which he detailed the pressures to allow faculty to teach fewer and fewer courses.  That the official policy of the department is to teach a certain number of courses is irrelevant, since professors can get dispensation for doing more research, for taking on administrative roles, or just by negotiating to teach fewer courses. Therefore, each faculty member is an even less productive teacher, but still getting paid more. The institution, therefore, either needs to hire more people to teach the same number of courses or it can offer fewer courses or sections of courses with more students in each class.  The road usually taken is to hire more faculty.

Curiously, there is little reliable data which is publicly available that documents the actual number of classes taught by faculty. I can find very precise data on graduation rates and the number of dollars of tuition that is taken in, but little on the amount of time spent preparing and instructing a class.  The researchers at the Pope Center voiced their frustration after looking at teaching loads at the North Carolina public university system.  They commented that their attempt to study faculty teaching loads "shows so many problems that it is hard to figure out what is going on except for the clear conclusion that its official average is inflated." One college’s faculty had an average teaching load twice that of a peer school, and 1.7 courses more than is required. This, in their words, "defied credibility." 

The only usable data is that from The Higher Education Research Institute at UCLA, which has done a survey of faculty every three years since 1989–90. The latest published survey received responses from just over 20,000 full-time undergraduate teaching faculty at 143 four-year colleges and universities. While this is not complete, it is comprehensive and the data are consistent between surveys, so its trends should be reliable.

The trends that we see are quite revealing. The percent of faculty with no classroom teaching scheduled increased from 0.4% that’s 4/10 of 1% in 1989–90 to 7.4% in 2016–17. The number teaching only one to four hours per week increased from 8.6% to 18.2%, so the total percent teaching zero or one course per week went from 9% to 25.6%, that is to say, that one quarter of respondents taught zero or one class per week.

The prep time per week, including creating presentations or lesson plans, reading papers, and grading, showed a similar trend. In 1989–90 0.3% spent no time preparing but in 2016-17,  5.7% spent no time preparing. The percent spending 0 to 4 hours per week preparing for their class went from 8.7% to 21.3%.

One argument for reducing teaching load is so faculty can do more research.  How did this deceased teaching load affect research productivity? In 1989–90, 37% of faculty published 0 to 2 articles in academic or professional journals. Despite the reduced teaching load, in 2016–17, 33% of the faculty were still publishing only 0-2 papers per year. There was a similar only modest increase in chapters and books published. So it looks like reducing teaching loads does not lead to a substantial increase in research productivity.  A University of Texas at Austin study documented that 2% of the faculty brought in 57% of the research money and 20% of the faculty brought in 99.8% of the research funding.  To be fair, funding for research in STEM fields is much more abundant than funding for the Arts and Humanities. But the study also showed that those who brought in the bulk of grant money also taught their fair share of students.  Those that taught the fewest students also brought in disproportionately less external research funding.   So it is not a given that universities must choose between teaching and research.  Other studies have shown that the quality of teaching by the productive researchers is at least as good as the teaching of unproductive researchers.  “That less teaching leads to better scholarship remains a curiously under researched assumption” according to Notre Dame’s John McGreevy.

The second assumption associated with Baumol Cost Disease is that the composition of the faculty is constant. The trend in colleges has been to move away from expensive full-time tenured faculty toward lower-cost adjunct professors. According to the Delta Cost Project, between 1990 and 2012 part-time faculty employment increased 121% but full-time faculty increased only 41%. This discrepancy was especially prominent at public four-year institutions. We are now at the point where a little over 50% of college faculty across-the-board are part-time or not on a tenure track. This number is less in affluent private, four-year institutions. I should mention that in the University of Texas at Austin study just mentioned, non-tenure track faculty taught over half of the undergraduate student hours and almost a third of graduate classes.  Adjuncts get paid only a few thousand dollars per course and usually receive no health or tuition benefits. They may not have a permanent office and thus require less space. The labor cost is decreased with no reduction in fees charged or collected.  Since salaries and compensation account for over 40% of the colleges’ budget, this results in tremendous cost savings for the university. One would think that this would contribute to a significant decrease in tuition but the savings are not passed on; rather, they are used to finance other endeavors.

The third assumption is that the faculty brings in no other income. This disregards external research grants obtained by individual investigators.  Research is one of the very important missions of the modern university. Remember, agricultural research was a central reason for the Morrill Act which established state land grant colleges. Military research became important during World War II. It remains important today along with research in bio science, energy, and computers. Research is responsible for transforming colleges from seminaries, clubs, and finishing schools to their present academic status. The U .S. federal government alone gives almost $50 billion each year to universities to conduct research.  This helps fund at least a portion of professors’ salaries as well as the salaries of some administrative and compliance support. 

Many external research funding dollars go toward paying for graduate students. These graduate students are a source of cheap labor for the university where they serve as teaching assistants or even primary course instructors. This is money that the university does not need to spend hiring additional faculty. 

Because research funds are weaved into so many different parts of the university, it is difficult to quantify its effect other than to say that it should offset, to students, a large portion of the institution’s personnel costs.  By that I mean one cannot simply look at the total amount spent on payroll and divide by the number of students and say that is how much each student needs to contribute to cover the cost since there is money coming in from outside sources to pay for at least part of the cost.

Research costs, including institutional research spending will be covered in more depth in the next episode.

The fourth assumption is that there are no faculty costs other than its direct compensation. This ignores the enormous annual expense of sending 63% of faculty to conferences and paying their airfare, conference fees, lodging, and food.  There are sabbaticals where no teaching is done, yet the professor receives compensation.  This perk is claimed by 11.5% of faculty in a year. There are tuition benefits where the university pays all or a part of college tuition for the children of faculty.  If that were an inconsequential amount of money, you wouldn’t be listening to this podcast. 

So in conclusion, we can say that overall, tenured and tenure-track professor compensation contributes only modestly to college costs rising faster than inflation.  Douglas Webber, now at the Federal Reserve, estimates this amount to be about $850, since 2000, but there are other variables which can change the degree to which that occurs, if it even occurs at all. If we factor in the reduced productivity as measured by fewer courses taught, then full-time faculty compensation is responsible for driving up costs much, much faster than inflation. But the increased use of cheaper adjunct faculty will temper this increase.  The degree to which this offsets costs depends on the degree to which adjunct faculty is used.  Also, it does not follow that the cost savings necessarily lead to a reduction in tuition charged.  The securing of external research grants which support at least part of the faculty and staff salaries, should theoretically decrease the cost which is borne by student tuition.  It is unclear if this is the case. The weight of each of these factors is different at each institution and so their effects on college costs will vary greatly.

Thank you for listening to Charging U.  In this episode, we looked at the compensation of professors, their teaching loads, and whether Baumol Cost Disease really causes tuition to go up.

In the next episode, we will look at research costs.

If you enjoyed Charging U, please leave a rating and review.  Let everyone you know who is concerned about the high cost of college about the podcast.  Email any questions or comments to larry@chargingupodcast.com Until next time, be well and be safe.