News of the Collegespring2007

Ask a Prof

Reed’s comprehensive fees for tuition, room and board for 2007–08 will increase 5.4 percent to $45,880. Fee increases at comparable liberal arts colleges range from a high of 15.5 percent at Grinnell to a low of 3.8 percent at Amherst; but nowhere will the increase be as low as the overall inflation rate of 2.5 percent. Why is the cost of higher education continuing to rise so much faster than the cost of cars, furniture, or Caribbean vacations?

Jeffrey Parker, Reed’s George Hay Professor of Economics, researches the economics of higher education and peer effects in student learning.

Reed: Why is college tuition rising so quickly?

Parker: The proximate cause is that costs are going up. It’s not like colleges are making a profit. They’re spending every dime they’re taking in.

So why are costs going up?

It’s the cost disease of the service sector. The analogy is to a string quartet. Over the last century, we’ve streamlined production, so you can now produce a car with one quarter as many workers. But in the service sector, it still takes four players to be a string quartet—or one instructor to teach a 16-student Hum conference.

If the price goes too high, won’t consumers rebel? And then won’t colleges begin to compete on price, just like computer-makers or phone companies?

The nature of competition in higher education is different. Instead of competing on price, we tend to compete on quality. If a college wants to go out and recruit better students, we don’t cut the price, we spend more—introduce a new major, renovate or build new dorms, build a new sports center. There aren’t many markets like this one: we select the people we’re going to allow to buy our product.

Can these fee increases go on indefinitely?

My worry is that we—all of the high-priced colleges and universities—are going to end up with a bimodal student body. Rich kids will be able to afford our tuition; at the bottom they can afford it because they don’t pay for it, they get grants. And the middle-class kids—the ones with family income from $75,000 to $200,000, for whom this is a steep cost—get squeezed.

Additional reading on the economics of higher education can be found in the syllabus for Economics 421: Economics of Reed College, which Parker will teach in fall 2007. A link to the current syllabus is at http://academic.reed.edu/economics/parker/.