Economics professor confronts rising tuition, health care costs

Sanjay Paul November 13, 2014 0

Death and taxes. To the two certainties in life attributed to Mark Twain, we could add two contemporary issues: sharp increases in tuition fees and health care costs.

College students all over the country, alas, have come to dread the tuition increase every year. Homer, with a child in college, is painfully aware of the phenomenon — and has subsequently cut back on his consumption of scones. Every little bit helps.

Fortunately, however, the pace of increase has slowed in recent years. Where once tuition costs rose seven percent or eight percent every year at private colleges, the increases are now in the 4 four to five percent range. A small consolation, perhaps, but the downward trend seems likely to continue. Along with granting more financial aid, colleges are straining mightily to keep the sticker price of tuition under control.

And that means keeping costs under control. Education is a highly labor-intensive business. You need professors in the classroom. You need administrators to handle the variety of tasks involved with running a college. These people have to be paid salaries.

But that is not all. The college’s labor costs also includes benefits. Employees receive retirement and health benefits; the college has to pay payroll taxes for each employee. Add up salaries and benefits, and you are looking at over 60 percent of the budget.

Now, growth in salaries has moderated sharply in recent years. Nowadays faculty salaries rarely outpace inflation, currently under two percent. With salaries stagnant, or rising modestly, both faculty and administrators generally find themselves in the same boat. Whether you earn $50,000 or $100,000 a year, a salary increase of one percent at a time prices are rising two percent constitutes a decline in your purchasing power. Falling real wages and declining standards of living then have become a fact of life for most college employees.

But there is more bad news. It has to do with health care costs. In a further attempt to rein in costs, colleges are increasing the share of premiums paid by the employees. In the past, health insurance premiums were rising rapidly, even faster than college tuition, but in the last couple of years, their growth too has moderated. Many people may be unaware of this, but a respected national survey of employers across various industries shows that health insurance premiums for family coverage rose three percent in 2014, not the nine percent or 10 percent that is commonly thought to be the case. For single employees, the growth was even smaller, at two percent.

But these mild increases mask a trend among certain firms to shift the cost of spousal coverage to their employees. The cost of insuring spouses is steep. So, some colleges are asking their employees to pay a larger share of the health insurance premium if spouses remain on the policy. In other cases, they are encouraging — or requiring — spouses to get their coverage through their employers. This trend is likely to intensify over time, especially since the advent of the Affordable Care Act (or ObamaCare) provides opportunities for spouses to obtain coverage through the marketplace.

The steep rise of tuition and health care costs is in part due to what economists call Baumol’s cost disease. In certain sectors of the economy, such as manufacturing, the introduction of machines and computers raises workers’ productivity, leading to increases in real wages for the employees. But in education, health care and (in Baumol’s original example) the fine arts, productivity gains are difficult to come by, but wages must rise to ensure that these professions continue to attract workers. So you end up with rising wages without a commensurate gain in productivity, leading firms to raise prices sharply. To supplement their revenue streams, firms in these sectors strive to attract public funds and donations from rich individuals. And in the case of colleges, they seek to attract more students by building leisure pools and lazy rivers.

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