MORTARBOARDED BY THE COLLEGE EDUCATION MARKET

We should be brave with our talents. ~ Caroline North 

I have thought more about the market for college education now that graduation season has ended and the 2.92 million new college graduates have celebrated and tossed their mortarboards into the air this spring. We spend lot of money on college education. The latest data show that postsecondary institutions’ total expenses for the 2013-14 academic year were approximately $517 billion; public institutions accounted for 63% to the total, private nonprofit institutions spent 33%, and private for-profit institutions account for 4% of the total. This 3-year old total expenditure is within 10% what the federal and state governments now pay for Medicaid.

I’ll start by returning to basic microeconomics and examine the market for college (aka, tertiary) education. I’ve used the term “college” here to include every type of post high-school (post-secondary) education, including elite and non-elite 4-year private institutions (e.g., Harvard, Stanford, Cal Tech, Denison, Willamette and Shimer College in Chicago that has just 97 students), elite and non-elite 4-year public institutions (e.g., UC/Berkeley, Univ. of Arizona, Western Washington Univ., West Chester Univ.) and public and private 2-year institutions (e.g., Berkeley City College and for-profit schools like DeVry University). Broadly speaking, these are the 3 distinct types of colleges that comprise the “supply” side of the college market. California has the largest number of colleges of any state, 1,246, and is home to colleges in each of these 3 supply tiers. There are 3 major stakeholders in the market for college education; (1) the college suppliers of this education, (2) the students who “demand” education services of the colleges, and (3) federal and state governments who finance large parts of both the suppliers and demanders.

The demand side of the market is the students who apply to, enroll in, attend and hopefully graduate from the over 4,700 higher-education institutions (aka, colleges) in the US. The latest information indicates the total student enrollment in US colleges is more than 20.5 million in 2016. College enrollment has been steadily increasing since post WWII, when the federal government enacted the Servicemen's Readjustment Act of 1944 (aka, the G.I. Bill). In effect, the G.I. Bill helped create the 20th century version of the “American Dream” and augmented it to include not just a house but a college education. In 2015 the college graduation rate was 59% at public institutions, 66% at private nonprofit institutions, and a depressing 23% at private for-profit institutions (about one-third the rate for private nonprofit institutions).

From 1950 to 2016 student enrollment in US colleges has increased about 740% and represents an unqualified, first order achievement that has benefited not only the millions of college graduates themselves but our nation as a whole. These undeniable collective benefits are why Econ 101 teachers like me use college education as a prime example of an economic activity that provides positive externalities. This laudable, long-term increase in people having a B.A. or more is illustrated in the following chart.

Percent of US adults with a B.A. or higher degree

Source: NCES.ed.gov. Adults are defined as people between 25 and 64 years.

This market for college education is now and has been out of balance; we are nowhere near “market equilibrium” in any white-board classroom sense. Some of this imbalance is the result of public policies, as well as policies created by the colleges and finally consumer behavior. The economics of this market are, to no one’s surprise, largely demand driven.

I now examine how college supply and demand have changed during the past decades. Total enrollment in “Higher Education Institutions” (HEIs) is a National Center for Educational Statistics (NCES) term referring to what ordinary folks call colleges and universities) grew by 76.1% from 1980 through 2013. Currently, 2013 is the last year of info for HEIs – but not enrollment in HEIs – those data go through 2015.

The number of HEIs from 1980 through 2013 grew 49.9%. HEIs include both 2-year and 4-year schools. Using 2000 instead of 1980 as the “base” year for growth through 2013, HEIs grew 13.0%, enrollment grew 33.1%. The number of HEIs in 2013 was 4,724 about 2/3rds of which are 4-year schools; number of enrolled students in 2013 was 20,376,000.

Interestingly, these NCES data indicate the growth in the number of 4-year HEIs was about twice as fast as that of 2-year schools, 41.9% vs 19.5%. My expectation, based on information presented in the media, was that 2-year schools’ growth would be stronger. From 1980 through 2000 the growth in the number of 2-year colleges exceeded that of 4-year colleges. But starting after the Obama administration took office, the federal Education Dept. launched a fairly extensive “review” of degree-granting schools (especially private for-profits) to better regulate them and improve their woeful graduation rates. As a consequence of these reviews and regulations, the number of 2-year HEIs declined by 2.1% between 2000 and 2013. Nevertheless, some 2 million students are enrolled in for-profit colleges, up from 400,000 in 2000. The Trump administration is now weakening and removing such regulations. Remember Trump University, it may be back in business? In contrast, 4-year HEIs grew by over 22% since 2000.

What’s happened to college faculty salaries during this time of tremendous enrollment growth and increases in the number of HEIs and tuition? Not much. The table below shows average real salaries for full-time faculty between 1971 and 2010. Faculty salaries have increased, but only nominally and far less than one would expect given the market growth. Look at the drop in real salaries that happened after 1971.

College Faculty Salaries, 1971-2010

	Average Salary	Average Salary
Year	All Faculty	Professor
	(2008-09$)	(2008-09$)
1971	$68,677	$97,035
1976	$64,479	$87,667
1980	$59,029	$78,495
1990	$67,847	$89,277
2000	$70,865    (3.2% fr ’71)	$94,350            (-2.8% fr ’71)
2010	$73,910     (4.3% fr ’00)	$102,691 (8.8% fr ’00)

Source: NCES. Figures in parentheses indicate percent change from indicated year.

From these data, it took the all faculty average salary until 1997 (not shown in the table) to get back to what it was in 1971. For professors the 1971 average salary level didn’t return until 2002. There’s no pre-1971 data so I can’t tell if this year was atypical for hiring faculty; that newly-minted PhDs were in abnormally short supply pushing salaries up, but average faculty salaries dropped after 1971 through the ‘70s, ‘80s and much of the ‘90s as shown in the table, despite large increases in enrollment. Also note the percent change in the 2000 and 2010 salaries. The average professor’s real salary actually shrank by 2.8% from 1971 to 2000, and grew a very modest 8.8% over the ten years ending 2010.

The 2015 average salary for professors from another source is listed as $114,134. This source shows the minimum/maximum salary spread for professors in 2015 from $55k to $207k. NCES data show that the full-time instructional staff at HEIs has increased over 20% since 2015 to over 620,000 people.

For the San Francisco Bay Area, Glassdoor.com states the average professor salary is $155,077, with a spread from $94k to $244k. The 2015 median “postsecondary teacher” salary is listed by the Bureau of Labor Statistics as $72,470. The BLS says they expect a humble 13% projected 10-yr growth in this college faculty salary level.

These data provide solid evidence that despite significant growth in the demand for college attendance and growth in the number of HEIs, college faculty real salary growth has been bleak. Faculty salaries’ increases do not embody the continued strong demand for the services faculty members have provided. One trend that has contributed to this low growth of faculty salaries is the increased use of non-tenure track, adjunct instructors. Or perhaps the majority of that tuition and fee revenue growth has gone to administrators, as anecdotal data seems to indicate. This information suggests that, on average, college faculty members have picked the short straws in the college market for quite some time.

College-going has deepened and broadened in the US. This is a very good thing from several perspectives. The demand for college education has increased significantly, and will continue to. The NCES now projects that awarded B.A.’s will increase 14% between 2010 and 2021, up from the 7.1% previously forecast. But the growth of supply (or capacity) of colleges to accommodate ever-more students has increased but lagged demand’s huge growth.

The bottom line regarding our college education market is that the demand for college enrollment has grown almost 3 times as fast as the number (supply) of HEIs has (33.1% vs 13%). It’s mostly a sellers’ market. 

What happens in a market when the quantity demanded exceeds the quantity supplied? Prices rise, as indeed they have in the college market. Tuition and fees have followed an upward, ballistic trajectory for quite a while. In the 15 years from 2002 to 2017 college tuition, fees and room & board have increased 40.4% in real terms (after accounting for inflation) for private, nonprofit 4-year colleges and 63.9% for public 4-year colleges. This is principally demand-pull tuition inflation that colleges are happy to oblige.

Tuition and other costs have risen for colleges, especially public institutions, because federal tertiary education funding has steadily declined since 1965; state funding of colleges has contracted since the late 1970s. Tuition revenues surpassed federally-supplied funds after 1965. In 2011 tuition revenues surpassed state funding for the UC system in 2011. Between 1996 and 2016 both in-state and out-of-state tuition at UC/Berkeley practically tripled. According to the College Board, national yearly costs for private, nonprofit 4-year colleges currently average $45,370; for public 4-year colleges it’s $20,080.

Although colleges have been fiscally pressed to raise tuition and fees since other funding sources have declined, how can they keep raising tuition and fees so dramatically without suffering a loss of customers (aka, students)? They can because the demand for college education is very price inelastic (insensitive). The economic assessments I found of the price elasticity of demand[1] (PED) for college education range from -0.44 to -0.85. In non-econ speak this means that students don’t really reduce their demand for education much when tuition and fees increase, despite their protests. Enrollment demand decreases much less than tuition price increases. Why? Because there aren’t any real substitutes, other than going to another college or a lower-tier one that has lower tuition.

Colleges don’t really compete on price; they compete on reputation and expected benefits. This lack of substitutes differentiates college education from a host of other retail services and products, and strengthens the colleges’ ability to raise tuition, especially when federally-subsidized college loan funds have increased. Exactly how colleges determine what their tuition and fees will be is far beyond the scope of this analysis. Adam Davidson wrote an interesting, insightful article several years ago that examines the tuition-setting process and expressed his belief that the top elite private colleges are probably underpriced.

Students and their families know that the only thing more expensive than a college education is not getting a college education. As one woman put it that is supporting her 2 sons with a part-time manufacturing job, “If you don’t have a college degree, your job choices are fast food or factory.” So students begrudgingly take out larger loans and/or apply for greater financial support with all fingers crossed. Given such numerically low price elasticities, increases in tuition and fees provide increased revenue for colleges. The price elasticity of demand is likely even lower for elite public and private colleges, as ever-lower acceptance rates demonstrate.

College students and their professors have been mortarboarded by this market. Students are always paying more, faculty members aren’t gaining much financial benefit and educational institutions rule the academic roost.

Given these substantial increases in college tuition and fees and the rising demand for tertiary education it’s easy to see why promises by liberal politicians to make college “free” have such wide appeal among young people. The “free” part of no-tuition public college is a chimera, especially for taxpayers. Bernie Sanders’ 2016 free-tuition program for all could have cost well over the $75 billion per year that he suggested. He hoped it would be paid by a new financial transactions tax. This April, he renewed his utopian legislative efforts to create free public-college education in America. Good luck with that, Bernie.

Last week’s surprisingly strong results for the British Labour Party were in no small part due to Millennials voting for Jeremy Corbyn, who pledged to make British colleges tuition-free. Unlike America where only 17% of Bernie’s young followers actually cast a vote for their free-tuition man in the presidential primaries, 57% of British young adults voted for Mr. Corbyn last week and rejuvenated the Labour Party.

Will free tuition rule? As a taxpayer, I hope not. A good friend of mine says that one of the most expensive services that government can provide is “free” stuff. Expanding Stafford loans and Pell grants is a much better policy option, though far less poltically entrancing.

Increased college graduation has greatly benefited individual graduates and our nation. Within the market for college education the process of getting such an education has become more complex, more time-consuming and more costly. The suppliers of this education – colleges and universities – excluding their faculty, seem to have benefited the most.

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[1] Formally, the PED is the ratio of the percent change in quantity demanded of the product/service (here college education) to the percent change in price of the product/service (here tuition), ceteris paribus. The PED is usually negative because for normal (non Veblen or Giffin) goods Q_d  is inversely related to P. PED = dQ_d/Q_d  / dP/P. If PED<1, it’s called inelastic and the percent reduction in Q_d will be less than the percentage increase in price.