Addressing the declining productivity of higher education using cost-effectiveness analysis

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This paper is one of three in a series on higher education costs. The series also includes "Initiatives for containing the cost of higher education" and "Public policies, prices, and productivity in American higher education."

Higher education productivity, as measured by academic degrees granted by American colleges and universities, is declining.[1] Since the early 1990s, real expenditures on higher education have grown by more than 25 percent, now amounting to 2.9 percent of US gross domestic product (GDP)—greater than the percentage of GDP spent on higher education in almost any of the other developed countries.[2] But while the proportion of high-school graduates going on to college has risen dramatically, the percentage of entering college students finishing a bachelor’s degree has at best increased only slightly or, at worst, has declined.[3]

Figure 1 shows the trend in productivity from 1970 to 2006, expressed in terms of the ratio of degrees granted to total sector expenditures.[4] The downward slope is steepest among universities, where current productivity is less than half of what it was 40 years ago. Even when adjusted for the growth in overall labor costs in the economy (see dashed lines in figure 1), the decline in bachelor’s-degree production is nearly 20 percent. If these declines continue, maintaining the current rate of bachelor’s-degree production will cost an additional $42 billion per year 40 years from now.[5] Thus, even if state support for public higher education did not continue to decline, tuition would have to increase by an average of $6,885 per full-time equivalent (FTE) student in public universities to maintain current spending, almost doubling today’s tuition.[6]

What accounts for declining productivity in higher education? Prior research provides an array of potential explanations.[7] Most analysts point to the role of rising costs, and others focus on declining degree attainment.[8] Collectively, these explanations reinforce a widespread perception among higher education administrators and many scholars that productivity is impossible to control. According to economists Robert B. Archibald and David H. Feldman, “The problem in higher education is that productivity growth often is synonymous with lower quality. Adding more students to each class can diminish the benefit for each student, leading to diminished outcomes and lower graduation rates. Increasing the number of courses a professor teaches would reduce research or community service.”[9] Similarly, in a study of college presidents’ attitudes, a two-year president said: “I don’t think there are any more efficiencies left to be squeezed out of public universities across the nation. . . . There are no more efficiencies to be had.”[10] So, at least some institutional leaders feel helpless when it comes to improving productivity without sacrificing quality.[11] Even when costs are considered, institutions tend to focus on enrolling more students rather than helping them graduate.[12]

In this paper, I show that policymakers and college leaders do in fact have some control over productivity, but generally lack the information necessary to take the appropriate steps toward improvement. Specifically, decision makers have little information about which programs, policies, and resource decisions are most cost-effective. Relative to other areas of public policy, cost-effectiveness analysis is rarely applied to specific education policies and programs.[13] Even research that looks at the higher education system as a whole rarely considers the relationship between the costs and output—that is, productivity.[14]

A basic principle of decision making is that we have to compare the costs and benefits of all feasible options, but this rarely happens in analyses of higher education. Even those few studies that do consider cost-effectiveness do not attempt to compare across programs. This absence is hard to justify because there is little question that—as my analysis later in this paper shows—some programs are much more cost-effective than others. In addition, cost-effectiveness analyses often ignore the practical constraints of decision makers, such as the availability of state or federal matching grants and pressures to boost college rankings. This paper tries to avoid that problem by addressing the distinctive features of higher education and laying out key questions policymakers need to ask themselves when interpreting the results of cost-effectiveness analyses.

After outlining a method for applying cost-effectiveness analysis to higher education, I apply the approach to a variety of well-known programs, ranging from financial aid to student services and alternative modes of instruction. Although the estimates that come out of this analysis may be useful by themselves, the main aim of this paper is to highlight a different way of thinking about the decisions policymakers and college leaders face and provide a concrete way forward that can help reverse declining productivity. Cost-effectiveness analysis cannot and should not replace the judgment of educational leaders, but the information that comes from it can provide useful guidance and perhaps improve the way those decisions are made.


1. Note that here and elsewhere in the paper, I use “productivity” and “efficiency” somewhat interchangeably, though, strictly speaking, the former refers to output per unit of input (for example, labor hours), whereas “efficiency” has a broader meaning. I adopt “productivity” here to align the discussion with how policymakers more typically use the terms in this context.
2. Charles T. Clotfelter, Buying the Best: Cost Escalation in Elite Higher Education (Princeton, NJ: Princeton University Press, 1996); and Arthur Hauptman and Young Kim, Cost, Commitment, and Attainment in Higher Education: An International Comparison (Boston: Lumina Foundation and Jobs for the Future, 2009).
3. Martha J. Bailey and Susan M. Dynarski, “Inequality in Postsecondary Education,” in Wither Opportunity: Rising Inequality, Schools, and Children’s Life Chances, ed. Greg Duncan and Richard Murnane (New York: Russell Sage Foundation, 2011); and John Bound, Michael Lovenheim, and Sarah Turner, Why Have College Completion Rates Declined? (working paper 15566, National Bureau of Economic Research, Cambridge, MA, 2009).
4. This measure of productivity is imperfect because, for example, the resources included in the four-year (two-year) sector expenditures are not all supposed to go toward Bachelor of Arts (Associate of Arts) production, but the nondegree roles of colleges have not changed significantly over this time period, so this probably influences the productivity level but not the trend.
5. Productivity in 2006 was 81 percent of 1970 levels. Current expenditures in 2007 on four-year colleges were $196 billion. See US Department of Education, National Center for Education Statistics, 2003–04 through 2006–07 Integrated Postsecondary Education Data System, “Table 362: Expenditures of Public Degree-Granting Institutions, by Purpose of Expenditure and Type of Institution: 2003–04 through 2006–07,” 2010, Assuming the trend continues, productivity in 2050 will be 81 percent of 2010 levels, and this will require an additional $42 billion to generate the same degrees. This slightly understates the additional resources because the figure represents only 36 years rather than 40, so the extrapolated productivity would actually be slightly larger. These calculations exclude two-year colleges because productivity is largely unchanged in that sector. The calculations also exclude private colleges, for which less data are available.
6. There were 6.1 million FTE undergraduates in public four-year colleges in 2008. See US Department of Education, National Center for Education Statistics, Higher Education General Information Survey, “Fall Enrollment in Colleges and Universities” (1969–1985); and 1986 through 2008 Integrated Postsecondary Education Data System, “Fall Enrollment Survey,” 2010. Dividing the $42 billion by this number yields $6,885. By comparison, according to the Delta Cost Project, tuition at public research universities was $6,741 ($5,004) in public research (public master’s) institutions in 2006. See Delta Cost Project, Trends in College Spending (Washington, DC: Delta Cost Project, 2009).
7. William J. Baumol and William G. Bowen, Performing Arts: The Economic Dilemma (New York: Twentieth Century Fund, 1966); G. C. Winston, “Subsidies, Hierarchy and Peers: The Awkward Economics of Higher Education,” Journal of Economic Perspectives 13 (Winter 2009): 13–36; Dan Black and Jeffrey Smith, “Evaluating the Returns to College Quality with Multiple Proxies for Quality,” Journal of Labor Economics 24, no. 3 (2006): 701–28; Liang Zhang, “Do Measures of College Quality Matter? The Effect of College Quality on Graduates’ Earnings,” Review of Higher Education 28, no. 4 (2005): 571–96; Robert B. Archibald and David H. Feldman, “Explaining Increases in Higher Education Costs,” Journal of Higher Education 79, no. 3 (2008): 268–95; Robert B. Archibald and David H. Feldman, “Why Do Higher Education Costs Rise More Rapidly Than Prices in General?," Change (May/June 2008): 25–31; and Douglas N. Harris and Sara Goldrick-Rab, “The (Un)Productivity of American Higher Education: From ‘Cost-Disease’ to Cost-Effectiveness” (working paper, Wisconsin Center for the Advancement of Postsecondary Education, Madison, December 2010).
8. With regard to the role of rising costs, see William J. Baumol and Sue Anne Blackman, “How to Think about Rising College Costs,” Planning for Higher Education 23 (Summer 1995): 1–7; Howard R. Bowen, The Costs of Higher Education: How Much Do Colleges and Universities Spend Per Student and How Much Should They Spend? (San Francisco: Jossey-Bass, 1980); David W. Breneman, “An Essay on College Cost,” in Study of College Costs and Prices, 1988–89 to 1997–98, Volume 2 (Washington, DC: National Center for Education Statistics, 2001), 13–20; Ronald G. Ehrenberg, Tuition Rising: Why College Costs So Much (Cambridge, MA: Harvard University Press, 2000); Malcom Getz and John J. Siegfried, “Cost and Productivity in American Colleges and Universities,” in Economic Challenges in Higher Education, ed. Charles Clotfelter et al. (Chicago: University of Chicago Press, 1991), 261–392; Dennis Jones and Jane Wellman, “Bucking Conventional Wisdom on College Costs,” Inside Higher Ed, July 20, 2009,; Richard Vedder, Going Broke by Degree: Why College Costs Too Much (Washington, DC: AEI Press, 2004); and Burton A. Weisbrod, Jeffrey P. Ballou, and Evelyn D. Asch, Mission and Money: Understanding the University (New York: Cambridge University Press, 2008). With regard to declining degree attainment, see William G. Bowen, Matthew M. Chingos, and Michael McPherson, Crossing the Finish Line: Completing College at America’s Public Universities (Princeton, NJ: Princeton University Press, 2009).
9. Archibald and Feldman, “Explaining Increases in Higher Education Costs,” 270.
10. John Immerwahr, Jean Johnson, and Paul Gasbarra, The Iron Triangle: College Presidents Talk about Costs, Access, and Quality (San Jose, CA: National Center for Public Policy and Higher Education and the Public Agenda, 2008). Direct quotations are not included in the cited paper but were collected as part of the study and provided by the cited authors.
11. Exceptions include William F. Massy, “Productivity Issues in Higher Education,” in Resource Issues in Higher Education, ed. William F. Massy (Ann Arbor: University of Michigan Press, 1996); and Michael McPherson, Morton Owen Schapiro, and Gordon C. Winston, Paying the Piper: Productivity, Incentives, and Financing in U.S. Higher Education (Ann Arbor: University of Michigan Press, 1993).
12. Sara Goldrick-Rab and Josipa Roksa, A Federal Education Agenda for Promoting Student Success and Degree Completion (Washington, DC: Center for American Progress, 2008).
13. David H. Monk and Jennifer A. King, “Cost Analysis as a Tool for Educational Reform,” in Reforming Education: The Emerging Systemic Approach (1994 Yearbook of the American Education Finance Association), ed. Stephen L. Jacobson and Robert Berne (Thousand Oaks, CA: Corwin, 1993); Jennifer King Rice, “Cost Analysis in Education Policy Research: A Comparative Analysis across Fields of Public Policy,” in Cost-Effectiveness Analysis in Education: Progress and Prospects (2002 Yearbook of the American Education Finance Association), ed. Henry M. Levin and Patrick McEwan (Larchmont, NY: Eye on Education, 2002).
14. Exceptions include Massy, “Productivity Issues . . . ”; and McPherson, Schapiro, and Winston, Paying the Piper . . .

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