Financial Issues Article Review – Explaining Increases In Higher Education Costs

1597 words - 6 pages

Financial Issues Article Review - Explaining Increases in Higher Education CostsIntroductionSince the late 1970s, annual costs at four-year colleges have risen three times as fast as inflation, and, with savings rates dropping and state aid to higher education being cut, students and their families have been forced to take on ever more debt in order to receive higher education (Surowiecki, 2011). The rapid increases in higher education costs have become a considerable public concern since the early 1980s. And the discussion of how much one has to pay for higher education has also been a serious national issue when the cost of higher education for each student has grown substantially over time. In response, national commissions have been created in regard of the costs and accountability in higher education. As a result, there needs to be a clear understanding of the causes of the rapid increase in higher education costs. Between two competing theories explaining the rise of costs in higher education which are William Baumol's cost disease theory and Howard Bowen's revenue theory of costs, the authors believe that Baumol's cost disease theory has a firmer behavioral foundation than Bowen's revenue theory. However, regardless of this advantage, the choice between them is actually rather empirical (Archibald & Feldman, 2008).SummaryThe article "Explaining Increases in Higher Education Costs" by Archibald & Feldman (2008) firstly explains William Baumol's cost disease theory and Howard Bowen's revenue theory of costs in some detail, then provides a detailed discussion of the competing explanations for rapid cost increases in higher education, and finally contains the test and the discussion of the policy consequences of the findings.Baumol's cost disease is a phenomenon described by William J. Baumol and William G. Bowen back in the 1960s. It is based on the idea that technological progress that increases labor productivity (and thus reduces unit cost) is not randomly distributed across industries and over time (Archibald & Feldman, 2008). Baumol analyzed the impact of differential productivity growth on the health of different industries and on the overall economy and hypothesized that stagnant industries will tend to experience above average cost increases, declining quality, and financial pressures if their productivity growth rates are below the economy's average (Nordhaus, 2008).According to Archibald & Feldman (2008), Baumol has also aplied cost disease to personal service industries including higher education. In some cases labor is primarily an instrument to produce the final products while in higher education the labor itself is the end product. Baumol recognized that productivity of some industries have been rising. For example, manufacturing industry regularly produce more with less, which leads to higher wages and continuously improved living standards. However, some other industries, like personal service industries, have...

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