A Survey of the Literature on the Economics of Higher Education

Part I

The economics of higher education goes back at least to Adam Smith, who suggested over 200 years ago in the Wealth of Nations that professors should get paid based upon the number of students enrolled in their classes (Smith, 1776)

Reviewed Topics

• Return to Education• Private Return

– Human Capital and Screening theory

– Higher Earnings

– Status

– Life Options

– Pleasure…

– Demand for High Skilled Workers: Technical change > The Rise in High Skilled

Workers wage

• Social Return– Education and Growth

– Education and Democratic Civil Societies

– Individual Economic Mobility and Social Justice

– Education and Crime

• Cost Sharing• Public: governments or taxpayers.

• Private: Parents

• Private: Students– Student Loans

» fixed-schedule, or conventional mortgage-type loans

» income contingent loans.

– Scholarship

» Merit Aid

» Need-based Aid

• Private: Philanthropists (Alumni)

Next time…

Reviewed Topics (Cont.)

• Academic Labor Market– Academic Salaries relative to private sector salaries– Salaries in private institutions relative to public universities– Academic Tenure– The end of mandatory retirement– Ph.D

• The University and the Industry (STE) • What Effects Education Quality

– Peer effects in higher education – Class Size

• Brain-Drain, Globalization and In-state out of State Students.

Reviewed Topics (Cont.)

Leading Researchers and Working Groups

• Prof. Charles T.Clotfelter (DUKE, NBER Higher Education Working Group) – Demand for undergraduate Education– Rising costs (Rising Expenditure)– Alumni Donors

• Prof. Ronald G. Ehrenberg (Cornell Higher Education Research Institute – CHERI)– Academic labor market (tenure, salary …) – Rising cost, Tuition Rising– Reducing Inequality in Higher Education – Privatization of Public Higher Education

• Prof. Nicholas Barr (LSE, UK Reforms)– Financing Higher Education – UK higher education debate: tuition and students loans or

‘free’ higher education.

• Prof. Bruce Johnstone (The International Comparative Higher Education Finance and Accessibility Project – ICHEFAP)– Cost Sharing– Student Loans

• Prof. Bruce Chapman (Higher Education Contribution Scheme - HECS) – income contingent loans

Leading Researchers and Working Groups (Cont.)

Private Return to EducationEarnings, Status, Life Options

and of course Pleasure …

Human Capital and Alternative Theories:

• Becker (1964)Becker, G. S. (1993): Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education.

• Mincer (1974)

• Heckman (1979) – Selection Bias

•  Ashenfelter, O., C. Harmon and H. Oosterbeek (1999). A review of estimates of the schooling/earnings relationship with tests for publication bias

• Harmon C., H. Oosterbeek and I. Walker (2003). The returns to education: microeconomics

Private Return to Higher Education

• Murphy, K. and Welch, F. (1989): "Wage Premiums for College Graduates", [mostly empirical]

• Becker, G. (1992): "Why Go to College: The Value of an Investment in Higher Education" [solid corroborating evidence]

• Murphy, K.M. and Welch, F. (1992): "Wages of College Graduates" [college earning premiums change over time, based on supply and demand for labor]

• Cohn, E. and Geske, T.G. (1990): "Benefit-Cost Analysis in Education“[technical discussion of returns to elementary , secondary, undergraduate, and graduate studies; also discusses differences in returns by race, sex, national origin, and religion]

 • Berger, M.C. (1992): "Private Returns to Specific College Majors“

[examines differences in earnings btw. broad academic categories - Engineering, Liberal Arts, Business, Science]

• Anderson, M.S. and Hearn, J.C. (1992): "Equity Issues in Higher Education Outcomes" [a Critique – the influence of individuals' socioeconomic background on the return to education[

Private Return to Higher Education (cont.)• Return to attending a 2-year college

– is the return to attending a 2-year college is the same as the return to attending a 4-year institution in other words, is the return to higher education depends only on the number of credit hours earned

(Grubb 1993, 1995, Jaeger and Page 1996, Kane and Rouse 1995)

• Whether the return to higher education depends upon the type of institution that an individual attends (expenditures per student and measures of average student test scores)

(James et. al. 1989, Loury and Garman 1995 – ignore selection bias!)

– Ehrenberg and Brewer 1996, Brewer, Eide and Ehrenberg 1999, Eide, Ehrenberg and Brewer 1998, Monks 2000, Liang Zhang (2005), Scott Thomas and Liang Zhang (2005)

– control for selection

– the most selective private institutions higher early career earnings and higher probabilities of being admitted to the best graduate and professional schools

Private Return to Higher Education (cont.)

– Dale and Krueger (1999), control for selection more directly, conclude that attendance at selective private institutions yields significant economic returns only for under represented minority students and students from lower-income families.

– Constantine (1998), Ehrenberg and Rothstein (1994), Ehrenberg, Rothstein and Olsen (1999) - whether African American students who attend Historically Black Colleges and Universities have higher completion rates and higher early career earnings than students who attend other 4-year institutions.

– Rothstein (1993), Solnick (1995) - whether women’s colleges confer economic advantages on women who attend them, and whether single-sex colleges alter the probabilities that female students will graduate from majors that are traditionally male dominated.

Demand for High Skilled Workers

• Acemoglu (1998). Why do new technologies complement skills? Directed technical change and wage inequality.

• Acemoglu (2002). Technical change, inequality, and the labor market.

• Berman, Bound and Griliches, (1994). Changes in the demand for skilled labour within U.S. manufacturing industries: evidence from the Annual Survey of Manufactures.

• Krussell, Ohanian, Rios-Rull and Violante (2000). Capital-skill complementarity: a macro-economic analysis.

Overeducation Papers from 1970-1980…

Private Return to Higher Education (cont.)

Signaling and Screening

• Arrow, K. J. (1973). Higher education as a filter

• Spence, M. (1973). Job market signaling

• Stiglitz, J.E. (1975). The theory of ‘screening’, education, and the distribution of income.

• Whitehead, A.K. (1981): "Screening and Education: A Theoretical and Empirical Survey"

• Chiswick (1973): "Schooling, Screening, and Income"

Private Return to Higher Education (cont.)

Social Return to Education

Mostly Education and Growth but also Education and Democratic Civil Societies, Individual Economic Mobility and Social Justice, Reduced Crime.

• Acemoglu and Angrist (1999). Social return of high school education (Evidence from compulsory schooling laws).

• Lochner (2004). The relationship between Education, work and crime.

• Morettti (2004) finds that all types of workers’ earnings are higher when the share of college graduates in the city’s workforce is higher. Specifically, a percentage point increase in the supply of college graduates raises high school drop-outs' wages by 1.9%, high school graduates' wages by 1.6%, and college graduates wages by 0.4%.

Education and Growth• Sianesi, B. and J. van Reenen (2002). The returns to education:

macroeconomics.• • Barro, R.J. (1991). Economic growth in a cross-section of countries.

• Barro, R.J. and X. Sala-i-Martin (1995). Economic Growth.

• Bassani, A. en S. Scarpetta (2001). Does human capital matter for growth in OECD countries?

• Beine, M., F. Docquier and H. Rapoport (2001). Brain drain and economic growth: theory and evidence.

• Benhabib, J. and M.M. Spiegel (1994). The role of human capital in economic development. evidence from aggregate cross-country data.

Education and Growth

• Bénabou, R. (1994). Human capital, inequality, and growth: A local perspective.

• Bénabou, R. (1996). Heterogeniety, stratification, and growth: Macroeconomic implications of community structure and school finance.

• Griliches, Z. (1996). Education, human capital and growth: a personal perspective.

• Krueger, A.B. and M. Lindahl (2001). Education for growth: why and for whom?

• Temple, Jonathan, (2001). Growth effects of education and social capital in OECD economies.

• Wolff, E. N. (2000). Human capital investment and economic growth: exploring crosscountry evidence.

Higher Education and Growth

• Newman (1985): "The New Economy: American Education in a Competitive World"  

• Foster (1987): “the Contribution of Education to Development”

• Birdsall (1996): "Public Spending on Higher Education in Developing Countries: Too Much or Too Little?"

• Smith and Drabenstott (1992): "The Role of Universities in Regional Economic Growth"

Academic Labor MarketFoundation Papers • Ehrenberg (2003) Studying Ourselves: The Academic Labor Market

– The declining salaries of faculty employed at public colleges and universities relative to their private institution counterparts

– The growing dispersion of average faculty salaries across academic institutions within both the public and private sectors

– The impacts of the growing importance and costs of science on the academic labor market and universities.

• Ehrenberg (2005) The Changing Nature of the Faculty and Faculty Employment Practices– The Growth in Contingent Faculty– Who Will be the Faculty of the Future (probably not female)– Increasing Importance and Cost of Scientific Research– Faculty Compensation Differentials (Growing faculty salary differential across

institutions, across fields within each institution and across faculty members in the same department)

– Mandatory Retirement and Health Insurance Issues

Academic Labor Market (cont.)Salary• Numerous studies have analyzed the salaries of faculty members to learn if salaries

are related to measures of productivity (Hamermesh, Johnson and Weisbrod 1982, Hamermesh 1988)

• Do colleges and universities have monopsony power over their senior faculty

(Ransom 1993, Hallack 1995, Monks and Robinson 2001)

• Whether, holding other factors constant, faculty employed under collective bargaining agreements are paid more and have lower quit rates than faculty who are not covered by collective bargaining agreements (Barbezat 1989, Rees 1993, 1994, Ashraf 1997, Monks 2000, Ehrenberg and Klaff 2003)

• The effect of unions on the compensation of staff, other than faculty, at higher education institutions (Klaff and Ehrenberg 2002)

• Assistant professors demand and receive a compensating starting salary differential for positions that offer low probabilities of tenure (Ehrenberg, Pieper and Willis 1998).

• "Paying Our Presidents: What Do Trustees Value?" (Ehrenberg, Cheslock, and Epifantseva 2001)

Academic Labor Market (cont.)Salary

• "Determinants of Faculty Gender Ratios Across Institutions and Departments," (Rajeswaren 2000)

• Whether there are gender differentials in earnings and promotion probabilities (Booth, Frank and Blackby 2001, Levin and Stephan 1998, Monks and Robinson 2000, Ginther and Hayes 1999, Hoffman 1976)

• Why females are underrepresented, relative to their share in the PhD population, at major research universities (Barbezat 1992)

• Why Do Field Differentials In Average Faculty Salary Vary Across Universities?" (Ehrenberg, McGraw, and Mrdjenovic 2005)

• "Increasing Earnings Inequality in Faculty Labor Markets" (Monks 2003)

• The impact of the growing cost of doing science on faculty employment and salary levels (Ehrenberg 2005).

Academic Labor Market (cont.)

The end of mandatory retirement (1994)• How faculty productivity varies over the life cycle (Levin and Stephan

1991, Goodwin and Sauer 1995, Oster and Hamermesh 1998).

• How the end of mandatory retirement influenced retirement rates at universities (Ashenfelter and Card 2002, Ehrenberg, Matier and Fontanella 2001, Clark, Ghent and Krebs 2001)

• Whether early retirement incentive programs for faculty covered by a defined benefit pension plan led to increased faculty retirements (Pencavel 2002).

• Faculty Retirement Policies and benefits to encourage people to retire (Ehrenberg 2001)

Academic Labor Market (cont.)

Tenure, why it is necessary?

• The important benefits institutions reap from tenure: – Carmichael (1988) Hire the best possible candidates.– McPherson and Winston (1993) – Incentives.

• Brown (1997) provides an efficiency-based explanation for academic tenure. Tenure is necessary for faculty to be willing to assume the roles normally associated with ownership without fear or reprisal from trustees and administrators.

• Tenure as a means by which professors seek partial contractual protection from internal political forces and the vagaries of academic democracies (McKenzie 1996)

Tenure

• higher education, as a whole, has taken steps to reduce the percentage of tenured faculty, particularly through the increased use of part-time and non-tenure track faculty (McPherson and Schapiro 1999 Eugene Anderson 2002, Roger Baldwin and Jay Chronister 2001, Valerie Conley, David Lesley, and Linda Zimbler 2002).

• "The Changing Nature of Faculty Employment" (Ehrengberg and Zhang 2004)

• "Changes in Faculty Composition Within the State University of New York System: 1985 - 2001" (Ehrenberg and Klaff 2003)

• Under what circumstances would a faculty member voluntarily relinquish tenure? (Charles Clotfelter 2000)

• The increased usage of non-tenure faculty adversely affect graduation rates at 4-year colleges, with the largest impact on students at the public master’s level institutions. (Ehrenberg and Zhang 2004)

Academic Labor Market (cont.)

Academic Labor Market (cont.)

• Efficiency in the provision of university teaching and research: an empirical analysis of UK universities (Glass, McKillop and Hyndman 1995)

Ph.D – Academic Labor Supply

• Ehrenberg (1991) academic labor supply– Projections of Shortages– A stock flow model of Academic labor supply– Decisions to undertake and complete Doctoral study– Demographic distribution of American Doctorats– Policy (should we increase the flow of new doctorates)

• Ehrenberg Groen, and Nagowski (2005) "Declining PhD Attainment of Graduates of Selective Private Academic Instutions“

• Zhang (2005) "Crowd Out or Opt Out: The Changing Landscape of Doctorate Production in American Universities"

Ph.D – Academic Labor Supply (Cont.)

• Groen and Rizzo (2004) "The Changing Composition of American-Citizen PhDs“(patterns in the composition of American-citizen doctorate recipients from the early 1960s to 2000, more women, more doctors from selective research universities)

• Ehrenberg (2005) “Involving Undergraduates in Research to Encourage Them to Undertake PhD Study in Economics”

• Ehrenberg (2004) “Changes in the Academic Labor Market for Economists“ too many doctors…

What Effects Education Quality?Peer Effect

• Winston and Zimmerman (2003). Peer effects in higher education.

• Arcidiacono, Foster, Goodpaster and Kinsler (2004) Estimating Spillovers in the Classroom with Panel Data

• Cook and Frank (1993) The growing concentration of top students at elite schools.

• Stinebrickner (2005) The Causal Effect of Studying on Academic Performance

• Bettinger and Long (2005) Mass Instruction or Higher Learning? The Impact of Class Size in Higher Education

• Ehrenberg (2001) "Does Class Size Matter?“

• Kokkelenberg, Dillon, and Christy (2005) "The Effects of Class Size on Student Achievement in Higher Education"

Brain Drain:• Bhagwati and Hamada (1974). The brain-drain, international integration of

markets for professionals and unemployment.

• Poutvaara (2005). Public education in an integrated Europe: Studying to migrate and teaching to stay.

• Few more papers in “Academic Labor Market”

In-State versus Out-of State Students• Groen and White (2003) In-State versus Out-of State Students: The

Divergence of Interest between Public Universities and State Governments

• Groen (2004) "The Effect of College Location on Migration of College-Educated Labor“

• Rizzo and Ehrenberg (2004) "Resident and Nonresident Tuition and Enrollment at Flagship State Universities"

Introduction to the Following Lecture

Accessibility

Liquidity (Borrowing) Constrains

Tuition Rising

Accessibility – Admission and Tuition

• Ehrenberg (2001) "The Supply of American Higher Education Institutions"

Admission and Affirmative Action • Volanski (2005) – the Israeli psychometric test

• Gilboa and Justman (2005) Academic admissions standards: implications for output, distribution, and mobility

• Cullen and Long and Reback (2003) Jockeying for Position: High School Student Mobility and Texas' Top-Ten Percent Rule

• Ehrenberg (2004) The Future of Affirmative Action

Tuition and Liquidity (Borrowing) Constrains

Borrowing against human capital is difficult - A lot of uncertainty! therefore the government should interfere…

• Cameron. and Taber (2004). Estimation of educational borrowing constraints using returns to schooling.

• Fernandez (1998). Education and borrowing constraints: tests vs. prices,

• Fernandez and Galí (1999). To each according to …? Markets, tournaments, and the matching problem with borrowing constraints.

• Carneiro and Heckman (2002), The evidence on credit constraints in post-secondary schooling.

Tuition and Liquidity (Borrowing) Constrains

• Stinebrickner and Stinebrickner (2004) Credit Constraints and College Attrition

• Hanushek Leung and Yilmaz (2004) Borrowing constrains, collage Aid, and intergenerational mobility

• Ehrenberg (2005) Graduate Education, Innovation and Federal

Responsibility

• Stinebrickner and Stinebrickner (2003), “Understanding Educational Outcomes of Students from Low-Income Families: Evidence from a Liberal Arts College with a Full Tuition Subsidy Program”

Tuition Rising• Selective Private Colleges and Universities :

– increased costs of technology,– student services and institutional financial aid– at the research universities: the increasing institutional costs of scientific

research – The arms race (the competition to be the best)

• Public Higher Education: – all the above– withdrawal of state support.

• Clotfelter (1996), Buying the best: Cost escalation in elite higher education - what happened to expenditure (4 universities, 1 college, 15 years – financial aid, increases in the number of faculty > decline in average classroom teaching loads, increases in real faculty salaries, and increased administrative expenditures.

• Ehrenberg, R.(2000), Tuition rising: Why college costs so much? – why it

happened

Tuition Rising (cont.)

• Rizzo (2004) A (Less Than) Zero Sum Game? State Funding For Public Education: How Public Higher Education Institutions Have Lost“

• Ehrenberg (2001), "Why Can't Colleges Control Their Costs?"

• Hoxby(1998) How the Changing Market Structure of U.S. Higher Education Explains College Tuition.

• Akabayashi and Naoi (2005) Why is there No 'Harvard' among Japanese Private Universities?

• Ehrenberg (2001) "Will Trustees Tame Tuition?"

Tuition Rising (cont.)

• Ehrenberg and Epifantseva (2001) "Has the Growth of Science Crowded Out Other Things at Universities?“

• Ehrenberg, Rizzo and Jakubson (2003) "Who Bears the Growing Cost of Science at Universities?“

• Bailey, Rom and Taylor(2004) State Competition in Higher Education: A Race to the Top or a Race to the Bottom?

• Ehrenberg (2005) The Perfect Storm and the Privatization of Public Higher Education.

Tuition Rising (cont.)

Ranking - U.S. News and World Report.

• Ehrenberg (2003) "Method or Madness? Inside the USNWR College Rankings"

• Ehrenberg (2003) "Reaching for the Brass Ring: How the U.S. News and World Report Rankings Shape the Competitive Environment in U.S. Higher Education"

• Bednowitz (2000) "The Impact of the Business Week and U.S. News & World Report Rankings on the Business Schools They Rank.“

• Monks and Ehrenberg (1999) "The Impact of U.S. News & World Report College Rankings on Admissions Outcomes and Pricing Policies at Selective Private Institutions"

Philanthropy • Clotfelter (2001) "Who are the Alumni Donors? Giving by Two

Generations of Alumni from Selective Colleges"

• Clotfelter (2003)"Alumni Giving to Elite Private Colleges and Universities“– Higher levels of contributions are associated with:

• higher income• whether or not the person graduated from the institution where he or she first attended college• the degree of satisfaction with his or her undergraduate experience cohort of graduates• those who had received need-based aid tended to give less• those who were related to former alumni tended to give more.

• Auten, Cilke, and Randolph (1992), The Effects of Tax Reform on Charitable Contributions.

• Auten, Sieg, and Clotfelter (1999), Charitable Giving and Income Taxation in a Life-Cycle Model: An Analysis of Panel Data

• Ehrenberg and Smith (2001) "The Sources and Uses of Annual Giving at Private Research Universities"