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Are Productivity Gains in Higher Education Possible?

Monday, June 27, 2011

Yes, but not until institutions are provided with incentive to pursue them.

Here’s a puzzle: leaders are calling on colleges and universities to produce more degrees, but cash-strapped states are cutting higher education spending. What’s the solution? Be careful how you answer—this question has become the most prominent fissure in contemporary debates about higher education reform.

On the one hand, many observers within higher education argue that colleges and universities are fundamentally handicapped when it comes to increasing productivity because of the nature of their core business. The argument (explored in the recent book Why Does College Cost So Much?) is that higher education is a service industry, where the “product” is heavy on human interaction, requires a fixed amount of time with the consumer, and is run by highly educated individuals with high reservation wages. These forces translate to increases in wages and costs without any increase in outputs, leading to declines in overall productivity. This dynamic is what economists call the “cost disease.”

Increasing wages leads to rising costs with no increase in outputs, and together this translates to declines in productivity.

Reform-minded analysts within and outside of higher education have argued that institutions can conceivably become more productive by leveraging technology, reallocating resources, and searching for cost-effective policies that promote student success. Advances in technology and in our understanding of how students learn have opened new avenues for online and hybrid courses that can build capacity and reduce cost. Decisions about how to structure programs—like requiring students to register full-time and creating a set sequence of courses—can promote retention and degree completion over a shorter time frame, leading some colleges to be far more productive than others. And some institutions have shown a willingness to think strategically about how to cut costs so that funding is preserved for elements that are both effective and efficient in promoting student success.

This divide—between those who see no way out the “cost disease” and those who believe colleges and universities can change to become more productive—has risen to the fore of current higher education policy debates. While age-old arguments about whether everyone should go to “college” and who should pay for it still rage, the productivity question is the most prominent dividing line between reformers and the status quo.

Objections to the Productivity Agenda: The ‘Cost Disease’

The standard response to calls for more higher education productivity is to invoke Baumol and William Bowen’s “cost disease.” The “cost disease” posits that service sector firms whose “products” involve interactions with customers (i.e., a nurse treating a patient, a barber giving a haircut) will have difficulty increasing their productivity because those interactions typically entail a fixed amount of time with the customer. Meanwhile, because industries outside of service sector routinely enhance their productivity by utilizing new technology and re-allocating labor, the wages for workers in those industries will increase as productivity increases. As wages increase in other sectors, service sector firms must pay their own employees more in order to prevent them from defecting to industries where the pay is higher, even though they are not producing more of their product. Increasing the wages of these service sector workers leads to rising costs with no increase in outputs, and together this translates to declines in productivity.

The authors argue that new technologies actually increase higher education costs.

Applying this argument to higher education leads many to conclude that productivity gains will prove elusive—students are required to spend about as much time listening to lectures as they were 50 years ago, and grading essays takes about as long as it did when typewriters ruled the day, yet a university must pay faculty and staff more in order to retain them. Moreover, if compelled to increase productivity, institutions will likely respond by decreasing the quality of the education they provide. As Robert Archibald and David Feldman write in their recent study of college costs and productivity:

An institution can increase class size to raise measured output (students taught per faculty per year) or it can use an increasing number of less expensive adjunct teachers to deliver the service, but these examples of productivity gain are likely to be perceived as decreases in quality, both in the quality rankings and in the minds of the students.

What about the promise of technology, which has so markedly increased the productivity of firms in many different industries? A blind alley, say Archibald and Feldman:

For the higher education industry, new technologies are not transforming the industry in ways that allow significant reductions in input use, especially of highly educated labor, and the shift toward an ever-more-highly-skilled workforce has not led to any measured productivity gain for the sector as a whole. Costs must go up as a consequence.

In fact, the authors argue that new technologies actually increase higher education costs as colleges seek to maintain a “standard of care” that keeps up with technological change and what employers need.

In light of this apparent iron law of higher education, it is not surprising that higher education advocates bristle at the suggestion that their institutions could improve without an influx of new dollars. In a recent editorial in Inside Higher Education, the director of South Carolina’s commission on higher education pilloried the idea that prodding colleges and universities to become more productive is a sensible approach to reform:

The thinking goes like this: 1) Higher education is getting more expensive; 2) Higher education is more necessary than ever; so 3) we should be able to get our colleges and universities to produce the same product at half the cost.

That shrieking sound in the background is the logic alarm going off. Unfortunately, many can’t hear it over the loud, unceasing babble about reform ...

We need to escape from the “creating more degrees through better management” box. If we don’t, my fear is that the ersatz reform movement will win and higher education will come to resemble K-12: a vast machine run by bureaucrats and focused on outputs that are truly quantitative but only pretend qualitative.

If focusing on outputs and better management are dead ends, how should we go about making real gains? By providing more money to higher education’s “experts” and improving inputs, naturally. A favorite recommendation: pour grant money “into projects designed to create more of a pervasive education culture in the U.S.” Walters’ belief “is that much of the inefficiency in our education system ... occurs because students don’t think learning is important or don’t believe they can learn, or both.” Translation: It’s those darn lackadaisical students who need to be reformed, not the institutions they attend. With remediation rates at community colleges hovering around 40 percent, we clearly have a lot of work to do on the preparation front. But this does not take colleges off the hook. If students must be prepared for college, colleges must be prepared for students.

The main target of Walters’ ire was a report released by McKinsey and Company last year (“Winning by Degrees”) which highlighted how improved management and use of technology could increase the productivity of postsecondary institutions.

Researchers and institutions themselves have rarely paid much attention to whether their policies and practices are cost-effective.

I’m as skeptical of management consultants in public policy as the next guy. The solutions always seem a little too simple and self-evident (“better management”) and the numbers are provocative but largely un-replicable (e.g., “the achievement gap costs the U.S. $3 to $5 billion a day”). More to the point, Walters is right that small-bore tinkering with management is only likely to produce incremental benefits. And experimentation with new ideas often requires some start-up investment to get them up and running.

But these caveats don’t add up to a rejection of the McKinsey report’s basic premise: institutions of higher education can learn to become more productive and can do so without a big infusion of new dollars or a decline in quality. At the very least, providing incentives for colleges to rethink the way they organize and do business seems like a more tractable approach than pie-in-the-sky proposals to increase students’ appreciation for learning before they enroll in college.

Getting Past the ‘Known Unknowns’ Is a First Step to Enhancing Productivity

In some sense, it is not surprising that colleges and universities would argue that they cannot possibly become more productive. As an influential paper by Doug Harris and Sara Goldrick-Rab argues, researchers and institutions themselves have rarely paid much attention to whether policies and practices are cost-effective. How would you know whether you’re spending money effectively if you’ve never even asked the question?

A redesigned course features computer-based interactive tutorials that periodically quiz students to gauge their mastery of concepts.

Harris and Goldrick-Rab argue that higher education research has largely ignored questions about the cost-effectiveness of important institutional policies—everything from student-faculty ratios, to the use of adjunct faculty, to call centers for student support. Without concrete information about cost-effectiveness, it is difficult, if not impossible, to figure out which changes might enhance productivity. The authors suggest that “the absence of [this] type of information ... is perhaps the strongest evidence that we are falling short of our productivity potential.”

On the basis of their analysis, Harris and Goldrick-Rab conclude that colleges are far from “helpless” when it comes to confronting productivity, and that their results “suggest a need to break out of this mindset, to actively search for new and better ways to serve students.” Shedding light on what policies and programs are cost-effective—the “known unknowns”—is a critical first step in enhancing productivity.

Are Productivity Improvements Possible?

In spite of the “cost disease,” some institutions and providers are experimenting with productivity-enhancing reforms, providing scattered proof points to the reform-minded.

The National Center for Academic Transformation (NCAT) is probably the most oft-cited example of how to reform instructional delivery in a way that maintains quality and reduces costs. NCAT partners with existing institutions to redesign large enrollment introductory courses using information technology. Instead of the standard model, where students sit in a professor’s lecture for 3-4 hours per week and attend an hour-long discussion section, a redesigned course features computer-based interactive tutorials that periodically quiz students to gauge their mastery of concepts. The redesigned courses also feature “on-demand” assistance from peer tutors or course assistants. Because these lower-cost assistants and tutors handle organizational and technical issues, faculty can spend less time fussing with these elements and more time on instructional matters. And because students can rely on these intermediaries for assistance, student-faculty ratios can increase in redesigned courses.

The proof is in the pudding: NCAT’s various redesign efforts, hosted at a variety of institutions and in a variety of courses, boast student outcomes that are as good if not better than the analogous traditional courses. Most importantly, they do so at a lower cost. NCAT’s rigorous evaluations have estimated cost savings of between 15 and 75 percent when compared with the traditional model. No loss of quality there, and a whole lot less expensive.

Reallocating resources away from costly policies and practices with dubious track records toward those that show promise is another route to enhanced productivity.

Leveraging technology is not the only route to enhanced productivity. Reallocating resources away from costly policies and practices with dubious track records toward those that show promise is another. For example, a high percentage of community college students are placed in remedial courses on the basis of an exam taken just before the semester begins. These remedial courses rarely count toward a certificate or a degree but must be taken before the student can advance to credit-bearing coursework. The costs of providing these remedial courses are enormous and research suggests that remediation may be negatively related to retention and completion rates. The good news is that some institutions are thinking of low-cost ways to help their students avoid remedial classes The key insight is simple: people are likely to do better on a test if they are prepared for it—if they know the stakes, are familiar with the format, and know which concepts will be tested. Some colleges have realized that a dose of such test preparation can go a long way toward reducing remediation rates.

Some institutions have invested a fraction of the money that they spend on remedial courses in a summer “bridge” program, where students are pre-tested and then brush up on their basic math and English skills before taking the real exam. Others, like El Paso Community College, have reached down into local high schools to let students know what they can expect on the Accuplacer exam. EPCC has found that simply explaining what a placement test is, pre-testing high school juniors, and providing targeted instruction on the basis of the pretest can help a nontrivial proportion of incoming students avoid remedial classes. Avoiding these “false positives” saves the student money and lowers the college’s cost per degree.

Getting Around the ‘Cost Disease’ Argument

The cost disease is clearly not a figment of college administrators’ imaginations. Indeed, Archibald and Feldman do an excellent job illustrating that the cost and productivity curves of other service industries (i.e., legal services, healthcare) look similar to those in higher education. Given the pathologies that plague these two industries, higher education should take little solace in the fact that it has company. But the costs of hiring highly educated workers are what they are, and policy makers must acknowledge that.

But they must also acknowledge that we are unlikely to see increases in productivity, or even experimentation with innovations that might cut costs, until institutions are provided with incentive to pursue them. Funding colleges and universities based on bodies in seats rather than successful outcomes is a fundamental handicap in advancing a productivity agenda. Competitive grant-making that rewards successful programs without attention to whether those programs are cost-effective leaves us without the information that would make productivity gains possible. Policies that provide incentives to focus on productivity not only test the limits of the cost disease, but can provide further proof that it is not an iron law.

At this stage, though, this debate is still as rhetorical as it is empirical. So long as entrenched higher education interests skirt responsibility for stagnant productivity by citing the cost disease or the academic preparation of their students, reformers who believe institutions can improve will cede any rhetorical momentum.

Inputs like state funding and the types of students that schools enroll are obvious determinants of institutional success, but they are not the only ones. In an era of budget cuts and mass enrollment, the path to raising attainment rates must start with colleges and universities themselves.

Andrew Kelly is a research fellow in education policy at the American Enterprise Institute.

FURTHER READING: Kelly has also written “The Global University and the Future of Human Capital” and “Hispanic Graduation Madness.” He has published “Contested Curriculum” and “Thiel's Dropout Deal Misses the Point.”

Image by Darren Wamboldt/Bergman Group.

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