The economics of the tenure system

The degree of job security for tenured faculty is higher relative to other kinds of jobs, but whether it is excessive is a different question.

The tenure system provides higher job security than a for-profit company would, but the monetary compensation is lower.

The correct view of the tenure contract is that universities get high-priced talent at a low monetary cost; they pay instead by providing job security.

While tenure provides job security, it doesn't guarantees a lifetime increase in salaries.

The disincentive of tenure system:
Untenured faculty view tenure as a incentive to work hard, but the desire to earn tenure also makes them cautious during the pre-tenured years. Many of them fear that unconventional teaching would impair their chance to get the tenure and thus they conform to conventional teaching and research topics that would pay off in a shorter time period. But when they take such mainstream teaching styles and research methods, the cost of innovative research and teaching at post-tenure career would be huge because they have locked in and failed to adopt more daring ways.

Dining and Housing

Student dining and housing are enterprise units in some schools, which means that they are expected to fully cover their operating and capital costs and receive no subsidies from the general operating budget of the university. But their operation still have impact on the rest of the university.

Higher dining rates increase the total costs of attending the university. It is the total cost of attending the school, not its tuition and fees, that influences accepted students' decisions to attend the school. It is also the total costs that determine the financial aid that is provided for students. Increased financial aid costs or reduced tuition revenues both mean that less money will be available to spend on the academic functions to the universities.

Intercollegiate athletics and gender equity

Even if the athletics department loses money on its operation, the claim is made that these sports are investments that generate considerable funding in the form of alumni contributions to the university as a whole.

A number of academic studies confirm that football bowl game appearances and basketball appearances in the NCAA men's basketball tournament have a positive effect both on the contributions that universities receive from alumni and on the quality of their entering students.

Intercollegiate athletics is more a participation activity than a spectator activity for students at Ivy League universities.

Public universities have long used success on the athletic field as a way of generating alumni and political support for their institution. To compete on the playing field with the public institutions in their conferences, Stanford, Duke, and Northwestern have all adopted the conference policy of awarding athletic scholarships.

Gender-equity efforts will have real financial cost if a university isn't able to bring itself to deeply cut male athletic programs. Sometimes gender-equity requirements add to the cost of existing women's sports.

State higher education cuts

Every state but Vermont is required by its constitution to balance its budget every year. In recessions when tax revenues fall and social welfare expenditure like Medicaid and TANF increases, either tax should be increased or some other public expenditure has too be cut.

But this can only explains the case of community colleges.

Baumol disease problem in higher education. It doesn't fully explain why college tuition is rising so much.

Now that there are many more PhDs, especially in the humanities, than tenure-track spots for them, the salaries of instructors are actually falling as universities turn to adjuncts. That directly contradicts the Baumol explanation.

 Robert Martin at Centre College did a research showing that between 1987 and 2008, full professor salaries increased by an average of 0.9 percent a year, and assistant professor salaries by a measly 0.7 percent a year. But support staff salaries grew at more than double that rate. If the core act of teaching is driving costs higher, that just shouldn't be happening.

A more plausible theory might be Bowen theory: universities will spend all the money they can possibly raise. If they raise more than they need for educational objectives, they will spend it on non-educational uses like climbing walls and nicer buildings.
Revenue theory of cost:
"

1. "The dominant goals of institutions are educational excellence, prestige, and influence."

2. "There is virtually no limit to the amount of money an institution could spend for seemingly fruitful educational ends."

3. "Each institution raises all the money it can."

4. "Each institution spends all it raises."

5. "The cumulative effect of the preceding four laws is toward ever increasing expenditure."

For details, read the paper by Ronald Martin and R. Carter Hill.

Three reasons tuition is rising

Research universities are spending too much. Even the record-high tuition cannot make up the volume of spending.

For many public universities, they rise tuition to shift cost because their support from state and local government has been shrinking. Community colleges have to keep cutting spending despite rise of tuition.

For non-research schools like liberal and arts colleges, their spending is increasing, yet their tuition is increasing more because they have to compensate for decline of donation and make up the new spending.

Source: Washington Post