What is the “cost disease of personal services” phenomenon and why does it help explain why tuition rates keep going up so fast?

Question

What will be an ideal response?

Answer 1

One of the curious developments in modern economies is that certain products and services get relatively cheaper while others keep getting more expensive. College education is one of the services that continues to get more and more expensive as time goes by. The “cost disease of personal services” explanation sheds much light on the problem and provides a rational answer to the question. The explanation is based on a few commonly accepted economic facts. First, real wages tend to grow at the same rate as productivity grows. This is why productivity growth is so important. Productivity is the main force behind increases in a nation’s standard of living. Second, some sectors of the economy have achieved rapid increases in productivity growth. For example, in the automobile industry, more and more cars are produced with fewer and fewer workers. Capital formation and technological change explain this development. In contrast, there has been very little technological change in college education. A live (or almost live) professor stands in front of a classroom and reads his lecture notes to semi-interested students. The third factor in the explanation is the rule that real wage rates grow at roughly the same rate for all workers, the increasingly productive auto workers and the traditional college professor. So the cost per auto declines as output increases per worker, and cost per professor rises because the professor’s productivity remains constant while his costs rise. The same explanation holds true for medical services, sports, and entertainment services. It is a function of rising productivity in some sectors and static productivity in others.