The Price of Education and the Cost Disease
Technological gains help processes scale. This means that the returns for goods and services are lower per customer but greater in aggregate. For example, a car-wash can service more cars today. As a result, customers pay less per wash but the car-wash earns more by servicing more cars. This is in line with classical economics which says labour productivity gains because of technology increases the pay for certain jobs. Silicon valley, the golden goose of the 21st century, can attest to the power of scale and its impact on wages. Each line of code reaches millions of users across the world and this, on aggregate, creates high wages.
On the other side, there are professions which cannot experience or have not experienced similar labour productivity gains. Looking at education, the number of students a professor teaches has remained relatively constant over time. Similarly, the number of patients per nurse or a doctor has remained relatively constant. However, these are the fields that have seen the highest increase in costs and much of this is attributed to a larger increase in wages. The graph below illustrates this for the US
The paradox illustrated by the graph above is called the Baumol’s cost disease. The rising cost of education and healthcare in the US is often cited in media. One major cause is rising salaries in these professions. As other professions start benefitting from technological gains, they also pull in more workers. This gives those in the non-scalable professions higher power to set their prices which consequently leads to higher salaries and thus higher costs. This isn’t to say those in these fields should be paid less. School teachers are often shown to be underpaid. There are plenty in the academia that aren’t adequately compensated. Yet, college costs are seen to be spiralling out of control. One way way to bring down costs, as has been the case in other fields, would be to bring technological gains in productivity to these fields.
The current COVID pandemic has seen educators open up to technology. School children routinely have classes over zoom. Colleges are adopting a more open approach towards online classes. Websites offering online courses such as Coursera, EdX, Lynda, Khan Academy, Lambda schools etc have presumably seen an uptake. With a greater adoption of tech in education, we may see the beginning of a new era of education which may exert downward pressures on education costs. Naturally, not all forms of education are amenable to online modalities. Similarly, not all value one gets from education is restricted to the content. However, this could expedite more innovation in education which the sector desperately needs.