By Richard Vedder
Chicago's Mayor Richard Daley opined the other day that it took too long to get a baccalaureate degree and that we could whack college costs dramatically by shortening the time in takes to finish. Meanwhile, the New York Times had a story about the reforms some schools (e.g., Princeton) are taking to shorten the length of time it takes to get a Ph.D., now averaging over eight years nationally. In Europe, the Daley idea has already taken hold, and under Bologna rules the standard B.A. degree in EU universities is now three years.
Meanwhile, the de facto bachelor's degree in the U.S. is now about five years. What is right? Three years? Four years? Five years? What about a Ph.D.? 3-4 years? 5-6 years? 7-8 years?
Economics offers some insights into the answer. I would opine that the costs per year of college tend to rise the longer one is in school. The direct financial outlays may be pretty constant, but the opportunity cost of going to college tends to rise because of earnings foregone. An 18 year old freshman might be giving up a $15,000 a year job to go to college, but the 22 year old senior with four years of work experience is more likely giving up a $20,000 or $25,000 a year job.
Similarly, there may be diminishing returns in terms of the true economic value of the courses taken in college. The first eight business courses in basic economics, accounting, finance, statistics, etc., may have a good deal practical utility, but further courses (a third economics class, for example), probably have less vocationally related benefits at the margin.
The graph shows the hypothetical, marginal social benefit and marginal social cost curves for college attendance. The optimal length of college attendance, optimally tied to degree completion, occurs at the point where the marginal social benefit equals the marginal social cost. My guess is for most baccalaureate programs, that point comes after about three years of study, and for Ph.D. programs after 3-4 years. Students hang around far longer than optimal, in part because of perverse financial incentives for both colleges and individuals (subsidized student loans and state subsidies to universities based on enrollment are two examples).
The huge reason for the "hanging around," however, relates to certification. There is a huge jump in the financial benefits of the student’s college attendance when the last course needed for obtaining a degree is completed. Up to that point, the marginal costs of college to the individual may equal or even exceed the marginal benefits, but the person hangs around because of the huge payoff associated with completing that last course that certifies college graduation
This reflects the information and search costs to employers --to employers, a prospective applicant is likely to be perceived as productive if he or she has a degree, and there are high risks associated with hiring "a dropout." Reform of higher education may center on developing a cost-benefit calculus resembling the above graph--reflecting the true utility to society and employers of the education received by students. More information about the "value added" by degree at various levels of instruction is key to implementing such reforms.
Two CCAP notes: First, we welcome back to the Website "the Cowboy," a faithful reader and commenter on our blog. He has had a very rough year, losing most of his Montana ranch in the big forest fires of the summer. We are overjoyed that he has recovered enough to rejoin the fray. Second, CCAP would not function without the Whiz Kids, students who help do the research that, among other things, keeps me writing these commentaries. I am overjoyed to have Jim Coleman join us. He is a philosophy and economics major --a great if unusual combination --and has the inquisitive mind that I require of all our young associates. Welcome aboard Jim.