Why Are Medical Care and College Tuition getting so expensive?

The cost of medical care and college tuition have skyrocketed for the past few decades. Since 1978, the cost of medical care has risen approximately 7 times, and college tuition has risen almost 12.5 times, while consumer prices and average wages have only risen 3 times as much. This means that health care and college tuitions is getting more and more expensive for the average US consumer. So why is it, you may ask, that this is occurring?

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William Baumol, a previous economist at New York University, introduced the concept of Cost Disease to explain such a phenomenon. He began his analysis by looking at the relation between inflation and the wage increases occuring in different sectors. In the industrial sector, technological improvements can be applied to improve efficiency. The increase in the wages of industrial workers are offset by the decrease in costs, and thus the rate of increase of costs of industrial products are consistently below inflation. But in the services sector, increasing efficiency becomes a more difficult task. There are two main reasons. First, it is difficult to standardize human services, the tasks of the service jobs are more case-by-case than homogenous, and thus can’t be streamlined. Second, it is almost impossible to increase efficiency without sacrificing the quality of output. If you reduce the time of the work the results would not be up to par. Even if there are ways to improve efficiency of services, they are assumed to be limited. Since the wages of service jobs also increase by the rate of inflation, the average rate increase of the price of all commodities and the price of services would always rise above inflation, and therefore would become more and more expensive for consumers. Thus, the college tuitions and health cares apre getting more and more expensive because they both suffer from the cost diseases of services sectors.

This theory is questioned by Alwyn Young, an economic professor at LSE. In Young’s paper, he explained that since workers usually choose to go into the fields in which they have both the absolute and comparative advantage, the productivity in the services sector would increase overtime.

Regardless of the analysis on labor productivity, it is known to us today that there are more and more technological improvement that can be applied to the services field which would reduce costs for the consumers. For example Google’s parent company, Alphabet, successfully applied Artificial Intelligence in diagnosis of retinal diseases. As for education, there are more and more online learning provider available, such as MOOC (Massive Online Open Courses) and Khan Academy. Hopefully these new changes would help decreasing the costs of education and health care in the future.

Sources

“A Revolution in Health Care Is Coming.” The Economist, February 1, 2018. https://www.economist.com/news/leaders/21736138-welcome-doctor-you-revolution-health-care-coming.

“An Incurable Disease.” The Economist, September 29, 2012. https://www.economist.com/node/21563714.

 “What Causes the Cost Disease, and Will It Persist?” In The Cost Disease, edited by William J. Baumol, 16–32. Why Computers Get Cheaper and Health Care Doesn’t. Yale University Press, 2012. http://www.jstor.org/stable/j.ctt32bhj9.6.

Young, Alwyn. “Structural Transformation, the Mismeasurement of Productivity Growth, and the Cost Disease of Services.” American Economic Review104, no. 11 (November 2014): 3635–67. https://doi.org/10.1257/aer.104.11.3635.

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