48 Pages Posted: 26 Oct 2012

Date Written: October 24, 2012

Abstract

We document the growth in higher education costs and tuition over the past 50 years. To explain these trends, we develop a general equilibrium model with skill- and sector-biased technical change. We assume that higher education suffers from Baumol's (1967) service sector disease, in that the quantity of labor and capital needed to educate a student is constant over time. Finding the model's parameters through a combination of calibration and estimation, we show that it can explain the rise in college costs between 1961 and 2009, along with the increase in college attainment and the increase in the relative earnings of college graduates. We finish by using the model to perform a number of numerical experiments.