Economic Arguments for Tenure

Why Tenure Improves Faculty and Universities...

In our previous posts we have discussed what faculty tenure is and isn’t, shared data on the declining importance of tenured faculty in universities, and wrestled with a set of arguments raised by critics who point to tenure as an obstacle to budgetary flexibility or a desirably greater rate of innovation in the academy.

In this post we make an affirmative case for tenure using arguments from the economics of executive compensation and thin labor markets.

Tenure and Executive Compensation

Many corporate executives receive significant compensation packages that include not only base salaries, but shares, or options to purchase shares, in their firm. Some argue these packages are too generous in terms of overall dollars, but the comparison that interests us is the structure of the compensation. Why do boards give executives equity (ownership) shares in the firm?

The problem facing a corporate board is this. The value of the firm (and the corresponding returns to its shareholders) depends on a number of factors. Some of these can be controlled by the firm and depend on the effort and quality of decision making by its leadership. But other factors are outside the control of the firm – are input costs rising or falling, is the economy growing or shrinking, have competitors developed fabulous new products or suffered major quality defects.

Unfortunately, the board has a difficult time assessing the effort their executives put into the job and the quality of their decisions. Boards struggle to separate whether sales and profits are rising because of great executive decisions or because the external competitive environment is rosy. How then do you write a contract that incentivizes executives to work hard and make great decisions when you can’t clearly assess whether they have?

The answer is to provide an executive with a base salary along with a share of ownership of the firm. Sharing in the rising/falling fortunes of the firm aligns the incentives of the executive with the interests of the shareholders, resulting in more effort and better decisions.

Incentivizing Hard-to-Observe Effort

What does this have to do with faculty and with tenure? Faculty are expected to do many things: generate high quality scholarship, teach effectively, and provide service to the university. In land-grant and many other public universities, the to-do list also includes engagement with external stakeholders.

Research, teaching, and engagement are the university’s main products, and service to the university makes providing those products feasible. “Service” means that faculty act as human resources officers in hiring, developing, and evaluating other faculty. They also work as product designers (creating and improving curriculum) and in operations roles, assisting with a host of other administrative chores that are adjacent to the other roles.

Just as with corporate executives, it can be extremely hard to evaluate the effort that faculty put in and the quality of work they produce. University boards and executive leadership can look at a CV to count publications or citations or tally up research dollars, but it takes someone working in closely related fields to truly evaluate a research record. That is so time consuming (we estimate our institution invests ten professor-years of work every year to evaluate candidates for tenure and promotion) and so reliant on experts outside the university that we do it perhaps twice in a career – corresponding to two major promotion windows.

University boards and executive leaders can look at faculty teaching evaluations in individual courses, or increasingly, at student complaints. But as we earlier argued, those are very poor measures of student learning in a course, let alone learning across a student’s cumulative experience in college.

Still, when it comes to teaching and research, boards and university leaders have some ability to evaluate and incentivize individual output. You can tell if someone is a disaster in a classroom or stops producing research entirely. If you wanted to strengthen these incentives toward individual production, you could do that pretty easily. (More on that in a few weeks.)

However, boards effectively have no ability to observe the effort and quality of decision making that goes into faculty’s HR and product design functions. If we consider the ongoing viability of the university as a whole, these may be the most important activities in which faculty engage.

A university might currently have great individual faculty and great programs. But if those faculty do not invest thoughtfully in their HR function - hiring, developing, and evaluating peers – the quality of faculty will degrade quickly, and with it, the main outputs of the university. Similarly, neglect of programs and curriculum quickly leads to outdated learning and inferior job market outcomes for students.

In the face of the difficulties in carefully assessing research and teaching output, and the comprehensive inability of university boards to measure effort or quality of service output, tenure is the academic equivalent of sharing the equity of a firm with a corporate executive.

How Does Tenure Tie a Faculty Member to University Performance?

Struggling institutions do not give raises. They provide inadequate benefit packages. They attract poor students who are a chore to teach. They inhibit faculty research productivity by housing faculty in sub-standard spaces or failing to provide adequate support for advanced computing, laboratories, grant-writing, or a host of other services. They are not able to hire strong research colleagues with whom to interact and innovate. In extreme cases, they close down departments and lay faculty off.

Because thriving and struggling institutions treat faculty very differently, the success of the university is strongly linked to desirable personal and professional outcomes for individual faculty. Contrast a faculty member with tenure to an adjunct delivering coursework piecemeal. If you have no long-term connection to the university, the variability in outcomes at an institution is far less concerning. You go and find another place to work that offers better pay and better working conditions.

Sometimes university leaders (us included) bemoan the fact that faculty invest less time in the institution itself than leadership might hope for. What is actually amazing is that faculty invest any time whatsoever in improving the institution.

Since service of the sort described here (HR function, product design, operations) generates little or no direct short-run financial returns to individual faculty, you might think an optimizing faculty member would eschew this activity altogether. Yet we consistently saw faculty invest time and thoughtful effort in their critical HR functions, in their critical product design functions, and in a whole host of necessary administrative chores. Many of these investments pay off over the very long-run, years or even decades. Yet faculty continue to provide this service.

Some would ascribe this to intrinsic motivation, that is, to an uncompensated motivation to make their university better. We think it is better described as faculty recognizing that tenure has provided them with an equity share in the university and they want to maximize the value of that equity share.

In short, while some argue that tenure insulates faculty from the consequences of institutional success or failure, we think this is completely backwards. Tenure causes faculty to take a much stronger interest in the long-term viability and strength of their institution than they otherwise would.

Extreme Specialization and Thin Markets

In the early days of universities, faculty were polymaths covering broad subject matter. But as disciplines developed, and the associated knowledge base deepened, it became necessary to specialize. Social sciences divided from the humanities and then divided into psychology, political science, sociology, and economics and these in turn divided into sub-specialties again, and again. Engineering divided from science and then divided into a focus on mechanical, or electrical, or chemical properties and systems, and these divided into sub-specialties again, and again.

From the outside all this specialization invites mockery, with scholars knowing “more and more about less and less” in Nicholas Butler’s memorable phrase. But this specialization is an inevitable consequence of scientific progress. In their research duties, we ask our faculty to do nothing less than produce a piece of science, or analysis, or understanding, that no person has previously produced in the history of mankind! And to do it over and over again. That is a tall order.

Alas, there are no more DaVincis or Jeffersons creating breakthrough knowledge across a wide range of disciplines. Or rather, knowledge has advanced so far that it is no longer feasible to be such a person. The only way to expand the frontier of what we know is to narrow the scope of focus so that we can accumulate the learning and experience necessary to reach the frontier in the first place.

(For a formal economic model of this process, we recommend reading Jones, The Burden of Knowledge and the Death of the Renaissance Man or the highly accessible summary written by Matt Clancy here which summarizes a number of additional provocative implications of this idea.)

How does this relate to tenure? Because of the extreme specialization we demand of people who can push out the knowledge frontier, we are asking them to take two kinds of big risks: temporal and spatial.

Temporal Risks for Faculty

Innovation is inherently risky. Many research ideas don’t pan out and represent what looks like, in retrospect, wasted resources. That isn’t just true of academic research, it is also true of private sector research.

In our last post we mentioned the extremely low success rate of new molecules explored by pharmaceutical firms – just 10% make it through regulatory approvals and that’s only counting as a share of molecules that make it far enough through the scientific process to begin clinical trials. In that industry the cost of developing a successful new molecule, including the cost of failures, is nearly $1Bn on average, though some estimates place the number as high as $4.5Bn.

The inherent risk in innovation – in generating a successful new idea nobody has previously thought of – is that many projects don’t pan out. You can try and fail and try and fail repeatedly, and without an external signal of production (a success that yields a grant, or a publication, or a patent) it may look to an outside observer that you have been doing nothing at all.

When your review is time limited (as it is prior to tenure) faculty respond by de-risking their investments and taking on projects with higher probability of success. That usually means taking on projects that add small increments to our stock of knowledge to generate the tangible outputs needed for their promotion.

The question is whether we want faculty to take big swings and big misses in order to solve big problems. If we do, tenure provides an insurance policy against being evaluated only on the basis of your most recent quarter of production.

Spatial Risks for Faculty

Because faculty are so specialized, there are at any one time a very small number of positions anywhere in the world that are of suitable quality/value to interest a high performing faculty member. And if you are located in a medium-sized college town somewhere in the Midwest, there is zero chance there is another position you would want to take anywhere in the same commuting distance.

You might have wondered why certain occupations are so heavily concentrated in very specific areas: finance in New York and London, software and venture capital in Silicon Valley, film-making in Hollywood. One reason is that these places host dense concentrations of firms who can hire someone with a very narrow specialization in sub-specialties of finance or software engineering or film editing. That means a person can choose to specialize very narrowly, move to where there is a concentration of firms, and be assured that they have options if employment in their first firm does not pan out.

Universities do not much cluster. Even the world’s great cities have only a small handful of top places, and most universities are the only game in town. From a labor supply standpoint that is an incredibly risky proposition. It gives the university what we call a monopsony position (monopolists are the only sellers in a market; monopsonists are the only buyer). If business turns down, the monopsonist university can lay you off, or slash your wages, or demand twice as much teaching. And you have no outside option.

Tenure is a guarantee against both kinds of risk. The temporal risk that you have a bad quarter or year of production. The spatial risk that in a downturn the only university in your city will be tempted to balance the budget on your head.

You might ask, why do faculty need that guarantee if most workers don’t get it? And the answer is, almost nobody in the labor market is as narrowly specialized as faculty are. The more narrowly you are specialized, and the thinner the market for your services, the more at risk you are.

Investing Half Your Working Life to get Tenure

You might think, well, life’s tough, you get a bad draw, so what? Here we have to ask about the incentives to become a faculty member in the first place. Faculty members invest four years in college. Another 6-8 years in a PhD program, and for many fields another 2-4 years in post-doc positions. Another 6-8 years as an untenured assistant professor before being granted tenure, and increasingly twice that with “tenure re-starts”.

Altogether this represents 22+ years invested in a research specialization, along with paying the associated costs for their academic program and the opportunity cost of foregone wages. These costs are substantial. About one in five PhD students use their own resources to fund doctoral study, and those numbers are dramatically higher in minority populations. For those who are on paid assistantships, PhD stipends are much lower than one could earn with a bachelor’s degree. (In our discipline, PhD stipends are about 33% of what you could earn in the private sector; for engineering it’s likely closer to 20-25%.) Further, if you are out of the private workforce, you aren’t accumulating the occupation- and firm-specific expertise that leads to really significant wage growth.

And now imagine at the end of all that highly specific investment and time to be a faculty member, your employment is at the mercy of your university’s short-run budget situation. Or at the mercy of a university leader or a legislator who doesn’t like the conclusions of your research. Massive upfront investment to generate meager and variable returns is not likely to attract smart people to pursue faculty careers.

Academia vs. Industry

These big upfront investments are one reason that many of our brightest scholars have given up on academia and opted for industry instead. In the most recent year, fewer than 12% of new PhDs in engineering took academic positions. Some of that reflects the length of investment and uncertain returns just described. Some of that is no doubt because academic institutions are expanding non-tenure track lines while reducing tenure track positions. Given the precarity of lecturing roles, new PhDs are saying: no thanks.

Of course, there is a level of compensation that would make all this investment worthwhile even without the insurance offered by tenure. What can we say about wages for a new PhD considering the academy versus industry?

Faculty wages vary widely across institutions and disciplinary areas, and the premia involved in industry positions also varies widely. Engineers and scientists are in great demand in industry, as are, for example, finance PhDs. Using data from NSFs “Survey of Earned Doctorates”, industry employment offered a 67% premium over academic employment for science and engineering fields overall, but only about 10% for the humanities. That probably tells us a lot about why 2/3 of new humanities PhDs but fewer than 1/8 of new engineering PhDs take jobs at a university.

But what about pursuing the PhD path in the first place? Our discipline, economics, tends to be well-paid relative to most faculty areas. In 2023-24 the median salary for a tenured economist at associate professor rank in the US was a little over twice what a newly minted undergraduate could expect to earn. But that’s after investing almost half of their working life, foregoing better earnings all along the way, to earn tenure.

So, you can revoke tenure, and eliminate stable returns on the decades of investment needed to earn it. You just shouldn’t expect many people to be interested in taking that deal.

Next Week

We’ve stalled as long as we could, but next week we tackle the 800-pound gorilla in the tenure debate: academic freedom. What it means, who has it, and how actions in DC and in state houses around the country will impact it.

“Finding Equilibrium” is coauthored by Jay Akridge, Professor of Agricultural Economics, Trustee Chair in Teaching and Learning Excellence, and Provost Emeritus at Purdue University and David Hummels, Distinguished Professor of Economics and Dean Emeritus at the Daniels School of Business at Purdue.