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The Economic Impact of Institutions of Higher Learning

 by Michael Rebuck Rebuck_Michael_2013_LiteratureSurvey

The Economic Impact of Institutions of Higher Learning

Institutions of higher learning can greatly affect their surrounding communities and many universities and colleges will undergo studies to state this economic impact. The most obvious manner in which universities and colleges affect their local economy is through employment and through the direct purchase of goods and services. Universities and colleges also act on their neighborhoods in indirect ways, such as by developing real estate. However, many of these economic impact studies exaggerate or incorrectly state the economic impact of their universities. To correct this, several other studies have been performed to identify these problems in order to allow individuals to judge objectively the role these institutions play in their communities. By acknowledging that a university’s economic impact can have both positive and negative effects, it becomes easier to discuss what role a university should take in shaping its community.

J.J. Siegfried et al. seek to address the problems that many university economic impact studies contain. Many of these studies attempt to determine the degree to which an area is better with an institution of higher learning than it would be without it. However, establishing this counterfactual can be difficult. Institutions of higher learning do not appear and disappear quickly and their expansions and contractions occur slowly. Indeed, it is very hard to determine what that local area would be like without the existence of an institution of higher learning. Therefore, it can be beneficial to measure the effects of only incremental investment made by universities (Siegfried 2007). Unfortunately, it is not always easy to say whether an effect is positive and negative. For example, a population that increases due to the new hiring of faculty can be both a good thing and a bad thing. On the one hand, there is the benefit of an expanding economy, but on the other hand there can be an increase in congestion and pollution. Some of the new faculty may bring spouses with them who will take the existing jobs of local residents. Many economic studies performed by institution of higher learning falsely imply that their contributions are always positive and these assumptions need to be challenged.

Determining an area of influence is one of the most challenging factors while creating an economic impact study of universities. The appropriate geographic boundaries depend upon the questions at hand but should always remain constant throughout the analysis. Annette Steinacker attempts to measure the impact colleges have upon their surrounding neighborhoods, which can be very different from their impact upon an entire metropolitan region (2005).  In the past, most US university impact studies were based upon a regional input-output analysis. Until the release of economic data at the zip code level, the smallest geographical unit that the US Bureau of Economic Analysis measured economic multipliers for was the county. By using smaller local area units, it is possible to create a local area unit for only the university’s surrounding neighborhood.

Economic impact is most commonly measured by summing the direct expenditures of the college community created by the existence of the institution. It is important to also apply multipliers in order to account for the interconnectedness of economic activity. Purchases from firms outside the impact area are considered lost to the local economy. The core of the analysis is the expenditures for goods and services by the university in addition to its payroll (Steinacker 2005). Multipliers for university expenditures take into account the additional spending by local companies resulting from each dollar of university purchase. The multiplier for payroll takes into account the propensity for individuals at a certain income level to consume specific goods. Most spending takes place in the area where the individual resides and that is one reason why the act of defining the area of influence is so important. If one uses the county as the defined impact area, a higher multiplier will be obtained than if only the local neighborhood is defined as the impact area. Inconsistent determination of relevant areas of influence can lead to great disparities between economic impact claims across studies.

Colleges and universities commonly claim that they create jobs, boost tax revenue, and stimulate their local economy (Siegfried 2007). Other studies have claimed that universities resist business cycle fluctuations, attract outside revenue, and attract and develop human capital. The purpose of many of these studies is to articulate the value of these institutions in order to help them compete for state funding and to maintain tax-exempt status. A university’s goal of persuasion leads one to doubt the concrete accuracy of their reports. Siegfried et al. point to inconsistencies across studies as a reason to question their validity. For example, multipliers for job impacts ranged from 1.03 to 8.44 in a review of 138 university impact studies.

Steinacker argues that universities and colleges located in large metropolitan counties should use smaller geographical units in order to more accurately reflect their impact. She also argues that only employees who have moved to the area specifically because of the university should be included in economic impact studies. Additionally, for employees who live outside of the zip code areas, only the purchases they make in the target area should be counted. For example, if a professor at Duke purchases a bagel and a coffee at the Erwin Road Dunkin’ Donuts every day, this should be included in the calculations. The third adjustment calls for studies to include more detailed information on student expenditures. Some studies include student expenditures, but they are often only a standardized estimate from the university’s financial aid office. Steinacker prefers a survey, and her student expenditures are calculated in a similar manner to the expenditures of employees (2007). Calculating student expenditures on housing can be difficult. On-campus housing is included within university budget data, but students who rent or buy off-campus are not. Local circumstances determine the impact of student housing spending. For example, if there are a lot of vacant housing units surrounding a university and students merely fill these units, then all rent can be considered new. However, where vacancy rates are low, student demand can drive rent higher and force local residents to move to new areas. Landlords will benefit, but it is unclear if the community as a whole does.

Some people assume that universities always have a positive impact on their surrounding housing markets. Alvaro Cortes investigates this relationship by studying local neighborhood housing markets from 1980 to 1990, and determines that the characteristics of neighborhoods next to universities are significantly different than the citywide neighborhoods. Like Steinacker, he uses zip codes to define the geographical units. Cortes also examines the differences in impact that private and public universities have on their surrounding neighborhoods and identifies why these effects are not always positive (2004).

Universities have both a direct and an indirect impact on real estate in their surrounding neighborhoods. By 1996, US universities held over $100 billion (book value) in land and buildings (Cortes 2004). Universities directly impact their surrounding neighborhoods through housing development partnerships, direct expansion, and through campus generated externalities. For example, these effects can increase the desirability of a neighborhood by increasing the amount of cultural events offered. On the other hand, a university can create negative effects if, for example, new student housing leads to a large increase in noise complaints in an adjacent neighborhood. Universities indirectly impact their surrounding neighborhoods through the effects of their partnerships and by attracting a distinct population. Many municipalities recognize the influence of universities and universities are occasionally regarded as important players in a city’s development plans (Cortes 2004).

Cortes empirically investigates the impact of universities on their local neighborhood by selecting five public universities and pairing them with a private university that exists in the same city. His empirical work uses three ordinary least squares multiple regression models to evaluate the research questions. Only census tracts that are directly adjacent to census tracts that have been defined as part of the university are included. They are then compared to the other citywide neighborhoods. Data for these examinations is drawn from the “Under Class Data Base” (UDB) (Cortes 2004). One problem with Cortes’s research is the size of his sample, as effects are likely to vary considerably from campus to campus.

The descriptive statistics show that there is a clear difference between the neighborhoods abutting a university and the other citywide neighborhoods. The poverty rate of university neighborhoods is typically 50% higher than that of the other neighborhoods. Additionally, in half the total number of cases, the percentage of persons without a high school diploma is higher in university neighborhoods than in city neighborhoods. This is somewhat surprising, as university faculty and students should all have achieved a high level of education, but the overall neighborhood effect is to the opposite effect. University neighborhoods also have higher levels of renters than other areas of the city do. Most of these university neighborhoods demonstrate lower monthly rental payments. Lastly, new residential unit construction is higher in university neighborhood (Cortes 2004).

The results of the regression and path analyses demonstrate that there is a statistically influential effect of neighborhood proximity to an urban university, but these effects are not systematic (Cortes 2004). Differences in changes between the two types of neighborhoods could be attributed to university decisions. For example, some universities have a large amount of student housing on-campus while others do not. Since students often desire low-rent, low-quality housing, a lack of on-campus housing could result in an overall pattern of neighborhood downgrading. It is hard to determine what goals a university should have with regards to its surrounding neighborhoods. For example, inflated rent may price university students out of neighborhoods. On the other hand, deflated rent may attract poorer individuals to a neighborhood, which could have negative consequences. It is important to note, however, that a university’s decisions have an important effect upon their surrounding neighborhood. Knowing that these effects can be both positive and negative, it is important for universities to align their goals with those of their community.

Institutions of higher learning can greatly impact their surrounding communities in a variety of direct and indirect ways. The impact of universities and colleges upon their surrounding neighborhoods is not always positive, and it is important to acknowledge both the good and the bad effects. By acknowledging that a university’s economic impact can have both positive and negative effects, it becomes easier to discuss what role a university should take in developing its community.

Works Cited

Cortes, Alvaro. “Estimating the Impacts Urban Universities on Neighborhood Housing Markets: An Empirical Analysis.” Urban Affairs Review 39.3 (2004): 342-75. Web.

Siegfried, John J., Allen R. Sanderson, and Peter McHenry. “The Economic Impact of Colleges and Universities.” Economics of Education Review 26.5 (2007): 546-58. Web.

Steinecker, Annette. “The Economic Effect of Urban Colleges on their Surrounding Communities.” Urban Studies 42.7 (2005): 1161-75. Web.


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