The Economics of Tenure

The Economics of Academic Tenure: A Brief Review

Jeffrey S. Royer

Although much has been written about academic tenure during the past several years, little of it has been based on economic analysis. A survey of economic journals uncovered only three articles on tenure. However, these articles are extraordinarily rich in terms of their analysis and implications. Although this review focuses on explaining tenure, these articles also address a number of related issues, including faculty incentives and rewards, motivating senior faculty members, and renewable term contracts as an alternative to tenure.

The economists who have analyzed tenure have seen it as a solution to the problems created by the special nature of academic employment instead of a protection for academic freedom. Basically, the articles summarized in this review present three paradigms for explaining the existence of tenure and discuss their implications for university governance and tenure reform. In these articles, tenure is alternately viewed as a means of minimizing employer and employee transaction costs, a solution to the moral hazard problem inherent in selecting new faculty members, and a protection against the special problems created by academic democracy.

Tenure as a Means of Minimizing Employer and Employee Transaction Costs (McPherson and Winston)

McPherson and Winston (1983) analyze tenure, motivating senior faculty members, and term contracts as an alternative to tenure under the paradigm of "relational economics." The predominant thesis in relational economics analysis is that uncertainty in economic life undermines the usual assumption of anonymity in economic transactions and makes it valuable for the parties in economic transactions to develop sustained relationships with one another. Relational economics has been used in recent years to study problems in several areas, including the economics of organizations, the economics of law and contracts, labor economics, and macroeconomics.

According to McPherson and Winston, one of the fundamental insights recently provided by analytical labor economics has been the recognition that the productivity of an organization depends largely on the character of the work environment it provides its workers. This finding stands in stark contrast to the classical model of the profit-maximizing firm, which continually adjusts wage rates and hires and fires workers to obtain the most of out of its work force. In fact, firms that conform to the classical model probably do not maximize profits because they implicitly ignore the existence of transaction costs.

McPherson and Winston argue that a firm can decrease the cost of maintaining a labor force of a given quality by reducing the involuntary turnover of employees. Turnover is costly to firms because of training costs and the value of the information it accumulates about current employees, information that cannot be purchased inexpensively or reliably in the market. Mobility is also expensive for workers because of search and relocation costs and the value of information workers accumulate about their employers. Consequently, both firms and employees benefit from environments that provide stable long-term employment relations that protect each other from the vagaries of the market and that are conducive to the development of a cooperative attitude among employees and employers.

McPherson and Winston assert that the implicit assumption that the world outside academia provides most workers with little effective job security is false and that the idea that colleges and universities could function efficiently by operating on the basis of personnel policies that do not provide job security is mistaken. Academic tenure differs importantly from the kind of job protection seniority affords production workers or, more appropriately, that corporate employment policies provide middle-level managers. But, according to McPherson and Winston, the difference lies less in the degree of job security afforded than in the nature of the job guarantee and in the explicit and risky probation that precedes the guarantee in academic employment.

Corporate employees are hired with an effective lifetime guarantee, perhaps following a brief and largely perfunctory probationary period and barring gross malfeasance or severe economic hardship for the corporation (qualifications corresponding to comparable limitations on the academic tenure commitment). However, corporate employees are not guaranteed a particular assignment with well-defined tasks and perquisites, but rather face an array of possible career paths along which the corporation has discretion to move them at varying rates.

In contrast, faculty members do not receive an immediate employment guarantee but face an extended and serious probation instead. However, when they are guaranteed employment, it is a guarantee of employment in a specific set of tasks with well-defined perquisites. According to McPherson and Winston, the system of rigorous probation followed by tenure is a reasonable way of solving the peculiar problems that arise in employing expensively trained and narrowly specialized individuals to spend their lifetimes at well-defined and narrowly specialized tasks.

Corporations have internal labor markets. The perennial prospect of promotion provides workers an individual incentive to stay with the firm and produce without exacerbating the tendency toward destructive competition among workers at the same grade. Essential to this picture is the presumption that there exists in the firm a variety of jobs of varying wage and productivity that workers might be willing to accept. To the degree that firms can freely assign workers to jobs and career paths with differing wages and productivities, they can avoid the risk of radical mismatches between wages and productivity for individual workers while still avoiding the costs of high turnover.

In academic employment there is very little of this internal job mobility. Individuals who are hired as faculty members either stay on the faculty or are dismissed. They do not move to alternative employment within the university, except for a relatively few who move into administration. Lacking flexibility in assigning responsibilities to workers, the university is limited to the following strategies to avoid mismatches between wages and productivity:

Adjusting wages to match individual productivity.
Dismissing low productivity employees.
Introducing more intensive and costly initial screening.

Although universities adjust wages to match individual productivity to some extent, extensive use of wage differentials is an unattractive strategy because it requires costly monitoring of the performance of every individual faculty member throughout his or her career and because of the disruptive and demoralizing effects that result from the introduction of large wage differentials for faculty members with comparable rank and responsibilities. By dismissing low productivity employees, universities must accept the costs of higher turnover. In addition, if this strategy is seriously pursued throughout every employee's career, it also requires expensive monitoring.

Consequently, universities have adopted more intensive initial screening as the central element of their personnel policies. This takes the form of more intensive pre-employment screening than corporations undertake for entry-level positions and of intensive on-the-job screening concentrated in the first few years of employment.

Tenure as a Solution to the Moral Hazard Problem Inherent in Selecting New Faculty Members (Carmichael)

Carmichael (1988) argues that tenure exists within academic environments because worker-professors are called upon to select new members. Carmichael seeks to explain why universities provide almost complete job security to older faculty members. He asserts that tenure prevents the optimal assignment of workers to jobs. Given the fixed resources available to the university, the opportunity cost of providing tenure to incumbent professors is the lost output of younger individuals who cannot be hired in the future because funding, or a "slot," is not available. In this context, the question Carmichael attempts to answer is, "Why are less productive older professors not replaced with promising young candidates?"

Carmichael develops an analogy between the university and a professional sports team. Professional athletics are similar to academics in several important ways:

Athletes undergo long and rigorous training that is almost completely specific to the industry.
Although the reward for success is high, the decision to invest in this training is risky because the probability of success is low.
The most productive part of an athlete's career is short relative to a normal working lifetime and occurs while he or she is young.
The opportunity cost of filling a position on the team with an older athlete is the lost output of a potential replacement because the number of positions on the roster is fixed.

Despite these similarities, the hiring and firing practices in professional sports and academics are markedly different. Older athletes, even former superstars, are regularly fired as soon as they become too expensive or their abilities fall below those of potential replacements. The inherent riskiness of the profession is mitigated by guaranteed payments, retirement plans, and disability insurance instead of guaranteed employment.

Carmichael suggests that academic training is no more specific, intensive, or inherently risky than athletic training and that academics are no more risk-averse than athletes. Therefore, it is difficult to argue that these factors explain the job security enjoyed by older professors. Instead, Carmichael offers an alternative explanation based on the way in which new members of the team are selected. In professional athletics, team owners, through their managers, determine who is to play. In academics, this task is performed by the incumbent members of the department.

Carmichael develops a model of the university as a nonprofit institution with the goal of maximizing research output subject to an exogenously determined budget. It is assumed that individual research can be described by a single index that measures quality and quantity with the correct weights. It takes time for any research project to be completed and for its value to be determined. However, the previous period's output will provide an unbiased estimate of an incumbent's potential output or ability. Carmichael uses a discrete-time framework and assumes that the decision to hire or retain individuals is made at the beginning of each period and that their output is realized at the end of the period. The university's problem is to decide at the beginning of each period which workers to hire from its pool of applicants and how many and which of its incumbents it should fire.

When the university has full information about the abilities and alternatives of incumbents and candidates, tenure is not part of the optimal solution. The least productive and most expensive professors will be fired and replaced by new candidates. However, when the university does not have full knowledge and incumbents have better information, the university will have problems getting incumbents to identify the best candidates if it plans to follow an optimal hiring and firing strategy. An incumbent cannot rule out the possibility that he or she will be fired in the future to make room for a candidate. Thus, if the university expects its incumbents to tell it who the good candidates are, the incumbent's signals about candidates must not affect he incumbent's probability of being retained. Although the restrictions on academic contracts suggested by this analysis do not suggest a unique contract, they are consistent with tenure and other institutions observed in universities.

Tenure as Protection from the Special Problems Created by Academic Democracy (McKenzie)

McKenzie (1996) takes an institutional economics approach in analyzing tenure. He views universities as extensively labor-managed firms in which professors largely determine the nature of the educational services provided, who provides these services, and how one another's work is evaluated. According to McKenzie, tenure is similar to health insurance as a voluntarily negotiated contract provision that benefits both sides of the employment contract--universities as well as professors. Tenure provides professors employment protection from the institutional politics that arise within academic democracies. Meanwhile, universities benefit by providing tenure because it allows them to pay lower wages and fewer fringe benefits than they might otherwise pay for the caliber of professors they hire. Tenure is understood to result from the supply and demand forces in a competitive academic labor market. The analysis of tenure begins with a recognition of the nature of academic employment and how it differs from employment in other industries.

The Nature of Academic Employment

An authoritarian-hierarchical governance structure can be expected to define and evaluate work when it is relatively simple, routine, and easily evaluated. Supervisors can judge the performance of workers because the tasks are relatively simple and the behavior of employees is readily easy to observe and relate to an overriding goal of the firm, securing profit. Workers in such environments would be inclined to view supervisors as individuals who increase the income of workers, as well as stockholders, by reducing the extent to which workers shirk the duties they have agreed to perform.

Academic work is substantially different because many forms of the work are highly sophisticated, because its pursuit cannot be observed directly and easily, and because it involves a search for new knowledge, which is transmitted to professional and student audiences. Supervisors, including presidents, deans, and boards of directors, may be highly trained in a discipline or subdisciplines, but they must employ faculty members who know far more than their supervisors about their assigned areas of research and teaching. Consequently, supervisors must rely extensively on professors to define their own specific research and teaching programs.

In addition, professors frequently undertake esoteric research projects, the benefits of which are uncertain, cannot be captured in salable products, and have no value in the market in which the professor works. In this regard, much of academic research involves the production of public good, which compounds the problems of evaluating the contributions of individual professors. Moreover, the value of some research may not be known for a long time. Indeed, its value may change with the passage of time.

Consequently, academia tends to be worker-managed and controlled in many significant ways. Worker management and control solves many decision-making problems, but it introduces other serious problems of unstable and uncertain decisions and circumstances from which professors will seek contractual protection.

According to McKenzie, contract provisions tend to reflect how willing employers and employees are to adjust to particular conditions of employment. For example, restaurant workers are sometimes paid in part with discounted or free food that can be provided by employers at modest cost. Similarly, the conditions of academic employment suggest several reasons why tenure will likely be one of the prominent contract provisions that will be supplied by employers and demanded by professors.

The Demand for Tenure

McKenzie disputes the conventional argument that tenure "serves a useful educational purpose by promoting politically independent and original thinking (327)." Originally, tenure was conceived as protecting "faculty members' livelihood from assaults by politically and religiously powerful people outside universities who might disagree with the professors' controversial research findings and teachings and who might put pressure on university administrations to fire or discipline professors (327)." Today, critics of tenure argue that outsiders no longer pose serious threats to the continued employment of faculty members because of legislative or judicial protections. In addition, according to McKenzie, few outsiders understand what professors do in their research or in their classes because it is so esoteric and because few professors disseminate their ideas to the general public.

Yet, many professors who never expect to confront hostility from outside political forces still demand tenure protection. McKenzie's analysis suggests that what these professors are really seeking is protection form the potential for changes in internal political forces and dynamics. McKenzie argues that, instead of protecting professors from the threats of those outside the university, tenure protects "worker-professors from their colleagues, acting alone or in a political coalition, in a labor-managed work environment operating under the rules of academic democracy (333)."

According to McKenzie, academic work is frequently full of strife because of the nature of the work and the way it is evaluated and rewarded. Except in unusual circumstances, it is difficult, if not impossible, to assess the absolute value of much of the work of academics in the short run. Normally, teaching and research quality is assessed in relative terms and raises, which are affected by exogenous factors such as state budget decisions, are allocated according to relative performance. Consequently, according to McKenzie, a faculty member can improve his or her relative raise in two ways: by additional production (publishing more articles or achieving higher student evaluation scores) or by predation (thwarting the productive efforts of colleagues).

According to McKenzie, once predation becomes established within a decision-making unit, competing factions can be expected to seek to extend their influence and defenses by forming coalitions among incumbents. They can also be expected to seek to increase the size of their coalitions by evaluating recruits on the basis of their probable political allegiances and effectiveness instead of their academic qualifications. Tenure is a means of protecting individual faculty members from political infighting by increasing the costs predatory faculty members must incur to be successful in having more productive colleagues dismissed.

Although academic decisions on the worth of colleagues and their work usually are made by the rules of consensus or democracy among existing incumbents, there are five problems that arise from reliance on internal democratic decision-making according to McKenzie:

Academic democracy is a process that gives individuals the right to vote and to change their individual and collective votes at will for whatever reason, whether good or bad or productive or counterproductive, that individuals deem valid. Consequently, the rules of academic democracy undermine the concept of a tolerably firm contractual relationship between the worker/professor and the university. Professors who are hired to carry out a particular research or teaching activity may be judged by a totally different standard for the purposes of annual raises and retention given the changing views of the voters/professors.
Even given constant standards of judgment, public-choice economics has long recognized that collective decisions, particularly in small groups of voters, can exhibit apparent inconsistencies. Arrow, for example, has demonstrated that, although each individual faculty member may exhibit normal transitive preferences, collective decisions can be intransitive and unstable, ever changing as majorities shift, even within a constant group of voters. Consequently, a reliance on labor-management decisions, even in a relatively stable group of decision-makers, presents the inherent possibility of instability in evaluative decisions. Therefore, faculty members would be expected to seek some protection from the vacillating changes in their status that could occur whenever there is a shift in the way decisions are structured.
Within the labor-managed academic environment, the instability of decision-making is exacerbated by the fact that group of decision-makers is constantly changing with new hiring, retirements, and firings (to the extent there are any), contributing to the instability and unpredictability of the coalitions within academic decision-making units.
Individual professors can change their assessments of the value of different disciplines, research methods, and courses. These changes in assessments can compound the instability and unpredictability of unit decisions.
The many coalitions that may exist within an academic department are themselves inherently unstable because faculty members have a stake in taking a greater share of the coalition gains despite that the total coalition gains may be reduced by the efforts of individual faculty members.

Tenure Tournaments and Supply and Demand Forces

To accurately assess the abilities of promising faculty members and induce them to confess their limits, universities have established what amount to tournaments--research and teaching competitions among new faculty members. Competition for the limited number of positions that comprise the prizes will generally drive new faculty members to exert a level of effort and produce a level of output that exceeds the value of their current compensation. To induce prospective faculty members to exert the amount of effort necessary to be ability-revealing, universities must offer a prize that potential recruits consider worth the effort. In other words, the recruits must expect the future discounted reward to compensate them for the extra effort they expend in the tournament and for the risk of not winning.

An approach universities can use to encourage recruits to exert a reasonable level of effort in the competition is to offer those who win the tournament a prospect of substantially greater compensation in the future, sufficient enough to repay the cost of the assumed risk and of interest lost on delayed compensation.

Without offering tenure, universities would find it difficult to make a credible commitment that prospective recruits, who make the necessary competitive investment during the probationary period by accepting below-market wages for above-market effort, will receive an income stream that compensates them for all costs, including the required risks.

After tenure is awarded, the effort expended by some faculty members can be expected to decline, while, at the same time, their pay increases. During the tournament, new faculty members will exert unduly high amounts of effort, simply because of the prospect of being rewarded in the future by higher pay and greater job security. If we did not expect new faculty members to anticipate relaxing somewhat after attaining tenure and enjoy to a degree being overpaid, we could not expect the tenure tournament to be effective as a means toward disclosing the limits of new faculty members' true abilities.

The Expected Effects of Abolishing Tenure

Following are some of the expected effects of the abolition of tenure based on the three models summarized in this paper:

Increases in the transaction costs of both employers and employees. Transaction costs of employers include training costs and the value of accumulated information about current employees. Transaction costs of employees include search and relocation costs and the value of accumulated information about current employers. (McPherson and Winston)
An increase in the wages necessary to attract good faculty members compared to those paid by universities offering more job security. (McPherson and Winston)
An increase in monitoring costs. (McPherson and Winston).
A reduction in the inclination of incumbent faculty members to choose superior recruits. (Carmichael).
An increase in the pay of new, untenured faculty members both during and after their normal probationary period. (McKenzie).
A reduction in the in inclination of new faculty members to reveal the true limits of their abilities. Less intense competition would provide them less of an incentive to be perceived as a superior recruit. (McKenzie).
A reduction in the willingness of faculty members to undertake long-term risky research and teaching projects. Instead, an abolition of tenure would increase their interest in undertaking research and teaching projects that would maintain or enhance their marketability. Consequently, faculty members' skills would tend to become less specialized and more generalized. (McKenzie).
A decrease in the reliance of university administrators on faculty for management decisions given that research and teaching would tend to become more routine or standardized and less esoteric and risky. (McKenzie).

The elimination of tenure would likely have other effects, such as a negative impact on faculty morale (McPherson and Winston), although these effects are not predicted by these models.

References

Carmichael, H. Lorne. 1988. "Incentives in Academics: Why Is There Tenure?" Journal of Political Economy 96: 453-72.

McKenzie, Richard B. 1996. "In Defense of Academic Tenure." Journal of Institutional and Theoretical Economics 152: 325-41.

McPherson, Michael S., and Gordon C. Winston. 1983. "The Economics of Academic Tenure: A Relational Perspective." Journal of Economic Behavior and Organization 4: 163-84.

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