Samuel Addy and Ahmad Ijaz
April 1999
The original study “The Economic Impacts of
The University of Alabama,” conducted in January
1997, considered among other things The University of
Alabama (UA) 1996 earnings and expenditure impact
on Tuscaloosa County. This update uses a 1998-based
consumer price index (CPI) on income and expenditure
levels in order to obtain ballpark estimates of the UA
economic impact on Tuscaloosa County. Although the
employment assumptions have probably not changed
significantly since 1996, earnings and expenditures
made by the University and its employees in the county
have increased in the last two years. Both expenditure
and employment impacts are presented.
The University provides numerous benefits that
have lasting impacts on both the general public and its
graduates. Graduates’ ability to learn and grow
intellectually is enhanced, enabling them to earn high
incomes, and contribute significantly in various ways to
society. UA generates jobs, attracts business and
industry to the area, helps create and grow business,
promotes innovation, yields large tax revenues,
enhances the workforce, and improves the general
quality of life in Tuscaloosa County, the state, and the
nation.
These benefits come at costs to the state and
students. State appropriations constitute a third of UA
revenues. Students incur the direct cost of their
education (tuition, room/board, books, etc.), and also
forgo income they could have earned otherwise. Thus,
UA education is an investment by both the state and the
students. To determine whether these investments are
worthwhile, public and private investment analyses of
UA education are also presented in this report. The
investment analyses involve only the measurable
components of benefits and costs.
1
Direct Expenditures
of The University of Alabama 1998
UA Expenditure Impact
(millions of dollars)
U of A Payrolls
35.3%
Total =
$431.0
$152.0
Purchases
33.7%
$145.3
$133.7
Student Expenditures
31.0%
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, The University of Alabama.
Expenditures of The University of Alabama
Made in Tuscaloosa County 1998
(millions of dollars)
U of A Payrolls
32.6%
Total =
$327.7
Purchases
26.6%
$106.7
$87.3
Multiplier=
1.5
$133.7
Impact =
$619.3
Student Expenditures
40.8%
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, The University of Alabama.
Economic Impact of Visitors
Football
Stadium Capacity
83,818
Average Spending Per Attendee $114
Total impact per game
4 game season
$ 9.6 million
38.2 million
Basketball, Baseball, Gymnastics, Swimming$ 3.8 million
Total Athletics
$42.0 million
Other Visitor Impact
$15.5 million
TOTAL VISITOR IMPACT
$57.5 million
Direct purchases and expenditures by The
University of Alabama and its employees in 1998
totaled $297.3 million. About 40 percent of purchases
are made to vendors outside Tuscaloosa County, and 10
percent of payroll goes to employees who live outside
the county. Adjusting for leakages out of the county
and taxes, payroll and purchases expenditures were
$194 million. It is estimated that $133.7 million was
spent by UA students in the local economy, on offcampus housing, food, books, clothing, etc., yielding a
total of $327.7 million of UA direct expenditure in the
county.
An additional visitor expenditure impact of
$57.5 million is estimated, comprising $42 million from
athletics and $15.5 million from other visitor
expenditures. Football alone has a visitor expenditure
impact of $38.2 million from the four-game season, at
about $9.6 million per game. Basketball, baseball,
gymnastics, swimming, etc. are estimated to have a
$3.8 million expenditure impact. Besides athletic event
spectators, UA attracts visiting parents and relatives,
visiting academic personnel, business representatives,
and others to various University functions and
attractions. Visitors are drawn to activities such as
honors day, commencement ceremonies, homecoming,
band competitions, alumni weekends and reunions, etc.
Academic and business visitors attend conferences,
seminars, lectures, and other educational programs.
Other business visitors include media representatives,
educational officials, vendors, research sponsors, and
candidates for faculty and staff positions.
Applying the multipliers estimated in the
previous study, the impact of payroll, purchases, and
student expenditures on Tuscaloosa County is about
$619 million. Adding the $57.5 million visitor
expenditure impact to this figure yields a total UA
expenditure impact on Tuscaloosa County of $676.8
million (Table 1). The recent salary increases for
University faculty and staff alone will add at least $14
million in 1999 to the 1998 expenditure impact. The
expenditure impact is estimated to generate combined
2
city and county sales tax revenues of approximately
$15.4 million for Tuscaloosa.
Total Economic Impact
of The University of Alabama
on Tuscaloosa County 1998
(millions of dollars)
Total =
$676.8
U of A Payrolls
29.8%
Purchases
24.4%
$164.9
$201.6
$57.5
$252.8
Visitor Expenditures
8.5%
Student Expenditures
37.4%
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, The University of Alabama.
Employment Impact of
The University of Alabama 1996
FTE Equivalent
Total = 4,385
The University of Alabama is the largest
employer in Tuscaloosa County. UA employed 3,301
full-time and 528 part-time workers in 1996. The
University also employed 3,280 student workers.
Assuming that the part-time staff worked half-time (i.e.
at exactly half full-time equivalent, 0.5 FTE) and the
students worked quarter-time (0.25 FTE), then the total
1996 direct FTE employment was 4,385 workers. With
an employment multiplier of 1.5, the total 1996
employment impact on the county is 6,578.
Full-Time
75.3%
UA Education as Private Investment
3,301
Employment
Multiplier = 1.5
Total
Employment
Impact = 6,578
UA Employment Impact
264
820
Part-Time
6.0%
Students
18.7%
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, and the Office of Institutional Research, The University
of Alabama.
Every year thousands of new students enroll in
UA degree programs. What’s in it for them? First,
education is its own reward. The ability to learn and
grow intellectually increases the graduate’s earning
potential. However, the college degree comes at a cost
that includes the obvious cost of the education as well
as the forgone earnings while in school.
The forgone earnings, often called the
opportunity cost, is taken to be the earnings potential of
the next educational level immediately below the
graduate’s degree. For example, the opportunity cost of
a master’s degree is the earnings potential of a
bachelor’s degree holder, and the total cost is the
opportunity cost plus the direct expenditure to obtain
the degree. This cost is the actual marginal cost of
pursuing the degree. By comparing this cost to the
marginal addition to value, called value added, for the
graduate, we can determine whether the decision to
obtain a UA degree is prudent. Only half the
opportunity cost is included in the marginal cost of the
UA degree since many students work an average of 20
hours a week to support their education. The
graduating class of 1995 is used for this analysis.
3
The methodology for estimating value added is
straightforward. Value added, the marginal benefit, is
obtained by determining the difference in salaries of the
graduate with that of a person with the degree level
immediately below. A doctoral degree salary is
compared to a master’s degree salary, a master’s is
compared to that of a bachelor’s, and a bachelor’s with
a high school degree. A category of people with “some
college” is included in the study to capture individuals
who began college but did not complete the bachelor’s
degree requirements. These individuals will earn more
income in their working careers than high school
graduates who do not attend college at all. The value
added of people with some college is obtained by
comparing their income to that of high school
graduates. Table 2 shows the number of students,
average starting salary, real earnings growth rate,
lifetime earnings, and value added of the graduating
class of 1995.
Estimated Return on Investment by Degree Level
Graduating Class of 1995, The University of Alabama
Value
Added
($ 1995)
“Cost”
($ 1995)
Real Annual
Return on
Investment
Annual
Return
Relative to
High School
Some College
$166,243
$17,984
27.2%
27.2%
Bachelor’s
$400,684
$44,596
36.4%
36.4%
Master’s
$125,706
$29,999
17.6%
50.7%
Doctorate
$230,497
$46,797
19.6%
42.9%
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, The University of Alabama.
People who attend some college and
baccalaureate graduates will earn $166,243 and
$400,684 more (in 1995 dollars), respectively, than a
high school graduate over their lifetimes. A master’s
degree will earn the holder $125,706 more than a
bachelor’s degree. A doctorate will earn $230,497
more than a master’s. It is assumed that graduates will
retire at 65 years of age, and lifetime earnings are
discounted at a 3 percent rate.
The real rate of return on the private investment
in a UA education is determined by generating the
annual cost and income streams over the different
lifetimes of the categories being considered. Clearly,
given that the real rates of return are all positive, the
decision to pursue a UA degree is very sensible,
whether or not one completes the degree. Even higher
returns can be obtained by completing the degree. The
bachelor’s degree has the highest return of 36.4 percent,
followed by some college with 27.2 percent. The
doctoral degree is next with 19.6 percent, and the
master’s degree has the lowest return of 17.6 percent.
The graduate degree returns are on top of that of the
degree immediately below.
4
Although the bachelor’s degree yields the
greatest return on the investment, the doctoral degree
earns the most, even over the shorter working life. One
may also consider the rate of return on all degrees
relative to the high school degree. In that case, the
master’s degree is the most profitable with a 50.7
percent real annual rate of return, followed by the
doctorate at 42.9 percent.
UA Education as Public Investment
Taxes Generated from
UA Expenditure Impacts 1995
(millions of dollars)
Payroll Sales Tax
20.8%
Payroll Income tax
21.4%
$7.2
Purchases Sales Tax
17.1%
$7.4
$5.9
$14.1
Student Expenditure Sales Tax
40.7%
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, The University of Alabama.
Estimated Return on Investment to State of
Alabama from Graduating Class of 1995
millions of dollars
Total State Appropriations
to Class
Less Taxes Generated from
1995 Expenditure Impact
Remaining Net Investment by State
Tax Collections
$108.8
$34.5
$74.3
$92.3
Percent
Annual Real Rate of Return
on Class Lifetime Tax Collections
4.2
Expected Inflation Rate
3.0
Nominal (market) Rate of Return
7.2
Source: Center for Business and Economic Research, Culverhouse College of Commerce
and Business Administration, The University of Alabama.
State appropriations of about $109 million
constituted 36.5 percent of UA revenues in 1995. What
does the state get in return? Many public benefits of
education are hard to measure—innovation promotion,
both direct and indirect new business development and
job creation, general improvements in the quality of
life, some public service, etc.—but others such as
additional tax receipts can be measured. These tax
revenues are the main measurable benefits derived from
making the appropriation. Again, the class of 1995 is
chosen as a reference group to look at UA education
from a state investment perspective.
The $109 million state funding is offset in 1995
by $34.5 million in sales and income taxes generated by
UA expenditure impacts, resulting in a net investment
by the state of $74.3 million. We assume that 30
percent of the class will reside permanently out of state,
and that the state’s sales tax rate of 4 percent and 5
percent income tax rate will be fixed over the working
life of the class. Historically, about two-thirds of UA
active alumni reside in Alabama, but there are
increasingly more opportunities for college graduates in
the state than in the past. The state’s unemployment
rate is lower than the national average and there is a
shortage of skilled labor.
The 1995-dollar value of total tax collections
from the class is estimated at $92.3 million. The state
will realize a real return of 4.2 percent on its investment
in the class of 1995. Since this is inflation-adjusted, the
market rate of return on this public investment is 7.2
percent, taking into account the 3 percent discount
factor on the future tax streams. This rate of return is
5
higher than the current 30-year U.S. Government Bond
rate.
Summary and Conclusions
The 1998 University of Alabama expenditure
impact on Tuscaloosa County is about $677 million.
UA education is a very sound investment for its
students. Real annual rates of return on some college
attendance and the bachelor’s degree are 27.2 percent
and 36.4 percent, respectively, over a high school
degree. A master’s degree yields a 17.6 percent return
over a bachelor’s degree, and the doctorate yields 19.6
percent return over the master’s. The state also realizes
a 4.2 percent real annual rate of return on its
appropriations to the University.
It is important to note that any study of this kind
has many uncertainties. The real rates of earnings
growth may change. So may the state income and sales
tax rates, student enrollment, rate of alumni residence in
the state, etc. However, under the assumptions of this
report, UA education is a better investment for students
than the stock market, and a better investment for the
state than bonds. In addition, there are several
intangible benefits of UA education that cannot be
measured.
UA is in the education business, producing
skilled and knowledgeable people, knowledge, and
information. The University enhances graduates’
ability to learn and grow intellectually, and to
contribute in various ways to society. It also provides
valuable research, adding to the stock of knowledge. In
the modern high-tech economy, the intangible, yet very
real and critical, role of higher education is
acknowledged. Economic growth is attributable to the
knowledge economy characterized by increasing
returns, rather than the physical economy with its
diminishing returns. Physical products, on the other
hand, depreciate and become obsolete. Our information
age makes UA essential to the economic development
of the county, state, and nation. The 1998 impact of
UA on Tuscaloosa County certainly exceeds by far the
measurable component.
6
Acknowledgments
Many people, including the staff of the Center
for Business and Economic Research (CBER),
contributed to the completion of this report. Ms. Sherry
O’Brien of CBER and Dr. William Fendley of the
Office of Institutional Research were especially helpful.
7
Table 1
Expenditure Impacts of The University of Alabama on Tuscaloosa County, Alabama 1998
(millions of dollars)
Source
University of Alabama
Payrolls
Purchases
Student Expenditures
Total
Spent in
Tuscaloosa
County1
Indirect
Impact3
$152.0
145.3
$297.3
$106.72
87.3
$194.0
$ 94.9
77.6
$172.5
$201.6
164.9
$366.5
$133.7
$133.7
$119.1
$252.8
Total
Impact
Visitor Expenditures
$ 57.5
Total
1
2
3
$431.0
$327.7
$291.6
$676.8
Estimates provided by officials of The University of Alabama.
After federal, state and local taxes.
Based on Tuscaloosa County Econometric Model, Center for Business and Economic Research,
The University of Alabama.
Table 2
Graduating Class of 1995
Degree
Number
High School
Average
Salary
Earnings
Growth (%)
Lifetime
Earnings
$12,480
0.42
$ 336,897
Value
Added
Working
Life (years)
47
Some College
2,188
17,680
0.84
503,141
$166,243
45
Bachelor’s
2,785
25,515
1.17
737,581
400,684
42
Master’s
1,078
30,919
1.16
863,288
125,706
40
341
41,349
1.16
1,093,785
230,497
37
Doctorate
Note: Average salaries are from placement offices throughout The University of Alabama.
Source: Center for Business and Economic Research, Culverhouse College of Commerce and Business
Administration, and the Office of Institutional Research, The University of Alabama.
8