Baumol's cost disease

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Baumol's cost disease (also known as the Baumol Effect) is a phenomenon described by William J. Baumol and William G. Bowen in the 1960s. The original study was conducted for the performing arts sector. Baumol and Bowen pointed out that the same number of musicians are needed to play a Beethoven string quartet today as were needed in the 1800s; that is, the productivity of Classical music performance has not increased.

In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually getting more productive due to technological innovations to their tools and equipment. In contrast, in some labor-intensive sectors that rely heavily on human interaction or activities, such as nursing, education, or the performing arts there is little or no growth in productivity over time. As with the string quartet example, it takes nurses the same amount of time to change a bandage, or college professors the same amount of time to mark an essay, in 2006 as it did in 1966.

Baumol's cost disease is often used to describe the lack of growth in productivity in public services such as public hospitals and state colleges. Since many public administration activities are heavily labor-intensive and have a limited desirable provider-customer ratio, there is little growth in productivity over time. As a result, the costs of the bureaucracy will inflate quicker than the growth in the GDP.

[edit] Effects, Symptoms, and Therapy

Producers can react to wage inflation in a number of ways:

Decrease quantity/supply
Decrease quality
Increase price
Increase non-monetary compensation / employ volunteers
Increase total factor productivity

The reported productivity gains of the service industry in the late 1990s can be mostly attributed to total factor productivity. ^[1] Providers decreased the cost of ancillary labour through outsourcing or technology. Examples include offshoring data entry and bookkeeping for health care providers, and replacing manually-marked essays in educational assessment with multiple choice tests that can be automatically marked (see Scantron).

The total factor productivity treatment is not available to the performing arts sector, because the consumable good is the labour itself. Instead, it has been observed that increases in price of the performing arts has been offset by increases in standard of living and entertainment spending by consumers. ^[2] The extent to which the other treatments have been employed is subjective.