by Jim Rose in applied price theory, economics of education, human capital, labour economics, labour supply, occupational choice Tags: Baumol's disease

Baumol’s cost disease is a phenomenon described by William J. Baumol in the 1960s. It involves a rise of wages in jobs that have experienced no increase of labour productivity in response to rising wages in other jobs which did experience such labour productivity growth.

The rise of wages in jobs without productivity gains is required to compete for employees with jobs that did experience gains and can naturally pay higher wages.

The original study was conducted for the performing arts. Baumol pointed out that the same number of musicians is needed to play a Beethoven string quartet today as was needed in the 19th century: the productivity of classical music performance has not increased, but real wages of musicians (as well as in all other professions) have increased greatly since the 19th century.

In labour-intensive sectors that rely heavily on human interaction such as nursing, education, or the performing arts, there is little or no growth in productivity over time. These sectors must pay more to stay competitive in the labour market. These jobs will survive as long as consumers are willing to pay these wage increases. Entrepreneurs react to Baumol’s disease in several ways:

Decrease quantity/supply

Decrease quality

Increase price

Increase total factor productivity

Baumol’s cost disease in the education sector would be reinforced by reductions in class sizes, more specialised teaching, and the increase in the higher education premium throughout the economy.

All of these effects would require the schooling sector to pay because would be teachers have many more options than in the past. In days gone by, outside of the professions, teaching was one of the few jobs available to a university graduate. Indeed, in days gone by, many teachers were either teachers college graduates such is the case with the sister or they learnt on-the-job as my mother was going to do.