Baumol's cost disease

Baumol's cost disease (or the Baumol effect) is the rise of salaries in jobs that have experienced no increase of labor productivity, in response to rising salaries in other jobs that have experienced the labor productivity growth. This pattern seemingly goes against the theory in classical economics for which real wage growth is closely tied to labor productivity changes. The phenomenon was described by William J. Baumol and William G. Bowen in the 1960s.

The rise of wages in jobs without productivity gains is from the requirement to compete for employees with jobs that have experienced gains and so can naturally pay higher salaries, just as classical economics predicts. For instance, if the retail sector pays its managers 19th-century-style salaries, the managers may decide to quit to get a job at an automobile factory, where salaries are higher because of high labor productivity. Thus, managers' salaries are increased not by labor productivity increases in the retail sector but by productivity and corresponding wage increases in other industries.

The original study was conducted for the performing arts sector. Baumol and Bowen 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. On the other hand, the real wages of musicians (as in all other professions) have increased greatly since the 19th century.

In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually becoming more productive by 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, as those types of activities rely on the movements of the human body, which cannot be engineered to perform more quickly, accurately, or efficiently in the same way that a machine, such as a computer, can.

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