Baumol’s cost disease is the rise of salaries in jobs that have experienced no or low increase of labor productivity. The phenomenon was described by William J. Baumol and William G. Bowen in the 1960s. It is often used to describe consequences of the lack of growth in productivity in the quaternary sector of the economy.
About Baumol’s cost disease in brief
Baumol’s cost disease is the rise of salaries in jobs that have experienced no or low increase of labor productivity. The phenomenon was described by William J. Baumol and William G. Bowen in the 1960s and is an example of cross elasticity of demand. The rise of wages in jobs without productivity gains derives from the requirement to compete for employees with jobs that can naturally pay higher salaries. The concept was alluded to as early as 1776 by Adam Smith in The Wealth of Nations. It is often used to describe consequences of the lack of growth in productivity in the quaternary sector of the economy and public services, such as public hospitals and state colleges.
The reported productivity gains of the service industry in the late 1990s are largely attributable to total factor productivity. Providers decreased the cost of ancillary labor through outsourcing or technology. Examples include offshoring data entry and bookkeeping for health care providers and replacing manually-marked essays in educational assessment.
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