1) Two-Sector Economy: In Baumol and Bowen's observations, the economy is divided into two parts:
- A Progressive Sector: Productivity grows rapidly due to technology and automation (e.g., manufacturing, data processing).
- A Stagnant Sector: Productivity grows slowly, if at all, because the service is labor-intensive (e.g., a string quartet performance, a haircut, K-12 teaching).
2) Wage Linkage: Both sectors compete for labor from the same pool of workers. As productivity gains allow wages to rise in the progressive sector, the stagnant sector must also increase its wages to attract and retain employees.
3) Divergent Cost Impact:
- In the progressive sector, the higher wages are offset by the gains in productivity. The labor cost per unit of output can remain stable or even decrease.
- In the stagnant sector, there are no corresponding productivity gains to offset the higher wages. The labor cost per unit of service must therefore increase.
4) Resulting Price Trend: The prices for services in the stagnant sector (e.g., concert tickets, college tuition, healthcare) must therefore rise and faster than the prices for goods from the progressive sector (e.g., electronics, cars). https://en.wikipedia.org/wiki/Baumol_effect#/media/File:Pric...
5) A lot of European countries fund these expensive services through general taxation rather than direct user fees. In the US that's not going to fly, so cost pressure incentivizes orgs to cut corners and reduce quality and automate as much as possible.
1) Two-Sector Economy: In Baumol and Bowen's observations, the economy is divided into two parts:
- A Progressive Sector: Productivity grows rapidly due to technology and automation (e.g., manufacturing, data processing).
- A Stagnant Sector: Productivity grows slowly, if at all, because the service is labor-intensive (e.g., a string quartet performance, a haircut, K-12 teaching).
2) Wage Linkage: Both sectors compete for labor from the same pool of workers. As productivity gains allow wages to rise in the progressive sector, the stagnant sector must also increase its wages to attract and retain employees.
3) Divergent Cost Impact:
- In the progressive sector, the higher wages are offset by the gains in productivity. The labor cost per unit of output can remain stable or even decrease.
- In the stagnant sector, there are no corresponding productivity gains to offset the higher wages. The labor cost per unit of service must therefore increase.
4) Resulting Price Trend: The prices for services in the stagnant sector (e.g., concert tickets, college tuition, healthcare) must therefore rise and faster than the prices for goods from the progressive sector (e.g., electronics, cars). https://en.wikipedia.org/wiki/Baumol_effect#/media/File:Pric...
5) A lot of European countries fund these expensive services through general taxation rather than direct user fees. In the US that's not going to fly, so cost pressure incentivizes orgs to cut corners and reduce quality and automate as much as possible.