Labor-intensive services rise in cost despite stagnant productivity.
Baumol's 1966 example: a Beethoven quartet needs the same four musicians for the same minutes as in 1800, so as economy-wide wages rise, its cost rises with no productivity offset. This is why healthcare, education and live performance persistently outpace general inflation.
In practice
- A string quartet and a haircut cost more each decade relative to a television, though neither has got faster.
- A council's social care bill rises faster than inflation while its printing costs fall, and the budget debate treats both as management failures.
- Standing
- In higher education its rival explanation is Bowen's revenue theory of cost, which puts rising costs down to appetite rather than productivity.
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys