Baumol’s cost disease (Baumol’s Effect) is a phenomenon first described by William J. Baumol and William G. Bowen in the 1966 book Performing Arts: The Economic Dilemma. In the book Bumol and Bowen pointed out that it takes the same amount of time was needed today to play a Beethoven string composition as was needed in the 1800; that is, the productivity of Classical music performance has not increased. They argued that costs in the live performing arts must rise relative to costs in the economy as a whole because wage increases in the arts must keep up with those in the general economy even though productivity improvements in the arts are not possible or will lag behind.
In the manufacturing sector and the retail sector, workers are continually increasing productivity due to technological innovations to their tools and equipment. In contrast, in many 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 musical performance example, it takes a nurse checking the vital signs of a patient or a college professor grading an essay, as much time in 2009 as it did in 1969.
No one can be held responsible for cost disease; it’s just common to businesses that are labor-intensive. For example colleges are always attempting to do things more efficiently, but, since their biggest expense is labor, the only way to reduce costs is either to increase the number of students each professor teaches (by increasing class size or increasing the number of section taught) or to outsource the work to poorly paid and possible unqualified adjuncts. Thus the dilemma: in order to lower prices you have to lower quality.
The true dilemma exists in the abundance of government subsidies to students through loans, grants, scholarships, etc. Once government steps in to subsidize education, the prices go nowhere but up - as the cost to the student decreases due to subsidy, the utilization and demand increases.
A perfect example of this exists in Tennessee. Every year since the lottery scholarships came into existence, the total number of enrolled students in the two- and four-year colleges across the state has increased. This increased enrollment has not been met by an equivalent increase in productivity because of the principles set forth in Baumol’s cost disease principle. Professors cannot increase their productivity. The solution should be to hire more professors, but the state legislature has not been willing to increase allocations to higher education. As a matter of fact the budget have been decreasing in real dollars, exacerbating the situation. This leads to the question of lowering quality in order to accommodate the increase demand that has resulted in the lottery scholarship subsidy.
In the manufacturing sector and the retail sector, workers are continually increasing productivity due to technological innovations to their tools and equipment. In contrast, in many 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 musical performance example, it takes a nurse checking the vital signs of a patient or a college professor grading an essay, as much time in 2009 as it did in 1969.
No one can be held responsible for cost disease; it’s just common to businesses that are labor-intensive. For example colleges are always attempting to do things more efficiently, but, since their biggest expense is labor, the only way to reduce costs is either to increase the number of students each professor teaches (by increasing class size or increasing the number of section taught) or to outsource the work to poorly paid and possible unqualified adjuncts. Thus the dilemma: in order to lower prices you have to lower quality.
The true dilemma exists in the abundance of government subsidies to students through loans, grants, scholarships, etc. Once government steps in to subsidize education, the prices go nowhere but up - as the cost to the student decreases due to subsidy, the utilization and demand increases.
A perfect example of this exists in Tennessee. Every year since the lottery scholarships came into existence, the total number of enrolled students in the two- and four-year colleges across the state has increased. This increased enrollment has not been met by an equivalent increase in productivity because of the principles set forth in Baumol’s cost disease principle. Professors cannot increase their productivity. The solution should be to hire more professors, but the state legislature has not been willing to increase allocations to higher education. As a matter of fact the budget have been decreasing in real dollars, exacerbating the situation. This leads to the question of lowering quality in order to accommodate the increase demand that has resulted in the lottery scholarship subsidy.
Reference
Heilbrun, J., (2003) Chapter 11, Baumol’s cost disease (PDF). A handbook of cultural economics. Edward Elgar. Retrieved from http://publishing.eur.nl/ir/repub/asset/782/TOWSE%20EBOOK_pages0103-0113.pdf
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