Comment by msteffen
11 hours ago
I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors, such as healthcare, construction). Basically, when software or AI is super lucrative,
1. students go into new lucrative thing
2. supply of doctors goes down
3. doctor wages go up
4. hospital margins go down
5. Hospitals raise their prices to stay in business
6. Wealthy engineers are able to afford higher prices
7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.
- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.
- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.
- I also think that we’re entering a stabilization phase.
>I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors,
This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.
>1. students go into new lucrative thing
Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.
>2. supply of doctors goes down
The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.
3, 4, 5
Yes those look like the Baumol effect.
6, 7
Not really what the Baumol effect is talking about.
Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.
The wikipedia entry looks pretty well done:
https://en.wikipedia.org/wiki/Baumol_effect#cite_note-:11-4
The Wikipedia entry actually says 2, or something very similar:
> The rise of wages in jobs without productivity gains results from the need to compete for workers with jobs that have experienced productivity gains and so can naturally pay higher wages.
Supply of doctors doesn't go down only because hospital raise wages to compete with the new lucrative thing. There are plenty of people that want to become doctors, but only so many of them are people that you want to be doctors, and if you don't pay enough they'll do the lucrative thing.
Doctors are just not a good example to use though as an example here. Healthcare costs have risen as one would expect due to Baumol’s cost disease, but Dr salaries have generally not gone up as much as one would have expected. Medicine is such a tightly controlled market that lots of things are distorted - Medicare decides how much they will compensate, etc. Many more qualified people would like to become Drs but are not allowed too (From 1980 to 2005, the number of medical students stayed flat despite population increases - this is slowly been increasing the last 20 years along with the number of residency positions.)
TIL! I’m entirely inexpert in the topic and posted as a curious layperson.
That said, some of what’s in the article only makes sense to me in the context of a system that’s at least somewhat like what I tried to describe. Maybe you can enlighten me?
> This effect is an example of cross elasticity of demand.
Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor? Eg land, healthcare, unskilled labor (as an input, in the case of skilled labor as the output—doctors and engineers in my comment)?
In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.
So people are either leaving the profession or raising their prices, and either firms pay, high-wage-earners pay, or they get no customers and again get other jobs (like the rope-holders). Is that not the effect?
>...Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor?
This isn't necessary to explain Baumol cost disease. Different kinds of workers may also be substitutes for one another, or complements. However, the quartet doesn't need to share a particular set of inputs with car manufacturing for Baumol's mechanism to operate.
>...In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.
Yes. Baumol cost disease is a way to explain the upward pressure on the cost of lower productivity labor-intensive services. It isn't an economic law, it is a tendency. It doesn't guarantee that every business will be able to pass those costs on to customers, or that every business will survive or that every worker will receive the same wage increase, etc.
Yeah, and it's similar reasoning as to why gentrification tends to happen when the wealthy move into an area, and why prices for things typically decrease when the wealthy leave.
When people leave, the prices of things they were buying goes down due to the Law of Supply and Demand.
> I also think that we’re entering a stabilization phase.
Why do you think that? Everything you wrote prior to that seemed to indicate further destabilization.
Hospitals and health insurers aren’t really operating in a free market.
The argument works with any service business that is shared by high income and low income earners: restaurants, transportation, clothing, housing, groceries, etc.