Saturday, February 19, 2011

The Baumol Effect

The Baumol Effect (or disease)
. It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth. This goes against the theory in classical economics that wages are always closely tied to labor productivity changes
Something I had not thought of in relation to a continual increase in the size of government, education, and health care.   Matthew Ylesias comments on it relative to education.
The Baumel Disease would probably not be a huge problem when these sectors are relatively small.    The productivity growth from the dynamic sectors would pay for the increases in the other sectors.  But when sectors that are known to be low in productivity growth become a larger portion of the economy, even when there is productivity growth in the dynamic portions of the economy, there may not be enough growth to pay for increased wages in non-growth areas. 
It was first noted in the 1960s which is interesting as this just prior to the time period when you would think that the problem would start becoming acute: the 1970s.


Freyja said...

Which is probably a big factor in how the economy of society becomes extremely top heavy.
Things that are top heavy have a way of falling.

russell1200 said...

The exact mechanism the is described seems to be unique to recent history. I am not sure when you would have enough "wage earners" to be able to pull off the comparison.

But if I understand you point, I believe we are in agreement. "Elites" fighting over societies dwindling surplus is not new. Too many elites = top heavy.