Baumol Effect(en.wikipedia.org)
en.wikipedia.org
Baumol Effect
https://en.wikipedia.org/wiki/Baumol%27s_cost_disease
104 comments
Colleges increasingly using adjuncts and doctors being replaced by multiple nurse-practicioners and nurses is a PERFECT example of steps taken to mitigate the Baumol Effect.
According to the wikipedia article, these are the symptoms, effects, and remediation:
Decrease quantity/supply Decrease quality Decrease profit margins, dividends, or investment Increase price Increase non-monetary compensation or employ volunteers Increase total factor productivity
The teacher teaching Python would be an example of "increase total factor productivity". The college using adjuncts and the doctors being replaced by multiple nurse practicioners and nurses would be an example of "decrease quality". Instead of being diagnozed by a doctor, you are diagnosed by someone with less training/certification. Instead of being taught by someone who is employed full time with benefits, you are being taught by someone who is on a fixed term contract.
According to the wikipedia article, these are the symptoms, effects, and remediation:
Decrease quantity/supply Decrease quality Decrease profit margins, dividends, or investment Increase price Increase non-monetary compensation or employ volunteers Increase total factor productivity
The teacher teaching Python would be an example of "increase total factor productivity". The college using adjuncts and the doctors being replaced by multiple nurse practicioners and nurses would be an example of "decrease quality". Instead of being diagnozed by a doctor, you are diagnosed by someone with less training/certification. Instead of being taught by someone who is employed full time with benefits, you are being taught by someone who is on a fixed term contract.
There is no real scientific evidence that NPs and PAs deliver lower quality care. Patient outcomes are equivalent.
I understand what GP means.
But I would rather put it in the "increase total factor productivity" category.
The idea here is that nurses are less costly than doctors: less training, lower barrier to entry, etc... And presumably, with the new organization, you are able to get the same quality of care with more nurses and less doctors. It is actually an increase in productivity: equivalent outcome for cheaper.
But I would rather put it in the "increase total factor productivity" category.
The idea here is that nurses are less costly than doctors: less training, lower barrier to entry, etc... And presumably, with the new organization, you are able to get the same quality of care with more nurses and less doctors. It is actually an increase in productivity: equivalent outcome for cheaper.
I agree 100%. I should have put "lower quality" in quotes because from an economic perspective it costs less. From an economic perspective, a "lower quality" alternative is one that costs less.
Arguably this might be a change in multi factor productivity?
This is not true "from am economic perspective", though individual studies may use "cost" as a proxy for quality.
No economist considers price the correct measure of quality, and a lot of economics deals with the often poor relationship between the two (and the factors subsidising the mismatch).
No economist considers price the correct measure of quality, and a lot of economics deals with the often poor relationship between the two (and the factors subsidising the mismatch).
To expand further on the absurdity mentioned in my other comment: Before germ theory was known, maternity wards where baby deliveries were done by doctors had higher mortality rates for mothers and babies than wards where the deliveries were done by relatively "untrained" midwives (because doctors worked with cadavers and didn't wash hands).
However, from a certain economic standpoint, the midwife service would be considered "inferior" to the doctors service due to the difference in training and licenses.
However, from a certain economic standpoint, the midwife service would be considered "inferior" to the doctors service due to the difference in training and licenses.
This is a very polarizing topic in the field of medicine, especially when it comes to independent practice of midlevel providers. I’d just point out that NPs have a very aggressive national organization that promotes such studies, and the issue of equivalent patient outcomes is certainly not yet decided. There are significant questions about the study design, namely that midlevel providers are seeing less complex and critical patients, while physicians take on cases where their more advanced and thorough knowledge is needed (and outcomes tend to be poorer due to the patient condition, not the care provided).
This is well and good, aside from potentially misrepresenting the research - midlevels are supposed to handle what they can and escalate what they’re unable to handle to a supervising physician.
There is similar research that shows NPs and PAs order more unnecessary diagnostic tests like labs and imaging, and are more likely to prescribe antibiotics and narcotics when it isn’t indicated.
This is well and good, aside from potentially misrepresenting the research - midlevels are supposed to handle what they can and escalate what they’re unable to handle to a supervising physician.
There is similar research that shows NPs and PAs order more unnecessary diagnostic tests like labs and imaging, and are more likely to prescribe antibiotics and narcotics when it isn’t indicated.
It’s entirely possible that the results/education curve is log/log complex, and that therefore because human biology is so complex and we know relatively so little, it doesn’t matter too much how trained the person working on you is (on average) past some baseline that might be lower than expected.
That's understandable, but then it's kind of misleading to represent any of those professions as a curve on a graph, if the profession is constantly redefining itself.
But now I just noticed that the graph represents products and services, not professions or workers. So we're not talking about the internal cost structure of those industries, but simply their price. I might be mis-reading the whole thing.
Oddly enough the outstanding curves on that graph are ones where the "market" is an archaic mixture of private and public entities with little resemblance to free markets.
But now I just noticed that the graph represents products and services, not professions or workers. So we're not talking about the internal cost structure of those industries, but simply their price. I might be mis-reading the whole thing.
Oddly enough the outstanding curves on that graph are ones where the "market" is an archaic mixture of private and public entities with little resemblance to free markets.
Ever thought of raising your rates? You're losing money in nominal dollars over a long time period.
https://www.successfulindependentconsulting.com/blog/how-and...
https://www.successfulindependentconsulting.com/blog/how-and...
That's a good question. One problem is that my skills have improved, but so have the skills of others, while the overall amount of available work has declined. I'm a double bassist, and when I started playing, there was a shortage of us, but I'm not sure that's true any more, and the caliber of players has increased.
I think one thing is that $100/player is a kind of psychological "anchor" that people understand, and that is easy to negotiate. By the time I receive the offer, the bandleader has already negotiated their fee with the client, and now has a fixed budget.
I think one thing is that $100/player is a kind of psychological "anchor" that people understand, and that is easy to negotiate. By the time I receive the offer, the bandleader has already negotiated their fee with the client, and now has a fixed budget.
That’s a really interesting point about teachers.
Their productivity has improved when you think about it more broadly. They are sharing information that improves the baseline productivity rate of society, and are therefore part of the productivity engine.
Their productivity has improved when you think about it more broadly. They are sharing information that improves the baseline productivity rate of society, and are therefore part of the productivity engine.
Did we lose occupations to this effect and if yes, which?
Like, work we would still like to pay someone for, but now the minimum wages are too high.
Like, work we would still like to pay someone for, but now the minimum wages are too high.
For the middle-ish class in the US, tons of low-skill service jobs. If you could pay someone $4/hour (or whatever) a lot of people would have lawns mowed, brush cleared, laundry done, maybe meals cooked (less low skill), errands run, etc. Contrast with the level of personal service in, say, SE Asia in many cases. The bar is pretty high to hire someone for a lot of stuff you can easily do but don't really want to, until you're very high income.
ADDED: Now some of this has been mitigated by gig economy and other shared resource types of jobs that pay (theoretically) ~ minimum wage or better but are more efficient than a driver waiting around to take you someplace. Or getting meals delivered rather than a personal chef. And laundry with modern appliances is much less of a big deal than it was previously. But the basic point still applies.
ADDED: Now some of this has been mitigated by gig economy and other shared resource types of jobs that pay (theoretically) ~ minimum wage or better but are more efficient than a driver waiting around to take you someplace. Or getting meals delivered rather than a personal chef. And laundry with modern appliances is much less of a big deal than it was previously. But the basic point still applies.
Also retail businesses in SEA tend to employ more workers than would be considered necessary in the west. e.g. hiring far more shop assistants than they need. If your labour costs are a small fraction of your overall costs then you have an incentive to hire many workers to provide better service in peak times even if most of the time they are doing nothing, or just to make your business look good.
Right. If people are relatively expensive , as with US retail, you use fancy retail scheduling software and you maybe share a maintenance or a bookkeeper with other businesses so they're not sitting around twiddling their thumbs most of the time. Ditto for household helpers. If, on the other hand, relatively unskilled people are cheap relative to your salary or a businesses profits, it's easier for you just to keep them around all the time even if it's not as efficient.
As someone else noted, there may also be value in specialization. Rather than have a full-time all-around handyman, it may make more sense to just call a plumber if that handyman isn't that cheap relative to the [plumber anyway.
As someone else noted, there may also be value in specialization. Rather than have a full-time all-around handyman, it may make more sense to just call a plumber if that handyman isn't that cheap relative to the [plumber anyway.
If anything, you seem to be saying the opposite of the Baumol effect! From Wikipedia:
> The rise of wages in jobs without productivity gains derives from the requirement to compete for employees with jobs that have experienced gains and so can naturally pay higher salaries, just as classical economics predicts.
You claim that those low-efficiency jobs would still have workers if we were allowed to pay them a low enough price. Baumol effect says they'd choose to work higher-efficiency jobs until you paid them the same wage as a high-efficiency job worker.
> The rise of wages in jobs without productivity gains derives from the requirement to compete for employees with jobs that have experienced gains and so can naturally pay higher salaries, just as classical economics predicts.
You claim that those low-efficiency jobs would still have workers if we were allowed to pay them a low enough price. Baumol effect says they'd choose to work higher-efficiency jobs until you paid them the same wage as a high-efficiency job worker.
> You claim that those low-efficiency jobs would still have workers if we were allowed to pay them a low enough price.
I think you misunderstood "If you could pay someone $4/hour..." It's not a statement about minimum wage or anything like that; GP isn't claiming that there's a potential market of $4/hr labor that would exist without regulation. Instead I interpreted the sentence as "Consumers value certain tasks at e.g. $4/hr but due to the Baumol effect nobody is willing to work for that amount."
I think you misunderstood "If you could pay someone $4/hour..." It's not a statement about minimum wage or anything like that; GP isn't claiming that there's a potential market of $4/hr labor that would exist without regulation. Instead I interpreted the sentence as "Consumers value certain tasks at e.g. $4/hr but due to the Baumol effect nobody is willing to work for that amount."
It's a rather weird way of saying that, but I suppose that must be what they meant.
> $4/hr but due to the Baumol effect nobody is willing to work for that amount.
No, it is NOT the Baumol effect that causes that. It's due to the fact that you cannot afford to live on $4/hr.
No, it is NOT the Baumol effect that causes that. It's due to the fact that you cannot afford to live on $4/hr.
But why can you not afford to live on $4/hr? Or, why is everything so much more expensive than it used to be? These questions may have answers or they may have broken assumptions, but you did not even attempt to address the point at issue.
Data really doesn’t back that up. Adjusted for inflation it’s cheaper to get lawn care done today than 40 years ago. Minimum wage was actually higher back then and automation was worse. Landscaping is extremely common with industry revenue hitting $51,908,304,000 in 2016 or an average of ~400$ per household per year across the US.
In the case of lawn care specifically, automation that requires some capital beyond what may be worth it for an individual probably helps. I have a lawn service and a small crew shows up every two weeks with various gear and they're out in 20-30 minutes.
That said, I'm not sure how common getting a lawn service is among middle to lower-middle class households is.
And I'm pretty sure most middle class-ish households don't outsource all yard/garden work generally.
That said, I'm not sure how common getting a lawn service is among middle to lower-middle class households is.
And I'm pretty sure most middle class-ish households don't outsource all yard/garden work generally.
For a lot of garden owners the yard work is kinda the point of the garden.
Gardening is something of an exception specifically--although even there, there are landscaping projects that aren't necessarily "gardening." But, while some people do just like an excuse to get of the house and do some outside work, generally people are happy to have their lawns cut, leaved raked, brush cut, trees trimmed, etc.
In my part of the US, even in an upper middle class suburb, most of the people in my neighborhood do their own mowing and edging. I hate mowing so I’ve actually priced out lawn services and I just can’t justify it. About $40 per service (for a fairly small yard) at 4-5 times a month adds up.
I think in the US, there's often a bit of an attitude too about people doing things for you that you're perfectly capable of doing yourself. In this case, I justify it on the grounds that I usually travel a lot and, especially in the spring, the lawn does need to get cut regularly. But I just get it done every two weeks. That's on the long side in the spring but it works for me.
More of a luxury for me is having a housekeeper once a month although it's nice to have someone give the house a good cleaning now and then. It's totally unnecessary with me not traveling at the moment but I wouldn't feel right about canceling them.
More of a luxury for me is having a housekeeper once a month although it's nice to have someone give the house a good cleaning now and then. It's totally unnecessary with me not traveling at the moment but I wouldn't feel right about canceling them.
If you could work a $4/hour summer job and save up for college that way like you used to, I'm sure people would be queueing up to do it.
I know, this only holds for some interpretations of "you" and "used" to, but it wasn't that unheard of a generation or two ago.
I know, this only holds for some interpretations of "you" and "used" to, but it wasn't that unheard of a generation or two ago.
Why would they? The 4$ wage wouldn’t even scratch the surface of college costs these days. The cost/wage ration is unreal now. Gone are days where a summer paper route paid for the semester. The more rational thing to do would be to spend the time studying, or enjoy your free time before you lose it for a decade.
TomSwirly(1)
How would someone paid $4/hour be expected to sustain themselves though? Or is the expectation that they would a higher paid job and do that on the side? But then why do they need the $4 job?
> How would someone paid $4/hour be expected to sustain themselves though?
By decreased living standards and working more hours. Take a look at farm labor for an example: the work is largely done by foreign labor where their opportunities in their domestic market is even worse.
By decreased living standards and working more hours. Take a look at farm labor for an example: the work is largely done by foreign labor where their opportunities in their domestic market is even worse.
The point is that you can’t pay $4, for the very reasons you mention.
To be clear, I'm not advocating for $4/hr jobs. The parent asked what jobs don't exist because there generally aren't $4/hr jobs for valid reasons.
[And yes, low income jobs may make sense for kids doing babysitting, etc.]
By and large you need a pretty large disparity between middle income jobs and unskilled but reliable labor for a lot of the jobs to exist except for truly wealthy individuals.
[And yes, low income jobs may make sense for kids doing babysitting, etc.]
By and large you need a pretty large disparity between middle income jobs and unskilled but reliable labor for a lot of the jobs to exist except for truly wealthy individuals.
The point is $4/hour isn’t sustainable in part due to more-productive people bidding up the cost of living and in part due to almost everyone having better options for employment (or unemployment).
[deleted]
Lots of people can do useful work without being sole breadwinners, and can use money even in small amounts.
Homemakers doing part time work, kids or young people making money (and getting experience) after school, retirees, disabled people on benefits (who may be able to work in limited capacity), travelers/itinerants, or people taking extra quick work on the side like you said.
Homemakers doing part time work, kids or young people making money (and getting experience) after school, retirees, disabled people on benefits (who may be able to work in limited capacity), travelers/itinerants, or people taking extra quick work on the side like you said.
rasz(1)
Having a full time maid. It was pretty common for middle class households in UK to be able to afford servants. Whole sections of middle class housing from the late 1800s in London have servants quarters. Most middle class families in India/Pak/Bangladsh have servants (even live in).
Having productive industries absorbing excess labor means that the average middle class family can no longer afford to have full time maids/servants. This is a good thing...
Having productive industries absorbing excess labor means that the average middle class family can no longer afford to have full time maids/servants. This is a good thing...
You can go to India and see exactly this. Even many middle income families have cleaning maids, drivers, etc also known as "servants". The job of "servant" no longer exists in the west.
>The job of "servant" no longer exists in the west.
It's something of a matter of terminology. That would be seen as a generally inappropriate term in the US. Although people do have au pairs/nannies. And they certainly have plenty of regular service people like lawn services who they share with others. Or personal assistants. But, yes, the relationship is generally different. And there's far less of it.
It's something of a matter of terminology. That would be seen as a generally inappropriate term in the US. Although people do have au pairs/nannies. And they certainly have plenty of regular service people like lawn services who they share with others. Or personal assistants. But, yes, the relationship is generally different. And there's far less of it.
A 1hour/week service is not a servant. A full-time person is. and a single servant that enables a second working parent is a rather minor example, showing specialization more than income inequality.
I don't believe you.
Cleaning Maids are just called "Cleaning Services"
Cleaning Maids are just called "Cleaning Services"
The "Cleaning Services" people in the U.S. and I suspect Europe are either independent contractors or wage workers for an independent contractor. They don't do 8-plus hour shifts in your home, or even live in your own home in "servants' quarters" as is common in places like India, Brazil, etc.
In a "servant" relationship involving close physical proximity the servant almost is obliged to care for the emotional well-being of those whom they serve, or to at least feign that care. The contractor on the other hand is doing a job at your home in one of many such places and aren't expected to service the customer's emotional needs except as social nicety, and conceivably are raking in more cash per unit-time worked (for independents especially) than those who hire them.
The "Cleaning Services" aren't servants.
edit: emotional "connection", relative wages
In a "servant" relationship involving close physical proximity the servant almost is obliged to care for the emotional well-being of those whom they serve, or to at least feign that care. The contractor on the other hand is doing a job at your home in one of many such places and aren't expected to service the customer's emotional needs except as social nicety, and conceivably are raking in more cash per unit-time worked (for independents especially) than those who hire them.
The "Cleaning Services" aren't servants.
edit: emotional "connection", relative wages
I would describe it from another perspective.
Servant living in someones quarters is dependent on his employer. Such person probably does not have enough freedom to change employer.
Contractor on the other hand should be able to refuse to work for someone if he does not like it and find another customer. So it should be more of a partnership relation.
In reality of course it is not so clear cut, but personal freedom element is more important for me than "emotional well-being" or "social nicety". Especially because I would expect "social nicety" from any contractor I hire and if I would have to deal with obnoxious contractor I would not hire them again. But of course I would not expect them to know my children names.
Servant living in someones quarters is dependent on his employer. Such person probably does not have enough freedom to change employer.
Contractor on the other hand should be able to refuse to work for someone if he does not like it and find another customer. So it should be more of a partnership relation.
In reality of course it is not so clear cut, but personal freedom element is more important for me than "emotional well-being" or "social nicety". Especially because I would expect "social nicety" from any contractor I hire and if I would have to deal with obnoxious contractor I would not hire them again. But of course I would not expect them to know my children names.
In Asia/Middle East they are simply slaves https://www.bbc.com/news/technology-50228549
"Slave market
Nine out of 10 Kuwaiti homes have a domestic worker - they come from some of the poorest parts of the world to the Gulf, aiming to make enough money to support their family at home.
The sellers almost all advocated confiscating the women's passports, confining them to the house, denying them any time off and giving them little or no access to a phone.
The 4Sale app allowed you to filter by race, with different price brackets clearly on offer, according to category.
"African worker, clean and smiley," said one listing. Another: "Nepalese who dares to ask for a day off." "
"Slave market
Nine out of 10 Kuwaiti homes have a domestic worker - they come from some of the poorest parts of the world to the Gulf, aiming to make enough money to support their family at home.
The sellers almost all advocated confiscating the women's passports, confining them to the house, denying them any time off and giving them little or no access to a phone.
The 4Sale app allowed you to filter by race, with different price brackets clearly on offer, according to category.
"African worker, clean and smiley," said one listing. Another: "Nepalese who dares to ask for a day off." "
[deleted]
In some areas:
A 100 years ago Americans had live in servants/slaves in about half of households (like what you see in parts of India, Asia, etc.).
As income inequality decreases, there are fewer servants in the home 24/7. Society has a transition as rates of abject poverty decrease. It will be interesting to witness the transition in Asia as they go through this.
A 100 years ago Americans had live in servants/slaves in about half of households (like what you see in parts of India, Asia, etc.).
As income inequality decreases, there are fewer servants in the home 24/7. Society has a transition as rates of abject poverty decrease. It will be interesting to witness the transition in Asia as they go through this.
Half? Really?
Highly recommend people follow up the Wikipedia article with this great piece on further implications of the Baumol Effect:
https://marginalrevolution.com/marginalrevolution/2019/05/th...
https://marginalrevolution.com/marginalrevolution/2019/05/th...
A side effect of this is that if your individual productivity goes up, your real wage might go up, but if your whole industry’s productivity goes up, it’ll be mitigated by this effect.
Kinda like how everything in SF is so expensive, so the real wage is diminished by the increasing cost of living.
Kinda like how everything in SF is so expensive, so the real wage is diminished by the increasing cost of living.
SF is an aberration because relocated high-income earners and rich people move in and raise prices because they out-compete for limited resources by throwing money around (out-bidding real estate) and/or sellers raising prices knowing the upper-crust will still pay them.
SF also is a problem for anyone not making more than $150k/year because it's a magical wonderland where everyone wants to live there, and so they're willing to irrationally sacrifice their financial futures to hang-on to something they can't afford, i.e., paying 50%+ income in rent, unable to contribute 10% to savings, and other forms of financial suicide.
How lower income people make it in SF, even with rent controls, seems like an unsustainable proposition.
I think a better way of measuring of microeconomic affordability is a reasonable budgeted cost-of-living for one person per month in a median housing situation in relation to their potential income. In other words, or thought of another way, the ratio of cost-of-living to income in local nominal dollars.
SF also is a problem for anyone not making more than $150k/year because it's a magical wonderland where everyone wants to live there, and so they're willing to irrationally sacrifice their financial futures to hang-on to something they can't afford, i.e., paying 50%+ income in rent, unable to contribute 10% to savings, and other forms of financial suicide.
How lower income people make it in SF, even with rent controls, seems like an unsustainable proposition.
I think a better way of measuring of microeconomic affordability is a reasonable budgeted cost-of-living for one person per month in a median housing situation in relation to their potential income. In other words, or thought of another way, the ratio of cost-of-living to income in local nominal dollars.
Rent controls don't help the poor, the help incumbent tenants at the expense of future tenants and housing quality.
This is not mutually exclusive though. When the incumbents are poor to start with, it does help them from not being gentrified out of their homes.
Between scenario A: rent control, some poor people are helped, others are not and scenario B: all poor people are forced out of the neighborhood, A starts to look acceptable.
Until that is, someone comes up with a workable scenario C that helps even more people than A. (UBI looks great in theory, but I think the "workable" part needs some more work.)
Between scenario A: rent control, some poor people are helped, others are not and scenario B: all poor people are forced out of the neighborhood, A starts to look acceptable.
Until that is, someone comes up with a workable scenario C that helps even more people than A. (UBI looks great in theory, but I think the "workable" part needs some more work.)
A side effect of this is that if your individual productivity goes up, your real wage might go up, but if your whole industry’s productivity goes up, it’ll be mitigated by this effect.
Articles telling us to focus on team, rather than individual, productivity should probably be viewed through this lens.
Articles telling us to focus on team, rather than individual, productivity should probably be viewed through this lens.
Can this all be explained by the cost of labor being uniform (since humans are humans in all industries)?
So if one industry demands more labor, all others will feel the rising price of labor?
So if one industry demands more labor, all others will feel the rising price of labor?
It can be explained if you cost things in hours rather than money.
As we improve technology fewer and fewer hours are required to create an item. But a violin concerto takes the same amount of human time.
Which then leads to the conclusion that we really exchange time when trading. Each of us only has a finite amount of time after all.
As we improve technology fewer and fewer hours are required to create an item. But a violin concerto takes the same amount of human time.
Which then leads to the conclusion that we really exchange time when trading. Each of us only has a finite amount of time after all.
The cost of labor is far from uniform.
A FAANG employee's labor is higher than a Uber driver's, driven by both supply (most people can drive an Uber) and demand (FAANG companies make a lot of money, something like >$1mm per engineer).
But getting back to the article, it only looks at the productivity of industries (which speaks to demand for certain types of labor), but the cost of training, say, a string quartet musician hasn't markedly decreased since the cost of education also hasn't fallen much.
A FAANG employee's labor is higher than a Uber driver's, driven by both supply (most people can drive an Uber) and demand (FAANG companies make a lot of money, something like >$1mm per engineer).
But getting back to the article, it only looks at the productivity of industries (which speaks to demand for certain types of labor), but the cost of training, say, a string quartet musician hasn't markedly decreased since the cost of education also hasn't fallen much.
If we talk about a highly skilled programmer requiring a lot of labor to produce, then we talk about something like "amortized labor" having uniform cost (the article mentions that it takes a lot of labor produce an orchestra player, for example). Even if some people are more skilled than other, if it takes a lot of labor to figure out who's really talented, you can price things this way.
That depends how you measure costs.
As a human, working for a for-profit tech company for 8 hours coats approximately the same amount of energy / effort as volunteering for a non-profit tech company, but it costs the organization vastly different amounts of money.
As a human, working for a for-profit tech company for 8 hours coats approximately the same amount of energy / effort as volunteering for a non-profit tech company, but it costs the organization vastly different amounts of money.
Kind of, but that's a roundabout way of saying "opportunity cost".
I would be more interested in seeing the other thing - that increase in productivity results in higher salary.
(It is taken from granted, but it does not seem to be the case in service-oriented jobs. More productivity means less people are needed to do the job, and while customers are happier at falling prices, it does not mean there is any benefit for the employees - except for lay offs.)
(It is taken from granted, but it does not seem to be the case in service-oriented jobs. More productivity means less people are needed to do the job, and while customers are happier at falling prices, it does not mean there is any benefit for the employees - except for lay offs.)
Applying a vastly simplified model, every job has a salary range possible:
From the company's side: At most the amount of money you make the company, and at most the cost of hiring a replacement who could do the same job equally well.
From your side: At least the second-best job offer you've received.
Raising productivity is often a prerequisite for raising salaries - but you also need a tough hiring market, if you want the business to give the money to the workers instead of the bosses, investors or customers.
From the company's side: At most the amount of money you make the company, and at most the cost of hiring a replacement who could do the same job equally well.
From your side: At least the second-best job offer you've received.
Raising productivity is often a prerequisite for raising salaries - but you also need a tough hiring market, if you want the business to give the money to the workers instead of the bosses, investors or customers.
I first encountered this idea and "cost disease" in this SSC article: https://slatestarcodex.com/2017/02/09/considerations-on-cost...
There are several interesting follow ups as well; I think this is one of the most interesting and important ideas I've ever read about.
There are several interesting follow ups as well; I think this is one of the most interesting and important ideas I've ever read about.
Planet Money has a good 3 and 1/2 minute overview as well: https://www.npr.org/2019/10/04/767095401/the-baumol-effect-a...
> This pattern seemingly goes against the theory in classical economics in which real wage growth is closely tied to labor productivity changes.
That sounds like a pretty big assumption. Why should labor prices be other than what is demanded?
That sounds like a pretty big assumption. Why should labor prices be other than what is demanded?
Because if market is efficient the wage should equal marginal product of labor, which is basically what defines productivity.
Also, it says “seemingly”, i.e. if you don’t take a closer look. In fact it completely reflects predictions of classical economics. It’s just that the model is more complex because it has heterogeneous sectors.
Also, it says “seemingly”, i.e. if you don’t take a closer look. In fact it completely reflects predictions of classical economics. It’s just that the model is more complex because it has heterogeneous sectors.
Not trying to be obtuse, but why should an employer want to employ anyone at all if the market was effecient?
Because access to capital gives employer some fraction of employee productivity as a reward. The exact fraction depends where exactly they land in the zone of possible agreement. In transactions (even efficient ones) there is usually hysteresis.
Coase would have said transaction costs. An efficient market doesn't imply no transaction costs. And if you take things out of economic theory it's pretty obvious why you'll hire people for some things and not for others.
Well, in an ideal model there is indeed no difference between any such decision.
But as you can ask “why should an employee do something”, you can also ask “why shouldn’t an employee do something”?
But as you can ask “why should an employee do something”, you can also ask “why shouldn’t an employee do something”?
It's weird they'd say "classical economics" - the Baumol article links indeed to classical economics/classical political economy but the linked article doesn't bear out the claim. The actual situation is that the original field known as "classical political economy" made the claim that wages are indeed a matter of the cost of reproducing laborers whereas a "modern economics" or "neoclassical economics" as a field/label is where the claim that real wages are tied to labor productivity changes appeared. The particular wages-productivity theory seems to have been articulated around the 1930s [2].
[1] https://en.wikipedia.org/wiki/Classical_economics
[2] https://en.wikipedia.org/wiki/Marginal_revenue_productivity_...
[1] https://en.wikipedia.org/wiki/Classical_economics
[2] https://en.wikipedia.org/wiki/Marginal_revenue_productivity_...
In the absence of a prevailing theory (in this case, supply-and-demand), people tend to go with their biases (in this case, the notion that every input that goes towards producing a product is comparably in value to the finished product). Here the example is the increase in the value of labor because some other more productive use can be found for the labor. Other times its the apparent discrepancy between a low-income worker contributing to the production of a high-value item.
Agreed. Classical economics would say that as the labor supply is restricted workers would switch careers or be initially trained in careers that give them the most reward for their work. This means that candidates for the "retail manager" case would either be of lower quality or harder to find so increases in wages would be seen to offset that.
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Prices (of goods, services and work) are in huge part influenced by affluence of the buyer.
I'm not sure if this effect is captured by some economic theory (can someone point me to it?) but it's very real.
On the local level where same goods can have very different prices if the local customers can afford higher prices.
Also on national level when real estate prices shot up when credit becomes more available due to change of rules.
I'm not sure if this effect is captured by some economic theory (can someone point me to it?) but it's very real.
On the local level where same goods can have very different prices if the local customers can afford higher prices.
Also on national level when real estate prices shot up when credit becomes more available due to change of rules.
That economic theory is a combination of supply-and-demand and collusion.
Does it take into account money supply on customer side?
My impression was that it only considers supply and demand of a given good, treats money differently as something else that everybody has infinite demand for and wants to supply in minimal quantity in exchange for good.
Is there a theory that treats money just as any other good? With limited demand and sometimes oversupply?
My impression was that it only considers supply and demand of a given good, treats money differently as something else that everybody has infinite demand for and wants to supply in minimal quantity in exchange for good.
Is there a theory that treats money just as any other good? With limited demand and sometimes oversupply?
Using their first example, the factory workers world take their extra, efficiency-induced earnings to market, and buy more services and luxury goods, increasing the profits in nearby but not more efficient sectors. And so those managers and workers in the example could in fact be paid more.
India is Unique; It has Producers, Consumers and Leeches; https://archive.vn/pOmij
Do we see Baumol's effect with Indian developers?
Maybe the way we calculate "real cost" is wrong?
This kind of hand-wavey nonsense is exactly why I have no respect for what passes for rational argument in conventional economics.
Let's deconstruct these assumptions:
"Baumol and Bowen pointed out that the same number of musicians is needed to play a Beethoven string quartet today as was needed in the 19th century; the productivity of classical music performance has not increased. On the other hand, the real wages of musicians (as in all other professions) have increased greatly since the 19th century."
1. Yes, string quartets still require four people.
2. This does not mean the "productivity of classical music has not increased", because:
a. String quartets can now make recordings and also play on radio/TV/streaming services, in addition to playing live. This means much larger numbers of people can hear a performance. This translates to ad revenue, streaming income, and sales of recordings. And there is also secondary income of various kinds for various supporting industries, including other forms of media.
b. String quartets can travel much larger distances than they used to be able to, allowing them to play live music over a much wider area than was possible when the fastest mode of transport was a horse. This hugely increases the possible listener base and potential ticket sales.
c. Culturally notable string quartets are likely to play in much larger concert halls than used to be the case, with increased direct ticket income.
d. The classical music industry is far more commercialised. There are numerous festivals and concert series which bring in far more money than they did when owning a pet orchestra was an eccentric hobby for aristocrats.
e. There are far more people than there used to be in the 19th century, and the worldwide classical music audience is much larger than it used to be.
So - this is simply a bad, ignorant example. It's not just wrong, it's flagrantly, wildly, outrageously misinformed, and is based on an almost total lack of insight into an industry that is worth $146 million a year - of which around $90 million is income from streaming.
The other examples are just as ridiculous and trivially incorrect. The productivity of nurses is not defined by the time it takes to change a bandage - ask any ICU nurse - and the productivity of professors is not measured by the time it takes to mark an essay.
How is anyone supposed to take this level of argumentation seriously when there is no evidence the authors made a credible professional effort to understand the economics of their own examples?
And as an advanced exercise for economists - how much has this poor level of economic insight cost the economy?
Let's deconstruct these assumptions:
"Baumol and Bowen pointed out that the same number of musicians is needed to play a Beethoven string quartet today as was needed in the 19th century; the productivity of classical music performance has not increased. On the other hand, the real wages of musicians (as in all other professions) have increased greatly since the 19th century."
1. Yes, string quartets still require four people.
2. This does not mean the "productivity of classical music has not increased", because:
a. String quartets can now make recordings and also play on radio/TV/streaming services, in addition to playing live. This means much larger numbers of people can hear a performance. This translates to ad revenue, streaming income, and sales of recordings. And there is also secondary income of various kinds for various supporting industries, including other forms of media.
b. String quartets can travel much larger distances than they used to be able to, allowing them to play live music over a much wider area than was possible when the fastest mode of transport was a horse. This hugely increases the possible listener base and potential ticket sales.
c. Culturally notable string quartets are likely to play in much larger concert halls than used to be the case, with increased direct ticket income.
d. The classical music industry is far more commercialised. There are numerous festivals and concert series which bring in far more money than they did when owning a pet orchestra was an eccentric hobby for aristocrats.
e. There are far more people than there used to be in the 19th century, and the worldwide classical music audience is much larger than it used to be.
So - this is simply a bad, ignorant example. It's not just wrong, it's flagrantly, wildly, outrageously misinformed, and is based on an almost total lack of insight into an industry that is worth $146 million a year - of which around $90 million is income from streaming.
The other examples are just as ridiculous and trivially incorrect. The productivity of nurses is not defined by the time it takes to change a bandage - ask any ICU nurse - and the productivity of professors is not measured by the time it takes to mark an essay.
How is anyone supposed to take this level of argumentation seriously when there is no evidence the authors made a credible professional effort to understand the economics of their own examples?
And as an advanced exercise for economists - how much has this poor level of economic insight cost the economy?
Your argument is simply wrong. Or rather, you take one interpretation of the situation and then denigrate in over-the-top terms all the other interpretations.
An orchestra produces a single unique performance. The productivity of the system of producing single, unique performance has no changed.
You're saying that this single unique performance can be reproduced - sure, that's true but now it's a different product. And certainly, that can increase the price of the final product. A programmer produces programs. Those programs are eventually reproduced on computers on a small or a large scale. A programmer producing a program used by few people still must be paid a salary similar to a programmer producing a program used across the globe - the cost of the program itself has to make up for this, if it doesn't, the programming isn't going to happen.
Moreover, the orchestra example is ... just an example. There are quite a lot of other fields requiring skilled workers, where the productivity has stayed fairly steady.
An orchestra produces a single unique performance. The productivity of the system of producing single, unique performance has no changed.
You're saying that this single unique performance can be reproduced - sure, that's true but now it's a different product. And certainly, that can increase the price of the final product. A programmer produces programs. Those programs are eventually reproduced on computers on a small or a large scale. A programmer producing a program used by few people still must be paid a salary similar to a programmer producing a program used across the globe - the cost of the program itself has to make up for this, if it doesn't, the programming isn't going to happen.
Moreover, the orchestra example is ... just an example. There are quite a lot of other fields requiring skilled workers, where the productivity has stayed fairly steady.
"The phenomenon was described by William J. Baumol and William G. Bowen in the 1960s."
I imagine streaming services were not a thing back then.
Also you make fair points in your comments but you confuse the example for the argument. Replace 'String Quartet' by 'waiter' or 'child minder' if you prefer.
I imagine streaming services were not a thing back then.
Also you make fair points in your comments but you confuse the example for the argument. Replace 'String Quartet' by 'waiter' or 'child minder' if you prefer.
Well, there was a fairly huge streaming service called FM Radio that had a huge audience at the time.
I think the issue is that you measure productivity as in quantitative physical output instead of in value as driven by supply and demand. Absolute value increases due to inflation even though the supply/demand ratio is the same.
> Absolute value increases due to inflation
For a meaningless definition of absolute, where it coïncides with “nominal,” yes.
For a meaningless definition of absolute, where it coïncides with “nominal,” yes.
Do your analysis per-capita, please; as a former gigging musician, I assure you that it doesn't matter how much money is being given to the Big Four by streaming services, it only matters how many gigging hours there are per week. And the number of gigging hours per week is limited, and the amount of music produced per gigging hour has not changed in centuries.
This is a bad, ignorant example. Not just wrong, but flagrantly, wildly, outrageously misinformed.
This is a bad, ignorant example. Not just wrong, but flagrantly, wildly, outrageously misinformed.
I had a similar reaction re: professors.
Sure, it takes the same amount of time to mark an essay. But it takes much less time to score exams and to administer them.
Writing research papers takes much, much, much less time because of word processors, online submission systems, copyediting changes, and so forth. A lot of research itself takes less time to do because of statistical analysis libraries, computerized administration and recruitment, etc etc etc
This is actually something I've heard older, very professors lament -- some of them have claimed that when, say, papers took longer to produce, you had more time to think when things were being mailed back and forth, and there wasn't so much of a factory approach to paper writing where they were treated as widgets. I'm not saying I agree or disagree with this necessarily but I'm really skeptical of claims that productivity hasn't risen in certain fields.
Now you can get into a discussion of "real" versus "false" productivity gains but that's a little different.
Sure, it takes the same amount of time to mark an essay. But it takes much less time to score exams and to administer them.
Writing research papers takes much, much, much less time because of word processors, online submission systems, copyediting changes, and so forth. A lot of research itself takes less time to do because of statistical analysis libraries, computerized administration and recruitment, etc etc etc
This is actually something I've heard older, very professors lament -- some of them have claimed that when, say, papers took longer to produce, you had more time to think when things were being mailed back and forth, and there wasn't so much of a factory approach to paper writing where they were treated as widgets. I'm not saying I agree or disagree with this necessarily but I'm really skeptical of claims that productivity hasn't risen in certain fields.
Now you can get into a discussion of "real" versus "false" productivity gains but that's a little different.
Another example - reference managers are a very specialized piece of word processing software that means researchers no longer have to renumber footnotes when editing their papers. If you make a derivative work, like if you give a talk on the paper, you can cut down the paper and the reference manager will automatically give you a bibliography slide for your presentation, with only the relevant citations included.
This is pretty much what I wanted to write. How come productivity is measured in dollars when exchanging goods/services, but constant units when this Baumol thing comes up?
The simplest way to resolve the paradox is that you have a society that becomes more productive over time, and that everyone shares in the increased productivity due to the negotiation process. If you can fish and I can cook, and you discover how to 10x your fishing output while I sit on the beach, you are still going to give me more than whatever amount of fish I got before.
The other thing about Baumol - not his fault - is you often see it quoted as a sort of club to beat people with if you don't like how they make their money. And the fact that it's an economist gives it a respectability that makes people hesitate before asking more.
The simplest way to resolve the paradox is that you have a society that becomes more productive over time, and that everyone shares in the increased productivity due to the negotiation process. If you can fish and I can cook, and you discover how to 10x your fishing output while I sit on the beach, you are still going to give me more than whatever amount of fish I got before.
The other thing about Baumol - not his fault - is you often see it quoted as a sort of club to beat people with if you don't like how they make their money. And the fact that it's an economist gives it a respectability that makes people hesitate before asking more.
" This is pretty much what I wanted to write. How come productivity is measured in dollars when exchanging goods/services, but constant units when this Baumol thing comes up?"
From an economist perspective there is no difference between the two. Money is just a convenient metric to be able to compare the value of multiple goods.
You don't think of you salary as the power to buy X burgers or Y beers but really it is what it is. It is just easier to say I earn XXXX$.
From an economist perspective there is no difference between the two. Money is just a convenient metric to be able to compare the value of multiple goods.
You don't think of you salary as the power to buy X burgers or Y beers but really it is what it is. It is just easier to say I earn XXXX$.
The difference is the price, no?
If I get paid 100 for playing a concert on one day, but 120 another day, did I get more productive? Either way I produced the same number of concerts, but got 20% more payment.
Measured in concerts my productivity was the same. Measured in other goods it went up.
If I get paid 100 for playing a concert on one day, but 120 another day, did I get more productive? Either way I produced the same number of concerts, but got 20% more payment.
Measured in concerts my productivity was the same. Measured in other goods it went up.
Maybe it has, or maybe wages are not the same, or it's not really the same product. I'm a jazz musician, and my gig pay has stayed steady at about $100/night for 40 years, though my skill has improved. A lot of people who would have been classical musicians during the classical period are now working as church musicians for peanuts, or playing for free. Musicians playing in front of crowds of thousands didn't exist during the classical period -- the instruments weren't loud enough yet. And "classical" music has gotten harder to play.
The article mentions teachers. My teacher taught me BASIC. Today's teacher teaches Python, which is considerably more productive and valuable. College is increasingly being taught by adjuncts.
Doctors and nurses. A century ago they mostly poisoned people. Today, my primary care clinic has a "doctor" who oversees multiple nurse-practitioners and nurses, and who I see only once a year.