I agree that it the cost diseased is misused and given as an excuse for inefficient organisations.
However, in the cases it does exist, it would mean classical labour economics no longer applies.
No longer are wages equal to marginal productivity and that has knock on ramifications for a lot of theory.
If you don’t know what Baumols cost disease is, essentially:
In certain labour intensive jobs, productivity growth is small relative to productivity growth in the rest of the economy. However, these labour intensive jobs are important to the functioning of the economy, hence these jobs receive pay rises above productivity, otherwise their pay would be so low and they would move to another sector of the economy. There pay is no longer related to their marginal productivity.
Two key examples are college tutors (not professors who give lectures) who mark essays, teach tutorials - the activities in their job are labour intensive. It would take them 20 minutes to mark an essay 20 years ago and 20 minutes in the present. However, the wages of tutors have gone up in the last 20 years.
Another example is high end haircuts, there has been no growth in productivity and the amount of time it takes to get a certain haircut 20 years ago is the same as it is today. However, we pay our barbers more. BTW I say high end, because of the proliferation of productivity enhancing electric razors in the low end barber sector.
This is an interesting topic, which was some I found bugging me after reading Baumol and Bowen’s original paper.
I think one answer is that the marginal productivity of the less productive job went up whenever any other jobs become more productive. Proof.
Suppose a function ‘output’ of ‘machinery’ and ‘labour’. Hold labour constant while taking derivative of machinery. As you increase quantity of machinery, marginal product of an additional effective worker hour (which was constant) rises. Why? Because the two are complementary.
Suppose, now, that marginal product of machinery increases. It can only increase at decreasing rate so long as marginal product of labour is constant and not increases side by side.
Therefore, if we consider all production technologies as one sector, we see that if one become more productive, then the other gains a bit also.
Now, this proof is not satisfactory to me, because it requires constructing a single aggregate production function.
It sounds like it misunderstands marginal productivity.
Workers are essentially paid for the marginal value of their labor. Let’s take hair stylists for example. If everyone in other sectors becomes more productive and wealthy, then the demand for things such as high-end hair cuts will rise. This makes the hair stylist’s work more productive in the sense that it is valued more highly. Therefore, if his/her pay does not rise, then he is getting paid less than his productivity contributes, even though he is still doing the same work. Because the cost of the hair cuts will rise due to increased demand, it will be profitable to increase their pay, or else some other employer can profitably do so.
To say that a workers real wage should stay the same unless he is physically doing more feels like the LTV to me. It doesn’t take into account that the value of the worker’s work is in fact subjective, so that the same work as 20 years ago may not be valuable or in other words, productive.
Everybody gets paid more than they did 20 years ago. You have a devaluing currency, you must adjust your numbers for inflation. And in the case of college education there has been a ton of inflation (For very little long term value to the educated individuals).
Also keep in mind that both the demand and supply curves are PREFERENCE curves. Nothing is absolute. My value to one person may be $1000 per hour and to another 10 cents/hour. Further more I may take less money to be part owner in the business or take less money for better hours or education in the case of the tutor, or apprentice time in the case of the barber. The point is that there are a lot of reasons why I would work at one place for less than another and there are a lot of reasons why one person chooses to take lower salary in lieu of something else.
Value and productivity are different things. what is LTV?
Let me put it to you in simple terms, if all a tutor does is mark essays and obviously productivity cannot rise in essay marking, why is the tutors wage higher in the present when compared to 20 years ago?
And yes, value and productivity are different things. Wage earners make wages based on the value of their labor, which may or may not be dependent on the foreseen physical productivity of their labor.
In the case of tutors, colleges and universities have to compete with other businesses for their student’s time. When a student decides to become a tutor, they are incurring an opporotunity cost of not being able to work elsewhere at that time. The only way the college can make this cost worthwhile for students is to offer wages somewhat proportional to the wages students could earn elsewhere.
Essentially, over the period of 20 years laborers time has become more valuable, and so, businesses looking to hire them have to pay more in order to compete.