Understanding Economic Equilibrium

CHAPTER 29

Baumol Cost Disease: The Relationship Between Wages and Productivity

As we have seen, increases in productivity increase worker output, which in turn leads to potentially higher wages divided among more people and lower costs. It is how economies move forward. But there are some industries, in particular the live arts, where productivity gains aren’t possible.

Consider a string quartet. Four people take the same amount of time to play a Bach fugue as when he wrote it in the early eighteenth century. You might be able to fit more people into a theater to hear it, but little else has changed. The pianist at Carnegie Hall playing a Beethoven piano concerto is no more productive than the pianist who played it when the Hall opened in the ...