Tuesday, October 22, 2019

econlife - How Healthcare Is Like Car Repair by Elaine Schwartz

When we think of productivity, Lucy, Ethel, and some smiles could be a good starting point:

Since the Lucy episode in 1952, each worker can make many more chocolates per hour. We have people in charge of machines that can move far faster (and eat much less) than Lucy and Ethel:

Here is where the Baumol’s Cost Disease enters the picture.

Baumol’s Cost Disease

Listening to four musicians play Beethoven’s string quartet #14 for 40 minutes, there is no way to guess the date. The performance could be 1826 or 1926 or 2026. The music, the pace, the instruments are all pretty much the same.

However, since 1826, people are getting paid more. In 1826, the average real wage for a typical worker was $1.14 an hour. Fast forward to 2010 and you have $26.44. Most workers are paid more because they produce more.

But not our string quartet. It still takes 40 minutes to play the same Beethoven piece and probably the same amount of preparation time.

Called Baumol’s cost disease (or the Baumol Effect), we have wage increases for workers without productivity increases. Because their labor depends on a human input that cannot go up, more productivity is impossible. And yet still, their wages rise when everyone else earns more. And, as society’s affluence grows, we could want more Beethoven even though its cost ascends.

Our Bottom Line: Healthcare Costs

According to Baumol’s cost disease, it’s tough to increase productivity when a task depends on a person. You cannot play the Beethoven piece faster. A physician still has to see patients personally, A car repair ship will need technicians to do some of the work and instructors need the same hour to teach a concept. Yes, I know that technology can enter health care and car repair and there is more media in the classroom. But still the role of people remains important.

As the more productive sectors of the economy increase our wealth, we want more of the areas with limited productivity like healthcare, education, and car repair. As Marginal Revolution’s Alex Tabarrok explains, we have more doctors and nurses even though they are paid more. Their higher pay and our increased demand nudge healthcare costs skyward:

And, returning to our title, because healthcare and car repair both have Baumol’s cost disease, they are rather similar.

My sources and more: Thanks to Marginal Revolution for its summary of the Baumol Effect. But then for more, do take a look at, Why Are The Prices So D*mn High?

After publication, this post was slightly edited to improve its clarity.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.