They have a good argument that the Baumol effect explains a significant fraction of cost disease.
Much of their point is that it’s not surprising that some industries have better productivity growth than others.
But they don’t have a full explanation of the extent to which productivity growth varies by industry. Why do medical productivity trends appear much worse than auto repair productivity trends? What caused the pharmaceutical industry to become less productive?
A key distinction is when labor is an input into the good or service and when labor, in essence, is the service. Consumers do not care how much labor is used as an input into the production of a car, but they do care how much labor input is used in a massage, artistic performance, or doctor’s visit.
That’s pointing in the right general direction, but I expect a full explanation would also involve consumers being unwilling or unable to switch to companies that offer cheaper services.
They have a good argument that the Baumol effect explains a significant fraction of cost disease.
Much of their point is that it’s not surprising that some industries have better productivity growth than others.
But they don’t have a full explanation of the extent to which productivity growth varies by industry. Why do medical productivity trends appear much worse than auto repair productivity trends? What caused the pharmaceutical industry to become less productive?
Their partial answer seems to be Hansonian:
That’s pointing in the right general direction, but I expect a full explanation would also involve consumers being unwilling or unable to switch to companies that offer cheaper services.