Baumol Effect
en.wikipedia.org
en.wikipedia.org
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.
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.
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.
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).
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.
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 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.
https://www.successfulindependentconsulting.com/blog/how-and...
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.
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.
Like, work we would still like to pay someone for, but now the minimum wages are too high.
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.
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.
> 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.
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."
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.
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.
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.
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.
[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.
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.
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.
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...
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.
Cleaning Maids are just called "Cleaning Services"
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
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.
"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." "
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.
https://marginalrevolution.com/marginalrevolution/2019/05/th...
Kinda like how everything in SF is so expensive, so the real wage is diminished by the increasing cost of living.
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.
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.)
Articles telling us to focus on team, rather than individual, productivity should probably be viewed through this lens.
So if one industry demands more labor, all others will feel the rising price of labor?
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.
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.
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.
(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.)
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.
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.
That sounds like a pretty big assumption. Why should labor prices be other than what is demanded?
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.
But as you can ask “why should an employee do something”, you can also ask “why shouldn’t an employee do something”?
[1] https://en.wikipedia.org/wiki/Classical_economics
[2] https://en.wikipedia.org/wiki/Marginal_revenue_productivity_...
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.
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?
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?
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.
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.
For a meaningless definition of absolute, where it coïncides with “nominal,” yes.
This is a bad, ignorant example. Not just wrong, but flagrantly, wildly, outrageously misinformed.
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.
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.
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$.
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.