Technological change and capital investment drive labor costs down in different businesses and activities at different rates. Sectors that advance slowly see the relative costs of their products rise. Labor intensive service sectors - nursing, teaching, hair cutting - have tended to be among the slowly advancing sectors.
This idea that costs would rise more in labor intensive service sectors is called Baumol's disease, after the economist who popularized it. James Surowiecki explains it in the New Yorker in the column "WHAT AILS US."
"...The average college professor can?t grade papers or give lectures any faster today than he did in the early nineties. It takes a waiter just as long to serve a meal, and a car-repair guy just as long to fix a radiator hose.
The rest of the American economy functions differently. In most businesses, workers are continually getting more productive and can produce a lot more per hour than they could ten or twenty years ago. In 1979, workers at G.M. needed forty-one hours to assemble a car. Today, they need just twenty-four. In the nineties, according to the consulting firm McKinsey & Company, retailers boosted their sales per hour by sixty per cent, and that was nothing compared with computer makers, whose productivity since 1995 has gone up sixty per cent each year. Because companies are producing more for less, they can hold down costs, and when times are good they can raise wages without hiking prices. So, in the late nineties, as productivity rose, wages did, too, though inflation lay dormant.
Generally, productivity growth is a boon, but it creates problems for non-productive enterprises like classical music, education, and car repair: to keep luring talent, they have to increase wages, or else people eventually migrate to businesses that pay better. Instead of becoming nurses or mechanics, they become telecom engineers or machinists. That?s why teachers are getting paid a lot more than they were twenty years ago. (The average salary for an associate college professor has risen almost seventy per cent since the early eighties, and that?s if you adjust for inflation.) To pay those wages, schools and hospitals have to raise prices. The result is that in industries where productivity is flat costs and prices keep going up. Economists call this phenomenon ?Baumol?s cost disease,? after William Baumol, the N.Y.U. economist who first made the diagnosis..."
Arnold Kling links to essays by Hal Varian, Jack Triplett and Barry Bosworth his blog posting "Service Sector Productivity". All three are pointing to the role information technology (IT) is now playing in increasing service sector productivity. Varian's New York Times column is probably the easiest to read. Varian is writing about changing patterns of productivity growth. He notes:
"...Recently two Brookings Institution economists, Jack E. Triplett and Barry P. Bosworth, have been investigating productivity growth in the services industry and have reached a surprising conclusion: most of the post-1996 growth in productivity has come in services. (A summary of their work is available at http://www.brookings.org/views/articles/bosworth/200309.htm. The numbers in this column are based on their later, unpublished study.)...
...the recent evidence compiled by Mr. Triplett and Mr. Bosworth shows that information technology may just be the cure for Baumol's disease.
They found that from 1995 to 2001, labor productivity in services grew at a 2.6 percent rate, outpacing the 2.3 percent rate for goods-producing sectors. Furthermore, this phenomenon was widespread: 24 out of the 29 service industries they studied exhibited growth in labor productivity after 1995, and 17 experienced accelerated growth..."
Here's an example of the potential for new techologies to increase labor productivity in fisheries management. Archipelago Marine in British Columbia is pioneering innovative uses of video, remote sensing, and GPS technology to monitor fishing vessel catches. This offers the potential to reduce the costs of on-board observers, these are very expensive, and to extend monitoring onto smaller vessels where it is prohibitively expensive now. These technologies may allow a much smaller number of observers to keep tabs on the catch of any given number of vessels.
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