Cost Disease

William Baumol studied the labor market for the performing arts and made the observation that the productivity for many of them never increases.  A Beethoven-playing orchestra, for example, uses the same number of people now as it did in the time of Beethoven, while other sectors of the economy show constant increases in productivity.

Wages tend to reflect productivity increases.  But a conductor would obviously not be able to pay 1820's wages to his musicians.  Musician's wages, in contrast to the productive sectors of the economy, are a reflection of the opportunity cost: the wages in the wider labor market.  If the conductor did not raise his musicians' wages, the talent of the musicians would suffer and the music would suffer.

Over time, the cost of a ticket to an orchestra will rise compared to other, productive parts of the economy.  (It is expensive to go to a Broadway play today, but it was mass entertainment in Shakespeare's time.)

Education (and health care) suffers from cost disease:  a teacher handles about one hundred to one hundred fifty students.  That number has not changed and probably will not change over time.  Education will become relatively more costly, just like the theater.  And teacher's wages must increase for the same reason that musician's wages must increase.

Many of the enthusiasts of education technology believe that it could solve Baumol's cost disease by  enabling teachers to handle more students.  (In other words, by requiring fewer teachers)  While there has been plenty of technological breakthroughs over the past hundred years, teachers have  maintained the same level of productivity.  

Much of the new technology, as well as the focus on data, will have the unintended effect of exacerbating Baumol's cost disease:  teachers will have to add technology and data manipulation to their required skills.

Are we prepared to pay them for it?

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