Could someone please explain the Baumol effect?

Question

Wikipedia says:

"It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth. The rise of wages in jobs without productivity gains is caused by the necessity to compete for employees with jobs that did experience gains and hence can naturally pay higher salaries, just as classical economics predicts."

I don't get this. If I am a nurse who in the early 20th century helped maintain the health of a worker who produced one car each year and if 100 years later I help maintain the health of a worker who produced 10 cars each year, has my productivity not increased because I am keeping a more productive worker "running." This argument makes more sense if you consider that the worker himself has become more productive only because his work today is keeping a technologically superior factory running (not necessarily because he got faster or smarter).

Answer 1

Baumol's cost disease (also known as the Baumol Effect) is a phenomenon described by William J. Baumol and William G. Bowen in the 1960s. It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth. This goes against the theory in classical economics that wages are always closely tied to labor productivity changes.

The rise of wages in jobs without productivity gains is caused by the necessity to compete for employees with jobs that did experience gains and hence can naturally pay higher salaries, just as classical economics predicts. For instance, if the music industry pays its musicians 19th century style salaries, the musicians may decide to quit and get a job at an automobile factory where salaries are commensurate to high labor productivity. Hence, musicians' salaries are increased not due to labor productivity increases in the music industry, but rather due to productivity and wage increases in other industries.

The original study was conducted for the performing arts sector. Baumol and Bowen pointed out that the same number of musicians are needed to play a Beethoven string quartet today as were needed in the 1800s; that is, the productivity of Classical music performance has not increased. On the other hand, wages of musicians (as well as in all other professions) have increased greatly since 19th century.

In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually getting more productive due to technological innovations to their tools and equipment. In contrast, in some labor-intensive sectors that rely heavily on human interaction or activities, such as nursing, education, or the performing arts there is little or no growth in productivity over time. As with the string quartet example, it takes nurses the same amount of time to change a bandage, or college professors the same amount of time to mark an essay, in 2006 as it did in 1966.

Baumol's cost disease is often used to describe the lack of growth in productivity in public services such as public hospitals and state colleges. Since many public administration activities are heavily labor-intensive there is little growth in productivity over time. As a result growth in the GDP will generate little more resources to be spent in public sector. Thus public sector production is more depended on taxation level than growth in the GDP.