12 ms·

Baumol Effect

123 points by dedalus 6y ago

aaron-santos 6y ago
> This pattern seemingly goes against the theory in classical economics in which real wage growth is closely tied to labor productivity changes. That sounds like a pretty big assumption. Why should labor prices be other than what is demanded?
- mlindner 6y ago
  Agreed. Classical economics would say that as the labor supply is restricted workers would switch careers or be initially trained in careers that give them the most reward for their work. This means that candidates for the "retail manager" case would either be of lower quality or harder to find so increases in wages would be seen to offset that.
- chordalkeyboard 6y ago
  In the absence of a prevailing theory (in this case, supply-and-demand), people tend to go with their biases (in this case, the notion that every input that goes towards producing a product is comparably in value to the finished product). Here the example is the increase in the value of labor because some other more productive use can be found for the labor. Other times its the apparent discrepancy between a low-income worker contributing to the production of a high-value item.
- LudwigNagasena 6y ago
  Because if market is efficient the wage should equal marginal product of labor, which is basically what defines productivity. 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.
  - aaron-santos 6y ago
    Not trying to be obtuse, but why should an employer want to employ anyone at all if the market was effecient?
    - ghaff 6y ago
      Coase would have said transaction costs. An efficient market doesn't imply no transaction costs. And if you take things out of economic theory it's pretty obvious why you'll hire people for some things and not for others.
    - ivalm 6y ago
      Because access to capital gives employer some fraction of employee productivity as a reward. The exact fraction depends where exactly they land in the zone of possible agreement. In transactions (even efficient ones) there is usually hysteresis.
    - LudwigNagasena 6y ago
      Well, in an ideal model there is indeed no difference between any such decision. But as you can ask “why should an employee do something”, you can also ask “why shouldn’t an employee do something”?
- joe_the_user 6y ago
  It's weird they'd say "classical economics" - the Baumol article links indeed to classical economics/classical political economy but the linked article doesn't bear out the claim. The actual situation is that the original field known as "classical political economy" made the claim that wages are indeed a matter of the cost of reproducing laborers whereas a "modern economics" or "neoclassical economics" as a field/label is where the claim that real wages are tied to labor productivity changes appeared. The particular wages-productivity theory seems to have been articulated around the 1930s [2]. [1] https://en.wikipedia.org/wiki/Classical_economics https://en.wikipedia.org/wiki/Classical_economics [2] https://en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages https://en.wikipedia.org/wiki/Marginal_revenue_productivity_...
k__ 6y ago
Did we lose occupations to this effect and if yes, which? Like, work we would still like to pay someone for, but now the minimum wages are too high.
- ghaff 6y ago
  For the middle-ish class in the US, tons of low-skill service jobs. If you could pay someone $4/hour (or whatever) a lot of people would have lawns mowed, brush cleared, laundry done, maybe meals cooked (less low skill), errands run, etc. Contrast with the level of personal service in, say, SE Asia in many cases. The bar is pretty high to hire someone for a lot of stuff you can easily do but don't really want to, until you're very high income. 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.
  - rasz 6y ago
    so what you are saying you no longer can hire a slave man servant? any other examples?
    - ravi-delia 6y ago
      More like you can't be employed as a slave man servent...that is paid. Money. So not a slave.
      - thaumasiotes 6y ago
        Slaves are paid too, mostly in kind but often in money. That's not what makes them slaves.
        simonh 6y ago
        The kind of work they are doing isn’t what makes them slaves either.
singhrac 6y ago
I first encountered this idea and "cost disease" in this SSC article: https://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/ https://slatestarcodex.com/2017/02/09/considerations-on-cost... 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.
- ochoseis 6y ago
  Planet Money has a good 3 and 1/2 minute overview as well: https://www.npr.org/2019/10/04/767095401/the-baumol-effect-and-rising-health-care-and-education-costs https://www.npr.org/2019/10/04/767095401/the-baumol-effect-a...
dblotsky 6y ago
Can this all be explained by the cost of labor being uniform (since humans are humans in all industries)? So if one industry demands more labor, all others will feel the rising price of labor?
- smallnamespace 6y ago
  The cost of labor is far from uniform. 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.
  - jhardy54 6y ago
    That depends how you measure costs. 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.
  - joe_the_user 6y ago
    If we talk about a highly skilled programmer requiring a lot of labor to produce, then we talk about something like "amortized labor" having uniform cost (the article mentions that it takes a lot of labor produce an orchestra player, for example). Even if some people are more skilled than other, if it takes a lot of labor to figure out who's really talented, you can price things this way.
- neilwilson 6y ago
  It can be explained if you cost things in hours rather than money. 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.
jvanderbot 6y ago
Using their first example, the factory workers world take their extra, efficiency-induced earnings to market, and buy more services and luxury goods, increasing the profits in nearby but not more efficient sectors. And so those managers and workers in the example could in fact be paid more.
TheOtherHobbes 6y ago
This kind of hand-wavey nonsense is exactly why I have no respect for what passes for rational argument in conventional economics. 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?
- asdasdasdas5453 6y ago
deleted 6y ago
[deleted]
analog31 6y ago
>>> ... the productivity of classical music performance has not increased 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.
- pratik661 6y ago
  Colleges increasingly using adjuncts and doctors being replaced by multiple nurse-practicioners and nurses is a PERFECT example of steps taken to mitigate the Baumol Effect. 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.
  - nradov 6y ago
    There is no real scientific evidence that NPs and PAs deliver lower quality care. Patient outcomes are equivalent.
    - pratik661 6y ago
lxe 6y ago
Maybe the way we calculate "real cost" is wrong?
ianhorn 6y ago
A side effect of this is that if your individual productivity goes up, your real wage might go up, but if your whole industry’s productivity goes up, it’ll be mitigated by this effect. Kinda like how everything in SF is so expensive, so the real wage is diminished by the increasing cost of living.
- hexbinencoded 6y ago
  SF is an aberration because relocated high-income earners and rich people move in and raise prices because they out-compete for limited resources by throwing money around (out-bidding real estate) and/or sellers raising prices knowing the upper-crust will still pay them. 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.
  - Wolfenstein98k 6y ago
    Rent controls don't help the poor, the help incumbent tenants at the expense of future tenants and housing quality.
    - red_admiral 6y ago
      This is not mutually exclusive though. When the incumbents are poor to start with, it does help them from not being gentrified out of their homes. 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.)
scotty79 6y ago
Prices (of goods, services and work) are in huge part influenced by affluence of the buyer. 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.
- srtjstjsj 6y ago
  That economic theory is a combination of supply-and-demand and collusion.
  - scotty79 6y ago
    Does it take into account money supply on customer side? 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?
stared 6y ago
I would be more interested in seeing the other thing - that increase in productivity results in higher salary. (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.)
- michaelt 6y ago
  Applying a vastly simplified model, every job has a salary range possible: 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.
soroushjp 6y ago
Highly recommend people follow up the Wikipedia article with this great piece on further implications of the Baumol Effect: https://marginalrevolution.com/marginalrevolution/2019/05/the-baumol-effect.html https://marginalrevolution.com/marginalrevolution/2019/05/th...
ziggystardust 6y ago
Do we see Baumol's effect with Indian developers?
known 6y ago
India is Unique; It has Producers, Consumers and Leeches; https://archive.vn/pOmij https://archive.vn/pOmij

123 points by dedalus 6y ago

> This pattern seemingly goes against the theory in classical economics in which real wage growth is closely tied to labor productivity changes. That sounds like a pretty big assumption. Why should labor prices be other than what is demanded?

mlindner 6y ago
Agreed. Classical economics would say that as the labor supply is restricted workers would switch careers or be initially trained in careers that give them the most reward for their work. This means that candidates for the "retail manager" case would either be of lower quality or harder to find so increases in wages would be seen to offset that.
chordalkeyboard 6y ago
In the absence of a prevailing theory (in this case, supply-and-demand), people tend to go with their biases (in this case, the notion that every input that goes towards producing a product is comparably in value to the finished product). Here the example is the increase in the value of labor because some other more productive use can be found for the labor. Other times its the apparent discrepancy between a low-income worker contributing to the production of a high-value item.
LudwigNagasena 6y ago
Because if market is efficient the wage should equal marginal product of labor, which is basically what defines productivity. 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.
- aaron-santos 6y ago
  Not trying to be obtuse, but why should an employer want to employ anyone at all if the market was effecient?
  - ghaff 6y ago
    Coase would have said transaction costs. An efficient market doesn't imply no transaction costs. And if you take things out of economic theory it's pretty obvious why you'll hire people for some things and not for others.
  - ivalm 6y ago
    Because access to capital gives employer some fraction of employee productivity as a reward. The exact fraction depends where exactly they land in the zone of possible agreement. In transactions (even efficient ones) there is usually hysteresis.
  - LudwigNagasena 6y ago
    Well, in an ideal model there is indeed no difference between any such decision. But as you can ask “why should an employee do something”, you can also ask “why shouldn’t an employee do something”?
joe_the_user 6y ago
It's weird they'd say "classical economics" - the Baumol article links indeed to classical economics/classical political economy but the linked article doesn't bear out the claim. The actual situation is that the original field known as "classical political economy" made the claim that wages are indeed a matter of the cost of reproducing laborers whereas a "modern economics" or "neoclassical economics" as a field/label is where the claim that real wages are tied to labor productivity changes appeared. The particular wages-productivity theory seems to have been articulated around the 1930s [2]. [1] https://en.wikipedia.org/wiki/Classical_economics https://en.wikipedia.org/wiki/Classical_economics [2] https://en.wikipedia.org/wiki/Marginal_revenue_productivity_theory_of_wages https://en.wikipedia.org/wiki/Marginal_revenue_productivity_...

k__ 6y ago

Did we lose occupations to this effect and if yes, which? Like, work we would still like to pay someone for, but now the minimum wages are too high.

ghaff 6y ago
For the middle-ish class in the US, tons of low-skill service jobs. If you could pay someone $4/hour (or whatever) a lot of people would have lawns mowed, brush cleared, laundry done, maybe meals cooked (less low skill), errands run, etc. Contrast with the level of personal service in, say, SE Asia in many cases. The bar is pretty high to hire someone for a lot of stuff you can easily do but don't really want to, until you're very high income. 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.
- rasz 6y ago
  so what you are saying you no longer can hire a slave man servant? any other examples?
  - ravi-delia 6y ago
    More like you can't be employed as a slave man servent...that is paid. Money. So not a slave.
    - thaumasiotes 6y ago
      Slaves are paid too, mostly in kind but often in money. That's not what makes them slaves.
      - simonh 6y ago
        The kind of work they are doing isn’t what makes them slaves either.

singhrac 6y ago

I first encountered this idea and "cost disease" in this SSC article: https://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/ https://slatestarcodex.com/2017/02/09/considerations-on-cost... 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.

ochoseis 6y ago
Planet Money has a good 3 and 1/2 minute overview as well: https://www.npr.org/2019/10/04/767095401/the-baumol-effect-and-rising-health-care-and-education-costs https://www.npr.org/2019/10/04/767095401/the-baumol-effect-a...

dblotsky 6y ago

Can this all be explained by the cost of labor being uniform (since humans are humans in all industries)? So if one industry demands more labor, all others will feel the rising price of labor?

smallnamespace 6y ago
The cost of labor is far from uniform. 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.
- jhardy54 6y ago
  That depends how you measure costs. 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.
- joe_the_user 6y ago
  If we talk about a highly skilled programmer requiring a lot of labor to produce, then we talk about something like "amortized labor" having uniform cost (the article mentions that it takes a lot of labor produce an orchestra player, for example). Even if some people are more skilled than other, if it takes a lot of labor to figure out who's really talented, you can price things this way.
neilwilson 6y ago
It can be explained if you cost things in hours rather than money. 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.

jvanderbot 6y ago

Using their first example, the factory workers world take their extra, efficiency-induced earnings to market, and buy more services and luxury goods, increasing the profits in nearby but not more efficient sectors. And so those managers and workers in the example could in fact be paid more.

TheOtherHobbes 6y ago

This kind of hand-wavey nonsense is exactly why I have no respect for what passes for rational argument in conventional economics. 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?

asdasdasdas5453 6y ago

deleted 6y ago

[deleted]

analog31 6y ago

>>> ... the productivity of classical music performance has not increased 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.

pratik661 6y ago
Colleges increasingly using adjuncts and doctors being replaced by multiple nurse-practicioners and nurses is a PERFECT example of steps taken to mitigate the Baumol Effect. 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.
- nradov 6y ago
  There is no real scientific evidence that NPs and PAs deliver lower quality care. Patient outcomes are equivalent.
  - pratik661 6y ago

lxe 6y ago

Maybe the way we calculate "real cost" is wrong?

ianhorn 6y ago

A side effect of this is that if your individual productivity goes up, your real wage might go up, but if your whole industry’s productivity goes up, it’ll be mitigated by this effect. Kinda like how everything in SF is so expensive, so the real wage is diminished by the increasing cost of living.

hexbinencoded 6y ago
SF is an aberration because relocated high-income earners and rich people move in and raise prices because they out-compete for limited resources by throwing money around (out-bidding real estate) and/or sellers raising prices knowing the upper-crust will still pay them. 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.
- Wolfenstein98k 6y ago
  Rent controls don't help the poor, the help incumbent tenants at the expense of future tenants and housing quality.
  - red_admiral 6y ago
    This is not mutually exclusive though. When the incumbents are poor to start with, it does help them from not being gentrified out of their homes. 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.)

scotty79 6y ago

Prices (of goods, services and work) are in huge part influenced by affluence of the buyer. 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.

srtjstjsj 6y ago
That economic theory is a combination of supply-and-demand and collusion.
- scotty79 6y ago
  Does it take into account money supply on customer side? 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?

stared 6y ago

I would be more interested in seeing the other thing - that increase in productivity results in higher salary. (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.)

michaelt 6y ago
Applying a vastly simplified model, every job has a salary range possible: 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.

soroushjp 6y ago

Highly recommend people follow up the Wikipedia article with this great piece on further implications of the Baumol Effect: https://marginalrevolution.com/marginalrevolution/2019/05/the-baumol-effect.html https://marginalrevolution.com/marginalrevolution/2019/05/th...

ziggystardust 6y ago

Do we see Baumol's effect with Indian developers?

known 6y ago

India is Unique; It has Producers, Consumers and Leeches; https://archive.vn/pOmij https://archive.vn/pOmij