I was listening in a forum on the future of Public Transportation in the US and this economic theory was noted as an important consideration in the future of Public Transit in the US and the need for Federal subsidies to sustain the sector. Need a little help connecting the dots please.
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Baumol’s Cost Disease is a phenomenon where rising wages in sectors with growing productivity drive wage increases in sectors with stagnant productivity.
A true ELI5 explanation:
Imagine you’re running a lemonade stand and your neighbour runs a lawn mowing business. You both make about $10 per day in net profit, so you both think, “Why don’t I hire someone for $5/day so that I can make more money!” This goes great, and you both hire younger kids on your block to do work for you.
The next summer, though, your neighbour gets a fancy new electric lawnmower. It’s cheaper, and it can mow lawns twice as fast, so he’s making $20/day instead of $10. Now when you go to hire the neighbourhood kids, your neighbour can pay $10/day while you can only pay $5. You’re competing for the same labour, though (all of the neighbourhood kids can mow lawns OR make lemonade), so you’re stuck paying $10/hour for labour, even though your employees are just as productive as they were last year.
For the transit question specifically, public transport is the lemonade stand. It’s actually a bit worse, because there’s some evidence that urban congestion is driving down driver productivity (how many people you move over a period of time). Because these labour cost increases don’t come with better service, consumers aren’t willing to pay for those cost increases. This leads to funding shortfalls that need to be covered by public funding.
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